Should We Cash Out Our Variable Annuity to Pay Off Debt?

Summary

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Episode Overview

Title: Should We Cash Out Our Variable Annuity to Pay Off Debt?
Date: October 15, 2025
Hosts: Ramsey Network (Dave Ramsey, Ken Coleman, et al.)
Featured Caller: Valerie from Minneapolis

In this episode, the hosts answer listener questions about personal finance decisions, particularly focusing on using a variable annuity to pay off debt. Through Valerie’s situation, the hosts break down how variable annuities work, why they’re typically inappropriate for young investors, and how to make sound financial decisions when stuck with complex products.

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Key Discussion Points & Insights

1. Valerie’s Situation: Variable Annuity and Debt (00:16–01:59)

• Valerie’s Question (00:20): Valerie and her husband are in Baby Step 2 (debt payoff) and are considering cashing out a $25,000 variable annuity she bought after selling property. She wonders if they should use it to pay down their debt.
• The annuity matures at age 65, was bought in 2021, and was recommended by her financial advisor (who, as Dave points out, is actually an insurance agent).

Notable Quote

“No one sells this stuff to a 34 year old except insurance agents... Sometimes a financial advisor will sell a variable annuity, but never to a 34 year old.”
— Dave Ramsey, (02:13)

2. Understanding Variable Annuities & Surrender Charges (01:12–03:21)

• Variable Annuity Basics: Essentially mutual funds inside an insurance wrapper; offers principal protection and a minimum return.
• Critical Caveat: Early withdrawal (“surrender”) could result in significant penalties (“surrender charges”) that usually last 5–7 years.
• Advice: Find out the current surrender charge before deciding to cash out.
  • If the charge is minor, cash out and use the money to pay down debt.
  • If the charge is high, wait until it drops or disappears.

Notable Quote

“The surrender charge will tell you whether to tap the brakes or cash it. If the surrender charge is minor, take it and cash it out and use it on your Baby Step 2. Right? But if the surrender charge is half of what you put in...there’s no reason to take that huge hit.”
— Dave Ramsey, (03:04)

3. Evaluate Your Advisor and Get Multiple Opinions (02:00–04:42)

• Advisor’s Role: Valerie’s “advisor” was actually selling insurance, not providing fiduciary-level investment advice.
• Action Step: Gather all information on the annuity and meet with a vetted, fiduciary financial advisor (like a Ramsey SmartVestor Pro).
• General Guidance: Always double-check advice from any professional, and get second opinions from those who don’t sell the product in question.

Notable Quote

“Before you sign on to a financial product, make sure that you are getting the pros and cons okay from multiple sources.”
— Ken Coleman, (04:12)

4. Bad Industry Practices & How to Respond (04:42–06:58)

• Intimidation Tactics: Many people don’t understand investing; unscrupulous salespeople take advantage by acting as untouchable “experts.”
• Ramsey Rule: If an advisor talks down to you, intimidates, or can’t explain things clearly, fire them immediately.

Notable Quote

“Anytime someone in the investment world...drops that kind of professor, I’m going to talk down to you posture, fire their butt...Their job is not to talk down to you. Their job is not to do it for you. Their job is to teach you.”
— Dave Ramsey, (04:50)

5. The Realities of Variable Annuities — Fees, Features & Suitability (06:59–end)

• Fee Structure: Investors pay both mutual fund fees and annuity fees, resulting in double fees (and commissions for the seller).
• Key “Benefits” Debunked:
  • Principal guarantees are largely unnecessary for young buyers; the market historically rises over 5–7-year spans.
  • Guaranteed returns are lower than the long-term market average.
  • Passing outside of probate is a minor perk for most.
• Who Should Use Them? Variable annuities are usually inappropriate for young investors. Even Dave Ramsey, at age 64, has “precisely zero” annuities.

Notable Quote

“If you’re a scaredy cat about the market...the variable annuity gives you some comfort...But I’m 64. The number of variable annuities I own is precisely zero.”
— Dave Ramsey, (06:58 & end)

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Memorable Moments & Practical Takeaways

• Action for Valerie: Gather surrender charge info, consult a SmartVestor Pro, weigh penalties vs. debt payoff benefits.
• Listener Homework: Vet your advisor’s credentials, get advice from real financial professionals, never buy complex products you don’t fully understand.

