[00:00:00] Speaker A: Hello and welcome to the Annuity Straight Talk podcast, episode number 147. My name is Brian Anderson, founder and creator of Annuitystraighttalk.com, writer and creator of all these podcast episodes. Don't know where it comes from? Oh yeah, I guess I do. It comes from you guys. Thank you so much for joining me again, providing me the opportunity to share my knowledge and answer your questions. Please like subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends. Get it out to people who you think might need some help. Because that's what I'm here to do. I'm just here to help everybody. I'm going to talk this week about something I should have done last week. We're going to talk about surrendering an annuity. It's been very popular. The previous episode I talked about all the money that's leaving Allianz, and still people are coming. Hey, is the bonuses so good? Is it a good deal? No, it's the same product. Anyway, that's not what this is about. We're going to talk about starting your news some share my screen, give me myself a visual aid, and if you want to read it, it's on the website annuitystraighttalk.com. if you want to make an appointment and talk about your scheduled call, I will give you a call. If you do that, name, email, phone number, time zone, time, a couple notes, what you want to talk about, I will call you. So if you would have asked me, probably up until two years ago, because this has happened a lot, I would have told you, never ever surrender an annuity. Early, early withdrawal charges. Surrender charges almost never made sense and new contracts making up losses would be difficult. There were a lot of opportunistic salespeople that took advantage of others. Hey, there's a bonus. And the funny thing is, 1012 years ago, people were doing it just for the bonus, but they were getting out of a high a contract with pretty solid rates and going into a contract with lower rates, all they were looking at is the bonus. This gave me a lot of ammo to talk about. Crazy sales pitches and sales practices. I don't like it. They use the bonus as a bait, and that's a lazy agent. That's somebody who's not very thoughtful. It's someone who gets mad at you when you ask questions. How dare you question me? There are a lot of people out there like that. I hear the stories all the time. So what made this possible in the past is because of market value adjustments. It's a positive or negative move based on changes in interest rates during the contract term. If you surrender a contract four years into it and it's early, if the rates have dropped, then there's going to be a positive market value adjustment that often wipes out the surrender charges. So it can work in it work for your benefit. A lot of people are doing this. Wow. I can get out because the NVA is positive and I don't have surrender charges. But the problem was, they're leaving a contract, getting into something with lower rates, and they didn't think it through. And some guys just trying to make the, make a commission. It looked good right now, but in the long run and over the years, it turned out to be like, hey, this isn't as good a deal. And I heard from a lot of people that do that. I remember one couple I told, this is probably 1213 years ago, we got a positive market value adjustment. I looked at their contract, the rates were good, contract was doing fine. I said, no, do not ever do that. And I said, if anybody ever tells you to surrender that thing early, you give me a call and I'll tell you why they're wrong. And they ended up doing it anyway a couple years ago. Yeah, so we did. We got out of that and got this new contract, and then they had garbage rates from 2013, 2014, something like that. Anyway, so things have changed now. Higher rates than existed a little more than two years ago. Everybody knows this. It's been the topic of a lot of podcasts, payout rates, growth rates, all that stuff. But underperforming annuities can be swapped for higher income or growth potential. That's what we did with the Allianz podcast a couple weeks ago. We demonstrated that she can move the money, pay a surrender fee, and get substantially more guaranteed income than she would have been able to expect with the current contract she was in. That's not to say that what she did was wrong earlier. Maybe you did the best thing you could do. Talked to a lot of people since that episode came out that said, did I buy a bad thing? No, you bought it in 20 2021 and some stuff early 22 before rates came up. You can get out of that stuff, and it doesn't mean you did something bad in the past. You did the best thing you could at the time. Conditions have improved and you can maybe do a little bit better. So then I had an agent or an advisor ask me, hey, I've got a lot of people sitting these contracts. What do I do? And so this is kind of for him, maybe a guide of what you have to look for and how do you got to do it. So there is a trade off, however, for this. Insurance companies who are about to get the money don't like to see you taking losses to get out of a current investment. They will consider that an unsuitable transactions. And that goes for whether the insurance company sees you surrendering an annuity, taking a cd penalty, selling out bonds, maybe they don't get in the middle of that. That's maybe just not a great idea. And even contingent deferred sales charges on mutual funds is what penalties are there for you liquidating the current investment, whether it's an annuity or something else. So all those penalties have to be of the current investment must be disclosed as part of the suitability review. Like I talked about last week, insurance company wants to cover themselves in the case of future liability, say okay, we have to determine that this is right. If the receiving company, the insurance company is going to get the money, thinks the losses are going to be too high, then they'll deny the transaction. This happens a lot for agents that don't understand the rules. So that's what I plan to explain. Currently, right now, I'm replacing a contract that was written two years ago where the surrender charge is too high, but we separately applied for an exception because the income increase for the new contract is so substantial. For the contract owner, he's kind of saying, why can't I do this? It's a way better deal. But it's only two year old contract, so his surrender charges are 7% or something like that. So I've learned over the past couple of years when we started looking into this and doing it in the right way, that there's kind of an industry standard for an acceptable replacement. That's a net 5% loss. If your surrender charges are 5% or less, then you can move the money. If a bonus offsets sets the charge, then it needs to result in a net 5% or less just the same. So if you have, say, a 10% surrender charge and a 5% bonus, then you'll
