We frequently see investors’ accounts stuck in inappropriate annuity contracts with insurance companies, facing the dilemma to choose between taking the huge surrender charge penalty or continuing to hold on until surrender period expires. Before signing an annuity contract, here are the tips that may help you avoid the most expensive investment mistake:
(1) Think twice before putting IRA accounts into annuity contracts. IRA accounts are tax deferred or tax free vehicles, is it necessary to put them into another tax deferred vehicles?
(2) Think twice if annuitization is mandatory in the annuity contract. By annuitization, annuitants are betting insurance companies under-estimate annuitants’ life expectancy. Are Insurance companies really that dumb?
(3) Variable annuity has very limited choice of investment options, typically limited to at most a few hundreds of mutual funds. If money is not in an annuity contract, 15,000 mutual funds, 1000 ETF’s, 10,000 stocks, real estates, separately managed accounts, and thousands of alternative investments are available to compete for your business. Which will be more cost effective?
(4) Annuity can be used as a tax deferred vehicle. But if you are paying 2% fee on 5% return, you are paying tax to insurance companies instead of IRS. Paying tax to IRS may not a bad thing after all if you really make money from investment.
(5) Annuity surrender charge is used to pay sales commission. Why not choose an annuity without surrender charge if you really want to buy a contract?