GeneralThe WorryFree Retirement® Blog

There’s No Such Thing as a Free Lunch…

By April 12, 2022 No Comments

Watch the video to learn why, in most cases, “there’s no such thing as a free lunch” …

 

Ever wonder why complete strangers would take the time and their hard-earned money to invite you to a nice steak dinner. To entice you to come in the hope that you’ll soon be handing over your 401k to them, many of these financial dinner seminars start and end with the word FREE. It kind of goes like this: in exchange for one hour of your time, you get to enjoy a FREE dinner and learn how to get FREE money in the way of bonus’ provided by annuities. Free this, free that; everything is free. But as the old saying goes, “There’s no such thing as a free lunch and if it sounds too good to be true, it probably is.”

So, what is the FREE pitch of all of these supposed FREE bonus’ offered by annuities? How can an insurance company who issues these bonus annuities offer them in the first place? While the bonus’ are real, they’re not free and do come with a cost. Since all insurance companies are in the business of making money on your money, they must be able to cover things like FREE bonus’. So how do they do this? How can they give you an “up-front” bonus of up to 15% on your contribution to them, without there being some sort of catch? Well, they can’t. Let me explain.

In order for any insurance company to offer something “above and beyond” the normal interest they might pay in return for safeguarding your money with an annuity, they must account for that cost to them somewhere else in the contract. One way they do this is thru “surrender penalties”. Notice below the chart of two annuities; one that offers no bonus and one that does. As you can see, if you decide to surrender (cash out) the entire annuity prior to the end of the 10-year surrender term, you will have to cough up a lot of money in the way of penalties. Notice that with the bonus, those penalties are huge! In other words, the larger the bonus they add to the contract, the larger surrender charge to you if you cancel the contract before the end of its surrender term.

The second way that an insurance company will try to recoup this FREE bonus is by not crediting as much in the way of index credits. Now, this can get really complicated but basically, if you have an indexed annuity with a bonus paid up front, the insurance company will not pay you as much if the market goes up (the participation percentage) as they will on a contract that does not have a bonus. So, in the end, there is the possibility that a contract without a bonus will outperform one that does offer a bonus.

And finally, you have to watch out for those companies that offer FREE bonus’ but then, turn around and charge an annual fee for it. In many cases, I’ve witnessed unsuspecting Savers who rush into these bonus annuities only to later discover that there is a one percent fee charged against their annuity to cover the bonus.

Moral to the story folks, when considering any FREE money offered by an annuity, be sure you know exactly what the cost of the bonus is. Remember, “there’s no such thing as a free lunch and if it sounds too good to be true, it probably is.”

Leave a Reply