The easy definition of the word "conundrum" is anything that puzzles you. Dictionary.com describes conundrum as a riddle of which the answer is a pun or a play on words, and point out one of the most popular conundrums we all are familiar with: What's black and white and read all over? The answer is a newspaper. Witty, huh?
Well, I have somewhat of a conundrum that seems to be inexplicably plaguing the annuity industry. What specific aspect of a deferred annuity contract seems so simple and basic, but ends up being so hard for many to understand? The answer would be the 10 percent free withdrawal rules. This is not witty conundrum at all, but is a true "head scratcher" in my opinion.
I am continually baffled by this "annuity conundrum" and I continue to get tons of calls from people that own or are thinking about owning an annuity, and have no clue how this basic contractual provision works and how it should (or should not) be used. At this point, I am assuming (i.e., hoping) that all agents understand how the 10 percent annual free withdrawal provision works with most deferred annuity contracts. However, judging from the inbound calls I get on a monthly basis, there is a huge need to make sure the client understands this basic liquidity provision as well.
I know this is very elementary for most agents, but covering the basics seems to be needed. The vast majority of deferred annuities have a contractual provision that allows some liquidity for the client. Most times, that annual liquidity allotment is 10 percent of the accumulation value total, not the income rider total. Now that this has been factually established, let's clarify a few mistakes that I think the industry is making when it comes to the 10 percent free withdrawal issue.
Stop using "10 percent free withdrawal" as a bullet point
I always laugh out loud when I hear a client regurgitate some annuity presentation they heard, and list the 10 percent withdrawal provision as a reason they are considering or have bought an annuity. What an absolute joke. To me, that's like saying you bought a car because it has four tires. Of course it has four tires, and of course you can take out some of your own money!
Not only do I blame the selling agent on this, but the carriers and FMOs as well. If I get one more product promotional email from an FMO that trumpets the withdrawal feature, I'm going to scream. Don't get me wrong, the 10 percent liquidity feature can come in handy if needed, but I see too many email blasts and product bullet-point lists that prominently display this basic withdrawal rule as a top reason to purchase a deferred annuity.
It's important to fully explain to clients that when you take money out of any annuity, it lessens the accumulation value and any rider value proportionately or dollar-for-dollar. I am always shocked and surprised how many annuity owners mistakenly think that taking money out of their policy does not disrupt or subtract from the contractual guarantees. That's either a reflection of the annuity buying public being misinformed, or the agent not fully covering that base. I'm placing blame primarily on the latter.
Liquidity should be an emergency strategy
