By Malcolm Berko
Dear Mr. Berko:
In March of 2007, I was making an annual $44,000 deposit at the Bank of America from a piece of property I sold on an installment plan. 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 I could get my money back at anytime. He said if I signed the contract today, I would get a 4 percent “up front” bonus and I did so. I started with an annuity worth $45,700.
But the guy lied through his teeth because the annuity only guarantees 6 percent, I can’t get my money back, and it’s not insured against loss. I’ve got to hold it seven more years to get out without paying a penalty of 8 percent plus a 10 percent federal tax because I won’t be 59 1/2 until 2017. So if I got out now, I’d only receive $29,000. 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 debt, but I very badly need $19,000. Other than my job, I have no source or assets to get the $19,000. I have one last $44,000 check, but that doesn’t come until next March. I need $19,000 right away.
I called the 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: Aurora.
Dear XX:
Your letter represents a common occurrence at many big banks around the country. Banks and brokerage houses dearly love to sell annuities because the huge commissions (6 percent 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 increased fees 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.
There’s little I can do to help you, but perhaps other 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 mutual funds “sphinx,” they pay the bank a huge 9 percent commission and its annual 3.3 percent carrying fees are enormously high.
But you gotta hang in there for another seven years till 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 the 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. 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 10 months of interest you pay will be deductible and you can pay off the $19,000 loan when you receive your 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 Web site at www.creators.com. © 2010 Creators Syndicate Inc.
