My Annuity Can Never Go Down
A lot of investors are under the
impression their annuity will automatically
earn 5% annually and never go down...when they
discover something different than this, they may
be subject to H.D.N.S.T.
Most readers of this website are unaware of a
non contagious biological virus that afflicts a certain
segment of the annuity owner population. This
particular virus, usually caught in an airborn fashion
directly from a deliberative host is known by its acronym
H.D.N.S.T. The virus itself can remain dormant for months,
even years at a time. Symptoms of the affliction can include,
but are not limited to : sweaty palms, throbbing cerebral cortex,
anger, feelings of inferiority and sadness and disbelief. Symptoms usually manifest themselves one time only (much like chicken pox) and the outbreak of these symptoms occurs specifically during the moment the policy owner (for whatever reason) has decided to study their policy statement in greater detail than before. Once the policy owner realizes his account has different terms than he or she was led to believe, an outbreak of H.D.N.S.T. occurs immediately.
Since this medical diagnosis is of a psychological nature,
privacy concerns are paramount. The afflicted policy owner
is usually too embarrassed to confide to anyone the nature of this problem.
H.D.N.S.T. is also known by its Full Latin Genus as :
"He Did Not Say That"
After a little education on how to decipher which numbers on
their annuity statements actually represent true accumulated
account value, in some cases policy owners occasionally recognize
that what their agent may have said, or not said, is not reflected
in the actual policy they have. This leads to the aforementioned
psychological condition and the reason that annuities, in general,
can be perceived as ambiguous, despite their virtue as excellent asset protection vehicles.
Specifically, we are referencing annuity values that for one reason or another have declined below the prior years accumulated principal, in spite of assurances from an agent that such potentialities could not occur. Structurally, contractual guarantees normally prevent account values from falling below the prior years accumulated principal, but there are only a couple of circumstances where it is possible.
And here are those 2 circumstances:
...and somehow you were led to believe that principal values were protected on an annual basis while you were alive.
a) Perhaps the broker had mentioned a
withdrawal rate of 5%, for example,
and somehow you thought that
was what you were actually
b) Or he referenced a growth rate in
an income only account that had
nothing to do with real lump sum
values, and this number hypnotized you.
c) Or you had heard that your account could never fall below zero, despite the fact that your funds are fully participating in the highs and lows of the stock market.
d) Or you had heard that there were principal guarantees, but mis-heard the important caveat that this guarantee only applied upon your death !
e) Perhaps you were unaware of the totality of fees in variable
annuities that tend to chip away at growth opportunities.
Fees in variable annuities consist of :
1) mortality and expense fees, 2) administrative fees, 3)
underlying fund expenses on sub accounts, 4) contract
maintenance fees and 5) turnover costs and 6) possible rider
fees as well.
Unlike their cousins the fixed and the fixed indexed annuities, annual principal guarantees and minimum interest rate guarantees while you are living are not typically available in variable annuities.
If you are comfortably taking out more money than you are earning, this may be because you are unaware that the income growth rate (guaranteed growth rate on money available only for income checks, not lump sum disbursements) is not your actual growth rate . Often these income growth rate have high guarantees like 7% or 8% annually. One of the biggest misconceptions amongst the public is that the growth rate in the income account represents the actual growth rate on accumulated principal.
THIS IS NOT TRUE.
and for emphasis again,
IT IS NOT TRUE.
And believing it to be true could lead you as the policy owner to jeopardize principal, which may not be in your best interest.
If you believe you are earning 8% annually on your accumulation value (but are really earning 4%), and you are withdrawing 7% annually, you will see your accumulated account balance decline by a net 3% annually. Now, true enough, that income withdrawal payment will continue till your last heartbeat regardless of principal depletion (because that is how income riders work) but you may be disinclined to see your policy values go too far south in the meantime.
In both cases above, H.D.N.S.T. is not terminal. You will not die. In fact, clarity is peace ! And there may be better contracts to transfer your existing contracts to that meet your needs more specifically.