Annuity Rate

Converting Annuities to Life

Lots of seniors have purchased annuities for their safety, simplicity and income tax deferral. Yet some annuity owners lose half of their annuity value and most aren’t even aware of this!

Let’s take a look at how this happens with a hypothetical example.

Mary, age 55, purchased a fixed annuity for $50,000. She held it for 10 years and the interest accumulated nicely. The account doubled to $100,000 (a compound rate of 7.17% which could have been locked in 10 years ago per data from Annuity Shopper Magazine, Dec. 2001). So far, Mary was very happy with this safe alternative. She never gave much thought to what happens to the annuity at her death. She figured she would eventually withdraw the money and use it.

The truth is, less than 10% of the annuity owners I meet make any withdrawals from their annuity. If the owner passes away, the policies can get hit with some very large taxes. In Mary’s case, here’s the picture at the time of death when the taxes are due.

Annuity Value $100,000

Income Tax -17,500

Estate Tax -33,0001

Beneficiaries get $ 49,500

In the blink of an eye, Mary’s beneficiary loses $50,500—over half of the annuity value! Is there a remedy? YES!

If you do not plan to use the annuity for yourself, you can make a smart move with the following tactic:

Annuitize the annuity (deferred taxes or sales charges could apply or 10% tax penalty if under age 59½—please call for a review of your contract). When you annuitize the annuity, you select a payout option that may include a lifetime income from the annuity company. You trade the $100,000 balance for a guaranteed income for life (or any period you choose). (The shorter the period, the higher will be the monthly income paid to you.) If you want to know how much monthly income you can receive, please phone with your balance and age and I will send you a printout of your monthly income.

Mary had her insurance company make monthly payments to her of $700.2 She did not need the money, so she used the after tax amount to purchase a life insurance policy on her life, payable to her beneficiaries.

Based on Mary’s current age of 65 (and assuming she is a preferred nonsmoker female), this $700 ($585 after taxes) per month purchased her a $364,140 universal life policy.

Now, instead of Mary’s heirs getting only $49,500 at her death (the amount that they would have received after the taxes on the annuity, as I showed you on the previous page), the heirs receive $364,140 of life insurance death benefit, free of estate and income tax!3 That’s seven times as much money for the beneficiaries, over $300,000 more!

Let’s say you start the payments from the annuity as I described. For each payment you receive from the annuity, you are paying for the life insurance. Even if you died after the first premium on the life insurance, your beneficiaries would still receive the entire $364,140 death benefit on the life insurance policy.

If you would like to see this analysis for your annuity and your situation, we have a computerized illustration available to send you. Simply call and provide information on your current annuity and your age.

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