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Timestamps for Important Segments

• 00:16–01:59: Valerie describes her situation and the annuity details.
• 01:12–03:21: Dave Ramsey breaks down what a variable annuity is and discusses surrender charges.
• 02:00–04:12: Discussion about the advisor’s role, suitability, and next steps.
• 04:12–04:42: Ken Coleman on the importance of multiple opinions.
• 04:42–06:58: Dave Ramsey’s rules for firing “talk-down” advisors.
• 06:59–end: Deep dive into annuity fee structure, guarantees, and why such products are usually unsuitable for young investors.

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Tone & Language

The episode features Ramsey’s trademark directness, humor, and passionate energy. Listeners are encouraged to both educate themselves and demand clear, respectful communication from all financial professionals.

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Summary Takeaway:
If you’re considering liquidating a complicated financial product to pay off debt, get all the facts, weigh surrender charges vs. benefits, and always get advice from a credentialed fiduciary—not just someone trying to sell you a product. And if your “advisor” can't teach you what you need to know, “fire their butt.”

Transcript

[A]

This episode is brought to you by SmartVestor.

[B]

Connect with an investing pro near you at RamseySolutions.com SmartVestor Valerie's in Minneapolis. Hi, Valerie, how are you?

[C]

Hi. I'm good, thanks. How are you guys?

[B]

Better than we deserve. What's up?

[C]

Great. Well, I'll try and keep it quick. I had a question. My husband and I were talking about an annuity that I purchased after. After the sale of a property a few years ago. My advisor recommended that we buy this $25,000 annuity. This was before we were married. And I was wondering, in baby step two, would you treat that kind of like, you know, in the same category as insurance or something like that where we just get rid of it to help us knock down that debt in baby step two?

[B]

Well, I would certainly learn more about it to make the decision. How long have you had it?

[C]

I bought it in 2021 and it was supposed to mature when I turned, I think, 65, I believe it's a variable rate annuity and it was supposed to be like a guaranteed payout or something like that starting at retirement.

[B]

Yeah. So a variable annuity is mutual funds inside of an annuity, which gives you a guarantee on the principal. You'll never lose principal and you'll have a minimum return on it, which you would have gotten both of those things anyway had you stayed until 65, because you're not that old. The trick with this is they also have a surrender charge. And what I'm trying to figure out, probably you're probably still. Usually they're gone by seven years, maybe five years, and you're only four in. So you may have a huge surrender charge if you cash out early, I don't know. But you may have in that. If that's the case, we're probably not going to cash it out now. But I am questioning. How old are you?

[C]

I'm 38.

[B]

Yeah. Okay. Your advisor is not a financial advisor. Your advisor is an insurance agent. So you need to change because they don't.

[C]

I'm definitely open to that.

[B]

Yeah.

[C]

Yeah.

[B]

No one, no one sells this stuff to a 34 year old except insurance agents. Sometimes a financial advisor will sell a variable annuity, but never to a 34 year old. It would be very, very unusual. Usually the reason is that insurance agents can't sell mutual funds. They don't have a securities license. So this is how they get around it. They got you into mutual funds inside of a variable annuity because this is the only product they could sell. That was a real investment and it's actually not a horrible investment except for the fact that you're trapped in it now and probably with a surrender charge. So I want you to get all the information together and get with go to one of our smartvestor pros and sit down with them and let's learn about what the surrender charge is. The surrender charge will tell you whether to tap the brakes or cash it. If the surrender charge is minor, take it and cash it out and use it on your baby step two. Right? But if the surrender charge is half of what you put in or 25% of what you put in and you can wait three years and it goes away, meanwhile it is going up in value, the then there's no reason to take that huge hit.

[C]

Got it.

[B]

So just kind of analyze it that way and look at the risk return on it and that'll help you move in that direction. So just go to ramseysolutions.com we're not in the investment business. We don't sell investments. Okay? We teach, we're teachers and stir up trouble. That's what we do. But we do have folks in the insurance world that we recommend Zander insurance and property and casualty folks. And the Ramsey trusted side. We do have people in the investment world to help you sit down. Ken uses one, I use one. We call them smartvestor pros. And they're people that we have vetted and that we are comfortable with and that have the heart of a teacher that are actual financial advisors. They actually can sell mutual funds for your Roth IRA. Do your 401k rollover, help you set stuff up and get it going and sit down with you and look at your overall situation.

