Taking Stock: Variable annuity fine print trips up even financial experts

Malcolm Berko: The AXA Equitable variable annuity owner can withdraw up to $10,800 every year, or 6 percent of his “benefit base” of $168,000 (of course, everyone knows what that is), without incurring an “excess withdrawal” penalty.
Published: February 10, 2013
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Dear Mr. Berko: Your answer last month to CC in Vancouver, Wash., about taking $9,000 from his annuity for income confuses me. His adviser said that if he took more than 6 percent of his initial $112,000 investment, or $6,720, his annuity value would be reduced by the difference between the $9,000 he would take and the $6,720 he was allowed to take, or $2,820. One broker tells me the 6 percent amount should be based on the stock market value of the mutual funds.

Another insists that the 6 percent should be taken from the original investment as you stated. And my property and casualty agent says it should be 10 percent of the initial investment.

Then I called Ohio National (my annuity company) and had trouble understanding what was patiently explained to me. Who is correct?

HG, Cleveland

Dear HG: None of us.

Equitable, founded before the Civil War, was unquestionably among the most revered American corporations until it was taken over by AXA Group, a large French insurance conglomerate, in 1991. And last month, I told the owner of an AXA Equitable variable annuity that the maximum he could take from his variable annuity (VA) without depleting principal was 6 percent of his original $112,000 investment, or $6,720. That was also the amount given to him by his broker.

Because 6 percent of the original investment was what I was sure I'd been told and what I believed I had read, I knew I was right.

But not long afterward, I received a call from Discretion Winter, who handles delicate, sensitive and unusual tasks for AXA Equitable. She told me I was wrong. And she was right! But she corrected me in such a beguiling, charming, disarming manner that I was pleased to hear from her. So the Gospel according to Ms. Winter, who speaks with the knowledge and authority of AXA Equitable, is as follows.

The VA owner can withdraw up to $10,800 every year, or 6 percent of his “benefit base” of $168,000 (of course, everyone knows what that is), without incurring an “excess withdrawal” penalty.

The benefit base is calculated as the original investment of $112,000 plus the annual 6 percent guaranteed compounded interest rate over the number of years the policy is in force. And the $4,080 difference between $10,800 and $6,720 is considerable for CC.