A Ten-Year Surrender Schedule Sold to a Client Who Needs Cash in Eighteen Months
Ruth is 72, widowed, with $1,950 a month in Social Security and a small pension. She has $300,000 in an IRA certificate maturing in 30 days and $18,000 in a savings account, and she takes her required minimum distribution each year. She expects to need about $45,000 within 18 months for a new roof and a knee replacement. A producer recommends transferring the entire $300,000 into a fixed indexed annuity with an 8% premium bonus, a 10-year declining surrender charge, a 10% annual free withdrawal, a market value adjustment, and a cap rate the insurer may reset each year. He tells her the bonus 'costs you nothing' and that she 'can get at her money any time.'
1. Identify the suitability and disclosure problems in this recommendation.
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Liquidity mismatch is the central problem. The 10% free withdrawal on $300,000 is $30,000. Ruth's $45,000 need is 15% of the contract, so $15,000 would come out of the surrender schedule, triggering a surrender charge plus a market value adjustment. A 10-year schedule on a 72-year-old whose stated need is 18 months away is not reasonably related to her circumstances.
The 'bonus costs you nothing' statement is false. Premium bonuses are typically funded through a lower cap, a longer surrender schedule, or a recapture/vesting provision that claws the bonus back if she surrenders early. She pays for it in reduced crediting and reduced liquidity.
'Any time' is also false. She can request a withdrawal at any time, but not without cost, and the MVA can make the cost larger exactly when interest rates have risen - the moment she would want out.
Unsuitable concentration. Committing the entire IRA plus reliance on Social Security leaves her with only $18,000 of genuinely liquid money for emergencies.
The cap reset is a disclosure item, not a detail. A non-guaranteed cap that can be reset annually means the illustrated return is not a promise; she must understand the floor is protection against loss, not a guarantee of growth.
Documentation. Washington applies annuity suitability/best-interest standards: the producer must have a reasonable basis for the recommendation, obtain suitability information (financial situation, liquidity needs, risk tolerance, time horizon), and document it in writing. Nothing in this fact pattern supports a ten-year commitment.
2. Design a more suitable approach, and explain the mechanics of moving the IRA money without creating a tax problem.
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Split the money by job.
- Keep roughly $50,000–$60,000 in a liquid vehicle - a short CD, money market, or Treasury ladder - to cover the roof and the knee replacement with certainty and no penalty. That money has a one-to-two-year horizon and should not be in an annuity at all.
- For the income/growth portion, use a shorter commitment: a multi-year guaranteed annuity with a 3–5 year surrender schedule, or a fixed indexed annuity with a genuinely short schedule and a meaningful free-withdrawal percentage.
- If she wants a lifetime income floor, consider annuitizing or purchasing a single premium immediate annuity for part of the balance, which produces income without a surrender charge at all.
- Hold back an emergency reserve beyond the annuity.
Transfer mechanics: the IRA is already qualified money, so this is not a 1035 exchange between nonqualified contracts. It should be a direct trustee-to-trustee transfer from the certificate custodian to the annuity custodian. A check made payable to Ruth and redeposited within 60 days is a rollover with withholding and one-rollover-per-year risk; a direct transfer avoids both.
RMD interaction is a hard constraint. Ruth is past her required beginning date, so the annuity must permit required minimum distributions, and the year-of-transfer RMD must be satisfied from the IRA (annuity or certificate) for that year. The 10% free withdrawal would normally cover an RMD, but a product that cannot distribute an RMD without a surrender charge is unsuitable for an IRA at her age.
Do not skip the free look. Washington gives an annuity buyer a free examination period (generally at least 10 days, longer in certain replacement situations): she may return the contract for a full refund of premium. Deliver it, point it out, and don't let a signature on the delivery receipt become a dispute later.