Annuityville horror stories

Even novelist Stephen King would be horrified by some of scary annuity events that unfortunately happen every day.

Annuities can be great transfer of risk strategies when properly positioned in a portfolio and there are many good agents out there trying to match up annuity guarantees with specific portfolio goals.

With that being said, recently I have heard some nightmarish stories of improperly sold annuities that you need to know about to avoid these potential sales traps.

See one of my recent MarketWatch articles “Annuity pitches to avoid” for other examples as well.

Annuityville horror story No. 1

“$51,000 in annual fees.”

Recently, a nice man (let’s call him Hank) called me to take an objective look at a load variable annuity he purchased a few years ago. For the record, I am a big fan of no-load variable annuities that are 100% liquid day one and provide efficient tax-deferred growth . I review people’s annuities all the time for free because most don’t know what they really own. It is a good will service that I will always provide.

Hank worked hard for 35 years in a bottling plant, has been married for over three decades, and has two grown children. Over that 35 years he had accumulated over $1 million in his 401(k), and that was all the money that he had for retirement.

As he was driving home one day, he was listening to a radio show that he trusted so he called and was referred to a local adviser to discuss his upcoming retirement. Hank told the adviser that he wanted to turn on a lifetime income stream in five years because he was going to take another job in the interim. He also wanted to set the payments up to cover both his and his wife’s life, and he didn’t want to lose any money to market volatility. Pretty simple and clear requests in my opinion.

Unfortunately, he was sold a fully-loaded variable annuity with 3.9% in annual fees, consisting of a Mortality and Expense fee of 1.25%, an Income Rider fee of 0.85%, a Death Benefit Rider fee of 0.85%, and Mutual Fund Expense of 0.95%. Hank was not aware of any of these fees until I went through his prospectus and showed the specific breakdown of annual charges. In addition, the adviser put 100% of the money into just one mutual fund, even though there were hundreds of choices — and charged an additional 1.10% management fee to oversee it. Huh?

The average annual fee on a load variable annuity (including riders) is typically around 3%. But with the “oversight” fee added to the 3.9% policy charge, Hank’s annual fees on the total asset amount was 5%, which adds up to a whopping $51,000 per year.

The income rider, which is an attached benefit used for future income, was added for lifetime income guarantees. That would have been OK except that the income rider was not set up to pay a joint lifetime income stream with his wife and couldn’t be turned on for 10 years (remember that Hank needed income to start in five years).

To surrender the policy in full would cost Hank over $80,000. Because of the high surrender charges, there is really nothing Hank can do except take out 10% of his money via the penalty free withdrawal clause, not the happiest of options. You can’t make this kind of horror up.

Annuityville lesson : Do your homework and take your time to learn everything about the product before signing the application. If you have specific requests or goals, write them down and have the agent sign off on them just to make sure.

Annuityville horror story No. 2

“Paying surrender charges because the bonus covers it.”

I hear this one on a weekly basis, so the story is the same every time and only the names change. Agents love to transfer one annuity to another annuity, and sometimes inappropriately use the “upfront bonus” as an excuse to “cover” for any surrender charges. This is called twisting or churning in the annuity regulatory world, and in some states like Florida, it can be a third-degree felony.

Most carriers try to prevent these types of transfers within the application paperwork by requiring a side-by-side comparison of the old annuity and the annuity that it is going to. The bottom line is that the math has to work in the client’s favor, not the agent’s. Make sure you get a copy of the application comparison page from the agent.

Annuityville lesson : In most cases, it doesn’t make sense to take surrender charges from one annuity and have an upfront bonus “cover” for that amount to move to another annuity. Do the math because it normally doesn’t work in your favor.

Coming attractions to the next round of Annuityville horror stories

“10% to 15% annual returns.”

Lose weight now! Just take this pill! No exercise needed! Those same too-good-to-be-true pitches are happening with annuities being sold on the Internet via misleading pop-up ads and inappropriate annuity sales videos.

Unfortunately, millions of dollars of annuity nightmares are being sold on the Web every day. Normally, you sign up after watching a video and magically … you have a bright eyed agent in your home usually talking about the best indexed annuity ever. The agent typically can’t stop saying the word “hybrid” or using the phrase “reasonable rate of return” (whatever that means). I recently wrote an article about this hybrid hype being the latest round of annuity sales pitches to be aware of.

Unless the regulatory bodies step in and stop these annuity Web promoters, the town of Annuityville will soon have thousands of new horror stories to be told.

Annuityville horror stories play daily all across America and on the Internet. Don’t let it come to your town or to your computer.

Orginally published by 4.30.2013 –