Equity Indexed Annuities: Why Not Lock Up My Money?

Many of today's hottest investment products require you to lock up your money for 7, 10, 12 or even 15 years. Don't do it. Here's why. This article is part of an ongoing series exposing the dangers of Equity-Indexed Annuities and provides information you won't find anywhere else. Guarding Your Wealth is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the president of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

March 27, 2004--Ive received a number of responses from my articles pointing out the problems with variable and equity-indexed annuities. Folks who call or email often ask the same question: Why not lock up my money? Im not going to use it anyway. Agents try to convince you that its good to lock up your money for 7, 10 or 15 years since you wont be using it anyway. This argument is complete hogwash, and let me show you why.

(Mr. Voudrie responds to questions from readers on an almost daily basis. If you would like clear straightforward unbiased answers to your financial questions, contact e-mail protected from spam bots)

First of all, the only reason, and I mean the only reason these advisors are asking you to lock up your money is because of the commission structure of these annuities. Thats how the insurance company makes sure they can pay brokers commissions of up to 15% on these investments. If you want to know how much your agent is earning off of your money, just take a look at the surrender penalty. It almost always equals the commission.

Just look at the underlying securities youre investing in when you buy a variable or equity indexed annuity. They work just like mutual funds or index funds, dont they? What if you were to purchase a mutual fund or index fund instead of an annuity. Would you have to lock up your money for 7 to 10 years then? Of course not! Youd be able to liquidate that money at any time at its current market value, without paying onerous surrender penalties. Locking up your money in an annuity is for the agents benefit, not yours.

Now that you understand that agents want you to lock up your money because it impacts their paycheck, lets look at the other side of the why not lock it up argument. You say that you arent going to use the money anyway, buy how can you be sure? How do you know you wont need that money?

Let me give a real life example. I have a client whose mother had a large portion of her portfolio invested in an equity indexed annuity. She wasnt going to use that money anyway, she thought, so why not lock it up and at least get a small, but guaranteed return?
Unfortunately, soon after, she developed Alzheimers and she had to move to an assisted living facility. Her annuity had a nursing home clause, which meant money could be withdrawn to cover nursing home care without incurring a surrender penalty. But she wasnt sick enough for a nursing home. So now, either her kids will have to pay $10,000 a month to cover her care, or she will have to pay steep penalties to get her own money. Either way, the family loses, not the agent.

There are many other situations that might cause you to tap that money. Some are negative, such as the death of a spouse, long term illness or needing to help a child going through a crisis. Some are positive. Maybe you decide you want to move to a warmer climate or help a grandchild pay for college. Whatever the reason, you cant predict the future and its foolish to paint yourself into a corner financially when you dont have to.

Many investors say they cant foresee a situation in which they might want to change their investment. But wanting to change your investment is even more likely to happen than a sudden illness. Interest rates can take a downward or upward trend. The market can tank or take off. Your income needs might increase beyond what youre currently earning. If your funds are locked up where you cant touch them, you wont be able to respond to these situations and opportunities. Its like locking an airplane on auto-pilot, so you cant navigate around a thunderstorm or take advantage of tailwinds.

Dont fall for the why not lock it up argument. Remember, agents are asking you to give up your flexibility so they can earn a big commission. It just isnt a fair trade. I am always happy to answer an investors questions about investments or annuities, so dont hesitate to call. I will be happy to help you in any way I can.

Mr. Voudrie is a Certified Financial Planner and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. His firm employs proprietary strategies designed to protect your investment and grow your wealth without locking you into years of surrender penalties. For more information call 1-877-827-1463 or email e-mail protected from spam bots.

Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email e-mail protected from spam bots.

Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:

Equity Indexed Annuities: There Are Better Growth Alternatives
Equity Indexed Annuities: There Are Better Alternatives (Stability)
Better Alternatives Than Equity Indexed Annuities
Equity Indexed Annuities: Agents Prey On Unsuspecting
Consumer Alert: Equity Index Annuities
Equity Indexed Annuities: Investing Aint What It Used To Be