May 24, 2013 Admin | May 24, 2013 Many people are enticed to buy an annuity with an initial teaser rate. Why should this be avoided?
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Many people see the teaser rate which is generally a few percent higher than the average rate and will think that it is a good investment. It is a lot like a bate and switch since you are baited by the good rate and then it will be switched to a lower rate after a period of time. Because the rate changes you may start with a very good rate and then be switched to a rate in which you are not making any money. You may then want to take your money out, but you are hit with a surrender fee which is going to eat up the money you just made with the high teaser rate.
Great answer, Thomas! Let’s look at an example. The local broker tells his client that he can get them in a fixed annuity for 4%. This sounds good to the client as their money is earning .2% in the bank. They jump at it. The problem is, this is a teaser rate that will go away in a matter of months (1 to 2 years normally) and it will be replaced with a lower rate that will mirror something closer to what that bank was offering you. You want to get out? The annuity has very high redemption commissions (as well as very high yearly fees) that will cost you dearly if you try to pull out early. They got you! So what is a person to do?
Avoid all annuities except maybe an immediate annuity and only select that option when you understand it clearly and you have reduced your fees dramatically (Vanguard will provide you some of the cheapest immediate annuities). If you have an annuity that you are stuck in, you have options. You could move it to a low fee variable annuity at Vanguard using a 1035 exchange, but first identify what redemption commissions there would be. Educate yourself clearly and prepare carefully before buying an annuity, transferring an annuity, or cashing out an annuity. There is a great deal of YOUR money at stake.