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Avoiding the Traps and Gimmicks

Excessive Surrender Penalties

Many companies have large penalties because agents demand large commissions. The general rule of thumb that I go by is that your penalty should not exceed than one year of interest for your product? Many fixed annuities have a 15 to 20 year penalty and the penalty percentage can be as high as 35%. This is very excessive and you should go running out the hall screaming, "Thief, Thief," if any agent tries to sell you one of these. An acceptable penalty might be 8% interest therefore and 8% penalty for 8 years. Many agents use the justifier, "You aren't going to touch this money until you are 59 1/2 are you?" this is simply not good thinking. Try to keep your funds as liquid as possible.

Bonuses Annuities

These annuities are the latest thing to fool you. They have a first year interest rate that seems too good to be true. It is to good to be true, because after you have had these annuities for over a year look out! You have the surrender penalty to keep you loyal and they have no incentive to keep you happy. The renewal rate in these products is always at least slightly lower than their other annuities to cover the acquisition cost. Look at the difference in the example.

Two-tiered Annuities

This is a very tricky annuity that can have many different interest rates. The only interest rate to compare is the cash value rate or the surrender value rate. All other rates of return on your statement are usually full of bull, or at the very least highly suspect. Avoid this type of annuity at all costs, and get out as soon as possible. The unique thing is the penalty in these products always grows, even after you are 59 1/2.

Switching companies every year

This is silly. Most often an agent will tell you that in order to allow you to borrow against your policies you should only put in $10,000 per annuity. What he is really saying is in order for him to get a bigger commission he needs to sign you up for a new annuity each year. By the way, if you do have more than 50% of all your annuities out on loan you are violating the IRS law and you could be in big trouble, NOT YOUR AGENT.

Poorly rated "weak" companies

Many agents use these companies for better commission. If the company is not over $10 Billion in assets and doesn't have an A+ Rating from AM Best, get out of Dodge.

Annuitizing

Never Never Never annuitize! It gives complete and utter control to the insurance company. Only do it if you are wanted by creditors or are a menace to yourself.