Recently a client of ours came to us with an indexed annuity that he had just bought and wanted us to take an independent look at.  We called the annuity company with him and asked a wide variety of questions to better understand the terms and conditions of the product.  Our clients’ main concern was how he could access his money.  What we found out was news to our client and he didn’t like what we learned.

This particular product had ten-year surrender period.  This means if our client needed to pull his lump sum of money out he would have been charged between 12% and 4% depending on which contact year he did so.  He did have access to 10% of the contract value every year without penalty but not until the second contract year.  This annuity also had a lifetime income payment benefit.  The longer he waited to access this benefit the higher percentage of his benefit base value he could access.  At our clients current age he could access 5.2% a year for the rest of his life.  The major problem with this was that once he attempted to access this income rider, the payment amount was fixed for life, which would not keep up with inflation.  This benefit was costing our client .95%.

After the phone call I asked our client what he told the people who sold him this product.  He said, “I want to be able to access my money when I need it.”  This statement threw up a giant red flag to me because this particular annuity had plenty of limitations on how he could access his money.  Then I looked at the start date of this contract and realized that he had purchased this product within the last month. I immediately thought of the free look period.

Every insurance-based product has what is called a free look period, which varies by company anywhere between 10 days to 30 days.  I explained this to the client and asked, “If we can get you out of this using the free look period provision is that something you would want?”  The client decided that he wanted to get out of this contract.  We called the company back and learned that this was indeed possible and exercised his right as a consumer and got a full refund of premium.  Our client was very pleased with this and was able to choose other investment options with us that better suited his needs and goals.
To avoid situations like this, it is critical to read the fine print of any annuity to understand the terms and conditions. If you don’t understand something, ask questions. We are always happy to evaluate annuity products for our clients.