The TRUTH about Surrender Charges in Indexed Annuities

The securities industry opponents of indexed annuities have used the surrender charges, for early termination of an annuity contract, as a claim of high expenses involved with the purchase and owning of an indexed annuity. Besides the fact that this is a complete lie, suggesting that surrender charges are a negative about indexed annuities that should inhibit people from purchasing them, is simply a scare tactic used by the securities industry to try to get back some of the $24 billion a year it has been losing in sales for several years to these fantastic financial products.

The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.

If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.

If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.

With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.

For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.