Maturity Date Is GOOD for Annuity Owner

In the recent action taken by the Minnesota Attorney General against Allianz, I read that one of the concerns she raised in the sale of indexed annuities to seniors is that the maturity date is almost always decades in the future. The statement was made that this locks up the client’s money so that they cannot get to it until the maturity date arrives. This misconception is probably one of the biggest misunderstandings about the inner workings of insurance products, and the Minnesota Attorney General is not the first person to make such criticism based on this inaccurate conclusion. Unfortunately, not only is this information completely WRONG, but such false statements unnecessarily fuel the fear in senior annuity owners that they will not be able to access their money when they want, and provides them the motivation to cash in their policies early, which forces them to pay surrender charges for no reason. In an effort to help save some poor elderly annuity owners the trauma and expense of worrying about an issue that is really one of their policy benefits, I want to fully explain what a maturity date in an annuity is all about.

Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.

Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.

Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.

Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.

Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.

Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.

Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.

The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.

The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.

So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.