Exposing the annuity premium trap


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Welcome to Hidden Value, the column in which Joe Elsasser, CFP, discusses common financial planning issues with ideas that advisors and their clients may not have considered.

For several years, I have offered free seminars on educational annuities at our local public library, and inevitably, the subject of bonus annuities comes up again and again. The concept can be confusing and the name itself is quite misleading.

The problem with annuity premiums

Some annuity contracts offer a “bonus” between 3 and 10% or more. It looks fantastic! The word “bonus” sounds like extra money, but that’s the problem – it isn’t.

An annuity bonus is like a cash advance. It is an advance on the future income of the contract. Any annuity that has a bonus also has a surrender schedule, and the surrender schedule penalizes the consumer for taking more money than the free withdrawal provision in any given year. The insurance company knows that it is able to advance a portion of the income that (more than likely) will be earned in the contract anyway.

Many people who buy bonus products do not necessarily understand how the future profits of the contract will be impacted. If they get a bonus up front, future earnings will be lower. It is not a bonus, it is an advance on future income, or it is recouped through higher fees for the customer.

Adequacy rule

Many carriers have a fit rule that says you can’t replace an old product or a previously purchased product that the customer already has, unless the bonus on the new product is greater than a redemption fee on the new product. old product. This leads people to believe that the bonus is free money, and it creates an excuse for insurance agents to replace products by taking advantage of a bonus instead of making an educated recommendation on the total remaining value. in the current contract and whether it is greater or less than the total value of switching to a new contract.


Darcy J. Skinner

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