[email protected] 5% loss with the bonus. And this will go for a true bonus. It's in a cash value bump or an income rider bonus. This can be a net positive to the accumulation value or the income benefit. So a bonus annuity is frequently, but not always, the only way to get out of an old one and into a new one. So if you want to get out of an underperforming contract, most likely if the surrender charge is too high, if it's only two years old, you're going to have a bonus to get you there. Not necessarily products that I would recommend for a first time buyer, but if you want to improve your situation, I talked to a lady yesterday. She's going to pay about a 9% surrender new contract with a 13% bonus. We'll get her right up to about the same cash value because there's a little bit of a negative market value adjustment as well. She's two years into a contract, a ten year deal, and it's going to go into another ten year deal. She, she said, what should I do? What would you do in my situation? I said, well, I can't tell you what I would do because, you know, buying an annuity from me, that's kind of self serving on my part. So how about I honestly explain to you the two options for doing it? So it would absolutely improve her situation, only add two years to the surrender term and give her much more growth potential going forward. In a contract that was written before rates came up a couple years ago and she's got 2% cap rates, so it's not very good, or she just rides it out and sits there and doesn't make a lot of money. Okay, so those are the objective facts. When you do this, your options are limited. In most cases, it has to be a fixed indexed annuity that, that you move into. So if you don't like fixed index annuities, I talked to one client last year who had a five year myga, 2.8%. Hey, would it make sense for me to surrender and buy a new five and a half percent myga? And it wouldn't because she's only got a couple years left. I said, no, write it out. There's still an 8% surrender charge on it. You're not even going to get pay. 8% down. Go five and a half for two years and you won't get back to what you get, just 2.8. Write it out and replace it when it's surrender free. So index annuities have bonuses for accumulation or income on income products. They're the highest payouts you can get if you're deferred for more than a year, and doing that makes it much more likely that a new company will accept the replacement. So, subjective variables are your own personal feelings on the matter. The only thing left to consider? Do you really want an annuity if you're two years into a ten year deal? Do you want to extend that by ten years or maybe you find a product that's not, there's not. Every product is a ten year deal. Most of the big bonus annuities, the high, the popular, say, selling ones, those are mostly ten year contracts. So this is, it's interesting. I'm going to give you a couple of examples, but yeah, so an accumulation contract, you're extending the surrender period. So that's where you sit and have to decide, do I really want to be in an annuity? And if you like the safety of, you like the growth potential, you understand the terms of the contract. That's what a lot of these deals, people just get to it and they, they don't even understand. I didn't know this. The salesperson said this, they said I could take away, take the bonus, I could walk away, I could do this. And then they realized they can't get the bonus and they're capped at two and a quarter percent. It's like, oh, that's no good. So glad I didn't do that. I sold a couple of contracts that aren't performing that well. Those are part of the stories I'm going to tell you. So, yeah, lackluster accumulation. You got to decide, is it worth extending it to get more potential? And then, I mean, there's always laddering out of it. 10% free withdrawals, moving the money, whether it's an IRA or non IRA, it's not Ira. You can pay a few taxes. If it's Ira, you can transfer it to another Ira and avoid the tax. Hit up to a couple weeks ago, the market had been performing exceptionally well. And so a lot of people was like, well, I'm just going to get out of this and go into the stock market. And then the stock market's, what, down 10% in the last month. So maybe it keeps going, maybe it doesn't. If you're inclined to take the money and go back into the stock market at all time high, exactly what Warren Buffett for years has been telling people not to do, then you got to decide, would you even want an annuity if you're inclined to take that risk? But remember, you bought the annuity so you could be safe. Income is an objective comparison. It's simple. Which one pays you more? Is it worth moving? And any of the income deals I've replaced in the past, it is a lot better. The one, the guy, the exception that we're looking for that's a little over 5% is, it's a 50% income increase with income starting in one year of course he would want to do it. Of course it makes sense for him. We'll see if the insurance company will accept it. We do a little extra paperwork at the beginning just to do it the right way so we don't waste anybody's time. So a few examples here. Rob was the first client of annuity, straight talk, way back in 2009. We've done a lot of business. We developed a close relationship over the past 15 years. He's a sports guy. He lives in North Carolina. Rob's awesome. We got a lot to talk about. We have a good time when we get together. So he bought an index annuity for me in 2020. Rates were really low. His average performance was around 2% his first year. He looked at it. Well, actually, in 2022, he looked at it, and he took a free withdrawal out of it and put it into a money market fund. That's kind of what, you know, again, I work with you overtime. I've had a couple other people the same thing. It's like, yeah, take your free withdrawal rebalance, move out of it. I got an old newsletter, how to get out of an index. Annuities. Talk about how much liquidity there actually is. After that first year, rates rose substantially. He's a very conservative investor, so he's going to do safe stuff no matter what. So he decided to purchase a new fixed index annuity. Got a 12% bonus, gave him a net positive account value. Plus the new contract has twice the growth potential of the previous one. He had seven years remaining on the first contract. He would extend that to ten years with the new contract. That didn't bother him because there was no plan to touch the money for retirement. He didn't really need it. He might dip into it every now and then, but big deal. I don't know. I'm a conservative guy. It's okay if I have money sitting there. So he didn't mind going from seven back to ten. He just wanted safety and decent growth potential.