[A]

It's a very good point. I just would caution our large audience in situation like this. Before you sign on to a financial product, make sure that you are getting the pros and cons okay from multiple sources. The Internet's going to give you pros and cons, but talk to real professionals. So if you sit down with somebody like this is in insurance. Go sit with somebody who doesn't sell that product and learn enough to Dave's point that you actually understand what you're doing. This is what happens. People just get sold and they go with the first thing that they get pitched.

[B]

Well, the problem is that investing falls in the heading of something I don't understand for most people. And so I'm intimidated. And then to add to that, sometimes people in the investment world unscrupulously use that to their advantage and just go and Basically adopt a, I don't know, an intimidation sales technique and go, well, I know you don't understand, but I do this for a living. And it's real. The arrogant type of a thing, right? So anytime someone in the investment world, in the money world drops their glasses on the end of their nose and drops that kind of professor, I'm going to talk down to you posture, fire their butt, right? Then just look at them go, oh, we're done, we're done. We're so done. We're not even going to have a clean breakup. You're just getting out of my house right now, okay? Because their job is not to talk down to you. Their job is not to do it for you. Their job is to teach you. And by the way, most of you have more money than they have. So you're sitting there with a half million dollars and this guy's using, driving $100 Toyota, okay? So you know, most of the time that's what's going on. So you just don't need to take crap off of these people. Their job is to put these investing things into a lingo where you can understand it. And if they sound like Charlie Brown's teacher, even if they're trying, doesn't matter. You got to get rid of them. They have to be able to explain this in a way where you, to your point, Ken, understand what you are doing with your freaking money that you got with the sweat of your brow. And don't you dare act like you're gonna like give me attitude smack you sideways into Sunday. I mean, no possible way you're going to pull that crap. Insurance people do it sometimes. Real estate people do it. They're not the, they're not the worst though, investment people. And they just, you know, and so what happens is, is that, you know, then they can sell them whatever they want to sell them. Now again, this product that she bought is not horrible, Right? It's just inappropriate for a 34 year old.

[A]

Exactly.

[B]

So the, the variable annuity is a mutual fund inside of an annuity. The annuity protects it from taxes. It grows like a 401k. A traditional or a traditional IRA grows without paying taxes till you take your money out. The only downside is when you take your money out, it's taxed at ordinary income, not at capital gains, which is triple what most of you are going to pay in taxes. So the taxes on the growth are very, very high. Also, you're charged not only a mutual fund fee, but you're charged the annuity Fee. And this is where their commissions come from. Right. And so nothing wrong with that, but you got doubled up on the fees. It's not the end of the world because they're not super high, but they're not great. And also that you could get these features. There are three or four primary features for a variable annuity. A mutual fund inside of an annuity. Primary feature number one, they will give you a guarantee of your principal if you leave it alone five or seven years. Okay, well, 97% of the five year periods in stock market's history are up. So that's not much of a guarantee. Whoopty doopty. But it made you feel good. If you're a scaredy cat, I'm scared about the market. I'm just so scared. If you go in telling people that they're gonna go, oh well, we can put you in a variable annuity and protect your principal, but you're getting the same thing, but just by hanging out for five to seven years. Okay. The second thing is they'll guarantee you a 5 or a 6% rate of return. Well, the stock market is averaged 11% for 75, 80, 90 years, okay. Since its inception, the S and P has. So if it's averaged to guarantee you five or six is whoop de dop dee. You can get no guarantee, but you got a guarantee. Okay? So I know I'm at least going to get this and I'm at least got my principal protected. But what it does is if you're scared and you don't learn enough about how the market moves before you buy, then the variable annuity gives you some comfort. The third thing it does that is actually more legitimate than the other two is you can name a beneficiary and it passes outside probate. So there's no probate tax on it in your state and it does not avoid federal estate taxes. But that's not a problem for most people anyway. Now with the current Trump limits, most people, you get $25 million without taxes on federal, okay? But if you're under 25 million, you not got federal. But on state you can avoid it with a, with this because it goes, it has a beneficiary element to it because it's technically an insurance product. So it works like insurance. It goes directly to the person outside of the estate. So that, that's actually a nice little touch if you care. By the way, I'm 64. The number of variable annuities I own is precisely zero.