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:
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.
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 firstname.lastname@example.org or through my website, rtholden.nwfllc.com.