Surrender Charges Revisited
One special need that annuities can provide is access to values in the contract and peace of mind. At first glance, surrender charges appear to restrict access. However, as you’ll soon see, the surrender charges can be a plus. One of the best ways to appreciate the surrender charge period is to compare the annuity with other financial products. For example, if you were to purchase 1,000 shares of stock valued at $20 per share, what would you be able to sell the stock for two years from now if we were in the midst of a recession? You don’t know, do you? If you were to invest $100,000 in muni-bonds, what would you be able to sell those muni-bonds for two years from now if interest rates increase appreciably? If you were to purchase that gorgeous $300,000 home overlooking the fifth fairway, what would you be able to sell it for two years from now? Plus, how long would it take you to sell it?
The surrender charges, the second best thing about a fixed annuity, can be a benefit because the surrender charges are expressed in every annuity contract. In 99 percent of everything we buy, we have no idea what the selling price is going to be. However, we always know our selling price because it is specified in every fixed annuity contract that we offer. Be proud of the surrender charge period. We can give people what they want—certainty, a known quantity, a guarantee, no surprises—a selling price (minimum cash surrender value) for every year of their fixed annuity.
When you really think about it, doesn’t an actuary provide a surrender charge period to protect an insurance company from excess withdrawals and premature surrenders—in other words, a run on the bank? Where would you like to have your money—with an insurance company that is trying to protect itself from a run on the bank, or with an insurance company that is not trying to protect itself?
There must be three winners. The insurance company must win . . . we must win, but above all, our clients must win.
Does the above mean that a senior should feel more comfortable with an annuity contract with a 15-year surrender charge period than a 5-year surrender charge period? No, in fact, there are many advantages for seniors to consider shorter surrender charge periods. However, the above points out the wisdom of an insurer having a reasonable surrender charge period. In addition, if an emergency were to arise, a properly diversified senior is one who can turn to his money market and passbook savings first, his CD second, and a free partial withdrawal from the annuity third.
