QUESTION:
I recently gave a talk at one of our local libraries, and at the end of my talk, a gentleman approached me and asked me if I could answer a couple of annuity-related questions. I thought I would share my answers here. He told me that a few days before the seminar he purchased an annuity. As he described, after he got home and thought about it, he realized he made a bad decision. The individual who sold him the policy told him that there was nothing that could be done. His first question to me was whether I thought he had a chance of cancelling the annuity or not. His second question dealt with taxation on the annuity. He bought the annuity with money from his IRA, and he was told the benefit of that is that he would not be required to take minimum distributions from that account. He told me they told him that annuities are exempt from required minimum distributions. He wanted to know if that was true.

ANSWER:
The first thing that I told the gentleman was that he did have a right to cancel his policy. In Michigan, you have 10 days after you receive a copy of your annuity to cancel it. Since he had not received his annuity contract yet, he was well within the timeframe to cancel the policy. I told him he should send a registered letter to the agent as well as to the annuity company cancelling the policy. I told him that he should also send an email and place a phone call to the agent and the annuity company. Once again, all I’m trying to do is to make sure he covers his bases.

Unfortunately, the annuity industry does have its fair share of unscrupulous salespeople who use high-pressure sales tactics, or salespeople who misrepresent their policies. In fact, one of the reasons why there is a 10-day period where people can cancel their policy is because of some of the high-pressure sales tactics employed by the annuity industry. Whenever you deal with someone in the financial industry, it is important to not let anyone pressure you or talk you into buying anything. As I’ve always said, you should never buy any financial product until you’ve had the opportunity to think about it and check it out independently. When someone attempts to have you sign something immediately, you can almost be guaranteed they’re not looking out for your best interests; rather, they’re only looking out for themselves.

With regard to the taxation of the annuity, once again your agent was not honest with you. Annuities are subject to required minimum distributions when someone turns 70½. Therefore, your typical annuity does not give you any protection from required minimum distributions.

As a side note, in a non-qualified annuity (an annuity not used to fund a tax-advantaged retirement plan or IRA) the money grows tax deferred and when you withdraw the money your income is subject to ordinary income tax. In other words, it doesn’t get the favorable capital gain treatment. Therefore, you get a break initially in the fact that you’re able to defer your taxes; however, when you eventually pay the taxes, more likely than not, you’re going to be in a much higher bracket because the money does not get favorable capital gain treatment.

On the whole, do I recommend annuities in this environment? The answer is no. Therefore, I told the gentleman that I believe he is making the right decision in cancelling the annuity. My reasons were quite simple, and that is he didn’t understand what he was buying and he was pressured into buying it. Those two reasons alone are enough for me to say he should cancel the policy. You should also use that as a guide. If someone is trying to pressure you into buying something, I can almost assure you it’s a great product for them, but it’s not necessarily good for you.

Good luck!

Rick is a fee-only financial advisor.  If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.
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