So Jim bought the same annuity Aethereze about the same time as Rob, while experiencing the same type of performance. His financial goals required a yield closer to 5%, and he wasn't getting it. Small part of, in any of these cases, is a small part of someone's portfolio. It's not like all hopes and dreams and financial outcome is dependent upon the performance of that contract. For these scenarios, this was just safe money. He wanted four to 5%. He wasn't getting it. So again, a new annuity would result in a net positive account value with higher growth potential and a better chance at meeting his goal. So he decided to swap to the better contract, the new contract. This is a kicker, which I tell everybody now because I learned it earlier this year. When the contract was issued, he noticed the surrender value was 10% lower than the previous contract surrender value. So you're cutting off seven or 8% of the account value. That's the new value. And then the surrender charge is 10% of that. In this case, it was $104,500. The surrender value was 96, and the new surrender value was 86 or 87, whatever it was. But he looked at it when he saw the new contract. He said, where'd my money go? It's all lower. Well, the account value included. The bonus was actually higher, more than what he had started with. But when he actually. The reality set in and he looked at it, surrender values are lower. Made him uncomfortable. So we free look. The new policy, it was within the same company. It was a quick phone call. Hey, listen, he wants to unwind it. Boom, he's out. They reinstated his old contract. He's back to seven years of surrender schedule. I just want to make sure everybody gets what they want. I don't really care. Then this guy from just a couple weeks ago, Marty was. He had a variable annuity with high fees and market risk that he'd rather not have. He's got a 7% surrender charge remaining, a bonus on an index annuity is about his only option to increase cash value and get protected growth in the future. But he had talked to a lot of people, and everyone had different ideas about the new product and company. And of course, I thought mine was the best. But first needed to ask whether he does, in fact, want to use an annuity. So when I said, do you actually want an annuity? Because I felt like I don't really like getting into aggressive competitions with other people, it's like, hey, I mean, I had a big income deal come in a couple weeks ago, and the guy said, I want this. And it was a big case. He said, I'm talking to this person and this person. I'm going to talk to everybody. It's like, you know what? I'm. Here's the three best deals. Talk to whoever you want. I don't care. I don't want to get into it. So this guy talked to a lot, like, Marty talked to a lot of people, and I asked him if he really wanted it, and he kind of paused for a few seconds, and I don't know what he's going to do. But I could tell, like, in his voice, at the end of our call, I really got the feeling that he'd rather just surrender the contract and choose a different investment altogether. That was always an option. It's like, all right, well, you're taking a hit, and in a lot of cases, you can get out with about what you put in to start with. It's not necessarily always a huge loss. It's just you lost the time. But he might choose a different investment, and I think that might suit him, but he's going to decide, and he's also got other advisors and of course, his asset investment manager. No, you need to go buy Nvidia. Ha, just kidding. He didn't say. I don't think he said that, but okay, so having the ability to surrender an annuity and get something better allows you to really solidify your goals again. It's like sitting there after a couple of years, hey, this isn't working out. The rates were low. They're better now. Do I really want to take this path? I tell a lot of people that buy index annuities to begin with. It's like, you're really going to get it after two or three years. Several people have surrendered income contracts. They've realized after a few years they don't even need the income.
Sometimes like, oh, I bought this income deal. Sounded good. That guaranteed 8%, it's nothing, growth on the money. Then they figured out it's an income, oh, I don't need the income. So they'll pull up and they'll do something else. After a few years of experience with an annuity, you'll know whether you want to continue doing the same thing or take the opportunity to pursue something else. Agents are always going to be greedy. They're going to want the sale. There always be someone who thinks you should switch. I'm a good person to ask because I'm not going to put you in that position.
Make an appointment. Top right corner of any page on annuitystraighttalk.com dot right now. It's okay to do it, but that is not always going to stand. Make sure you seek the advice of someone who can give you all the options and really just help you out with some advice, not a sales pitch. If you're getting the hard pitch right now, get on my calendar. I'll talk you through it. Might be a good idea, might not. But anyway, this has been episode 147, surrendering an annuity. I appreciate you guys joining me. Thank you all for the support over the years. I'm ready to keep going, and I'll be here next week with episode 148.
[00:16:48] Speaker B: You have been listening to annuity stray talk.
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No information presented today should be acted upon without meeting with a qualified and licensed professional.
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