Nov 04

Old Annuity – Gold Mine or Money Pit?

By Todd Holden, Financial Advisor

Annuities are contracts between the annuity owner and an insurance company — nothing more, nothing less. Like any contract, they have terms. Sometimes, these terms turn out to favor the annuity owner, and a smart owner can use these terms to their advantage. Other times the contract terms favor the company, and the annuity owner should get out of the contract as quickly as possible. Below is an example of both:

 

Gold Mine

Around 2002, my mother purchased an annuity contract from a well-known insurance company. The terms of her contract call for a minimum interest rate of 3% AND no surrender charges. As long as she keeps a $10,000 balance in this contract, she can move money in and out of it willy-nilly. During the last decade of exceedingly low interest rates, she has used this annuity as an alternative to a money market fund. Whenever she has had extra dollars, she’s put it into her annuity contract. Whenever she needed to make a large expenditure, she pulled the money out. No charges, and she’s always earned 3%. She loves this; the insurance company hates it.

 

Money Pit

Sometime in the ‘90s, insurance companies began to offer guaranteed income riders, usually referred to as GLWB or GMIB. (These are complicated, so we will not delve into them here.) These riders guarantee an annuity owner a certain level of income from the annuity no matter how the annuity investments perform. They are a contractual obligation of the insurance company for which the annuity owner incurred a cost, let’s say 1% per year. There were a ton of annuities with these income riders sold in the 2000s. Fast forward ten to twenty years, and we are seeing many investors with these annuities who have not utilized these income riders and NEVER will. Yet, they continue to pay substantial fees every year and will continue to do so for these unused riders. It makes sense for these annuity owners to consider getting out of these contracts as the advantage is to the insurance company.

Please beware that annuities should not be surrendered or redeemed without thoughtful consideration as there could be significant tax consequences of merely “taking the money and running.” Please seek advice from a professional who is knowledgeable about annuities and their particular tax characteristics.

If you would like to review your old annuity contract, you are welcome to contact me for a complimentary consultation. I may be reached at rtholden@nwfllc.com or through my website, rtholden.nwfllc.com.

This information is not a substitute for specific, individualized advice. For advice personalized to your unique situation, please consult with a qualified financial advisor. Annuities may not be suitable for every investor. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Guarantees are based on the claims paying ability of the issuing company.
Author
Todd Holden, Financial Advisor

Todd Holden

Financial Advisor

Recent Articles

Nov 04

Why Attempting To “Time the Market” is a Difficult Strategy

By Nikki Young, CFP®,  Financial Advisor

Market timing is an investment strategy in which investors move in and out of the markets to try to avoid losses before they happen and then buy back in at the bottom after the market has crashed. Buying low or selling high is a prudent strategy for most investors. However, buying lowest or selling highest — or trying to time the market perfectly — is an elusive strategy, one that is difficult to execute and may lead to lower returns and missed opportunities.