Taking Stock: Variable annuity comes at a cost

Dear Mr. Berko:

Three years ago, I invested $44,000 in a variable annuity that is now worth $36,000. I was making a 10th annual $44,000 deposit at Bank of America from a piece of property I sold on an installment plan, when the teller told me that I could get a better yield if I visited with the bank's representative. The representative said the annuity was 100 percent guaranteed, that it was insured against loss, that it would pay 7 percent and that I could get my money back any time. He said if I signed the contract right then, I would get a 4 percent "up front" bonus. I did, so I started with an annuity worth $48,000.

But the guy lied through his teeth: The annuity only guarantees 6 percent; I can't get my money back; it's not insured against loss; and I've got to hold it for seven more years to get out without paying a back-end charge of 8 percent plus a 10 percent federal penalty because I won't be 59 and a half until 2017. And if I got out now, I'd only get $29,000 after penalties.

I have used the previous nine $44,000 annual payments to pay off my house, buy a new car, pay for three years of nursing home care for my mother and put my son through college. I have no debts, but I very badly need $19,000, and other than my job, I have no source or assets from which to get the $19,000. I have one last $44,000 check, but that doesn't come until next December, and I need $19,000 right away.

I called Bank of America and told them I was misled, but their attitude was "tough luck, Charlie." When I talked to the salesman, he said it was my fault because I wanted out early. And a lawyer said he couldn't help me. You are my last chance. Can you please help? And please do not use my real name. I'd be embarrassed because lots of people know me by my initials. Just sign me:

XX in Aurora

Dear XX:

Your letter represents a common occurrence at Bank of America and most big banks around the country. Banks and brokerage houses dearly like to sell annuities because the huge commissions (6 percent and up to 14 percent) are much more profitable than making loans, providing checking account services or renting safe deposit boxes. In the past four years, many insurance companies have tripled their commission payouts to banksters, and annuities have become enormously lucrative sources of revenue.

Unfortunately, most investors who bought variable annuities in the past four years have suffered huge losses, and "getting out" can be very costly, as you just discovered. Everybody and their cousins (like the real estate business a few years ago) are peddling variable annuities. So when all those silver-tongued mooks, yankers and scalawags begin selling the same product, it's time to flip the flapjack. Banks do an enormous annuity business because they have well-trained tellers who get a sweet piece of the commission pie when you swallow the bait.

Sadly, there's little I can do to help you, but perhaps many folks reading this column will be cautioned by your experience. The variable annuity you own is not one of the better products. Their choice of funds, "sphinx," pays a huge 8 percent commission, and its annual 3.3 percent carrying fees are enormously high. But you gotta hang in there for another seven years until you can terminate without losing a body part. Even then, I doubt the value will equal your initial investment. Therefore, you will have to annuitize its accumulated value for 10 years to get your original investment back. And when you annuitize, a portion of your money will become taxable at ordinary income rates. So do not withdraw $19,000 from that annuity, because it would seriously impair its future value, which is when you will really need that money.

Rather, I would negotiate a $19,000 home equity loan with one of the hometown community banks in Aurora -- rather than a Bank of America that relates to you as it would animal waste and won't value your business. Meanwhile, the few months of interest you pay will be deductible, and you can pay off the $19,000 loan when you receive the last $44,000 installment from the sale of your property.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Jul 20, 2011