Three Quiet Annuity Mistakes That Can Cost You for Years

Nobody gets a phone call that says, "Hey, you just made a mistake with your annuity." These problems don't happen with a bang. They happen quietly, over years, and that's exactly why they're so common. Here are three I see over and over, and how to check your own contract for each one.

Mistake One: Letting a Contract Sit After the Surrender Period Ends

Here's how this usually happens. Years ago, you bought a fixed annuity or a fixed indexed annuity. There was a surrender period attached to it, maybe seven years, maybe ten. During that time, pulling out more than the free withdrawal amount meant paying a charge. So you did the smart thing and left it alone.

But then the surrender period ended, and nothing happened. No letter arrived saying, "Your money is free now. Here are your options." The contract just kept renewing.

Here's the part most people don't know. After the surrender period, many contracts credit what's called a renewal rate. That rate is set by the insurance company, and it's often lower than what the same company, or a different one, is offering to brand-new money today. So you can have a contract that's doing exactly what it was designed to do and still be earning less than it could, simply because nobody looked at it.

The fix isn't complicated. Find your contract. Look at the issue date and the surrender schedule. If the surrender period is over, compare what you're being credited now with what's available today. Sometimes staying put is the right answer. Sometimes it isn't. But you should know instead of finding out years later.

One caution if you do decide to move money: how you move it matters. A direct transfer between insurance companies, sometimes called a 1035 exchange for non-qualified annuities, keeps the tax treatment intact. Cashing out and writing a new check yourself can create a tax bill you didn't need. This isn't something to handle off a website on your own. Get it reviewed first.

Mistake Two: Not Knowing What Your Income Rider Actually Does

A lot of annuities sold over the last fifteen years came with an income rider, sometimes called a guaranteed lifetime withdrawal benefit. The way it often gets explained at the kitchen table is that your income base grows at a guaranteed rate every year. That sounds great. Who doesn't want a guaranteed rate?

Here's the catch. The income base is not your money. It's not a balance you can walk away with. It's a number used to calculate the income the rider will pay you, under the rules of that specific rider. Your actual cash value, the money you could withdraw or leave to your family, is a separate number, and those two numbers can be very far apart.

I've sat with people who were sure they had one amount because they'd been watching the income base grow on their statement. Then we looked at the cash value, and it was a very different conversation.

So here are three questions worth asking about any income rider you own:

• What is my actual cash value today, separate from the income base?
• What will the rider pay me per year, and starting when?
• What am I paying for this rider every year?

That last question matters because riders usually carry a fee, and that fee comes out whether you ever turn the income on or not. If you're never going to use the income, you might be paying for a benefit you don't need. If you are going to use it, you should know exactly what it pays and when it makes sense to start. Either way, you need the real numbers from your statement, not the brochure language from when you bought it.

The income base is not your money. It's a number used to calculate income under the rider's rules, and it can be very far apart from your actual cash value.

Mistake Three: Getting the Ownership and Beneficiary Setup Wrong

This one doesn't show up until the worst possible moment, which is when someone passes away. Every annuity has an owner, an annuitant, and a beneficiary. The owner controls the contract. The annuitant is the person whose life the contract is measured on. The beneficiary is who receives the money at death.

On a lot of contracts, these are all the same person, or a married couple, and everything lines up fine. But I regularly see setups that don't match what the family actually wants. Things like:

• A beneficiary designation that still names an ex-spouse.
• The estate named as beneficiary, which can push the money through probate and take away options your heirs would otherwise have.
• An owner and annuitant set up differently in a way that triggers a payout at a time nobody planned for.
• A trust named as owner or beneficiary without anyone checking that the trust is actually written to handle an annuity.

Here's the thing to understand: the beneficiary form on the annuity controls, not your will. If your will says one thing and the contract says another, the contract usually wins.

The fix is simple, and it's free. Pull out each contract you own. Look at the owner, the annuitant, and the beneficiaries, both primary and contingent. Ask yourself: if something happened tomorrow, would this money go where I want it to go, in the way I want it to get there? If the answer is anything other than a clear yes, fix it now, while it's just a form to update.

Checking Your Own Contracts

None of these three checks take long. Most people can find the answers in one sitting, with their statements in front of them.

• Check the surrender schedule and compare your renewal rate to what's currently available.
• Separate your income rider's income base from your actual cash value, and confirm the rider's cost and payout terms.
• Confirm the owner, annuitant, and beneficiary designations match what you actually want to happen.

Sometimes the answer to all three is that everything is already set up the way you want it. That's a perfectly good outcome too. The point isn't to assume something is wrong. It's to actually look, instead of finding out years later that nobody did.