How to Get out of a Variable Annuity Virtually Unscathed

Apparently I’ve ruffled some feathers in my industry because of my disdain for variable annuities. It’s not going to deter me, though. Too many times I’ve created financial plans for clients only to have their plans thwarted because they’re handcuffed to these contracts that were sold to them, probably inappropriately, by someone who maybe didn’t bother to do any research to determine if it was the best option for them. Let me say that annuities do have a place in some financial plans but, like I tell my clients, “Annuities are like rottweilers; they can be good, but not everybody should have one.”

Almost all annuities have a surrender period, typically seven years. If you decide to take your money out or transfer it to another annuity within this surrender period, you may have to give up to 10% of your investment back to the annuity provider. I don’t like this; it ties a hand behind your back and makes you stay with a product for no good reason. Let me say that annuities are intended for retirement, so I’m not encouraging anyone to take their money out for non-retirement purposes. I just like my clients to have options with their own money, and if they’re unhappy with the product or representative, why should they be penalized for choosing to move the money elsewhere?

Variable annuities do not benefit from lower capital gain tax rates; when you take the money out of an annuity, any increase in the account is taxed as ordinary income, and it could potentially increase not only your taxable income and taxes, but may also cause your Social Security payments to be subject to more taxation.

So what can be done with these things? Well, for starters, annuities are supposed to be used for retirement, they can serve as a self-made pension plan. Annuity payments that are actually annuitized – taken over a lifetime – are taxed slightly more favorably (a portion of each payment is a return of your original investment and is non-taxable, and a portion represents gain and is taxable). Statistics show that less than 1% of annuity holders select this option. Why? Because your payments die with you, unless you select some kind of “joint and survivor” option, which will provide payments for both spouse’s lifetimes, but this option lowers your payments.

The second option is relatively new and accommodates the current issue at hand; long-term care. New legislation allows you to exchange an annuity for a long-term care policy and any gain in the annuity is not taxable. This is pretty huge, because most people recognize the risk of potentially needing some form of long-term care (assistance at home, assisted living, nursing home care) and the potential cost of such care (in WNY annual nursing home care hovers around $100,000). The need for long-term care could quickly wipe out a person’s nest egg. Long-term care insurance can be the right solution but, again, it might not be right for everyone. There have been hybrid policies that have come out recently that combine life insurance with long term care benefits; I like this because – either way – you are going to make a claim, which isn’t the case with traditional long-term care insurance.

A third option will resonate with those individuals who are charitably inclined. Variable annuities could be placed into a charitable instrument, such as a charitable remainder trust, and the donor may receive an income from the trust for a period of years and what remains at the end is left to a charity. The donor is provided with a charitable deduction, based on many factors, which can offset taxable gain on the annuity.

These are just some ideas, everyone’s situation will be unique and is best addressed with a team of financial experts including a CERTIFIED FINANCIAL PLANNER TM practitioner, a CPA, an attorney and an insurance specialist. Collaboration among professional advisors promotes a system of checks-and-balances while creating an atmosphere of creativity and innovation.

About these ads

About Amy Jo Lauber

I help people make good financial decisions with confidence and find peace with money.
This entry was posted in Charitable giving, Insurance, Investing, Personal Finance with a twist, Retirement, Taxes. Bookmark the permalink.

14 Responses to How to Get out of a Variable Annuity Virtually Unscathed

  1. Robert A. Caldwell, CPA says:

    The ruffling of feathers is healthy, for as Socrates said, “The unexamined life is not worth living.” Amy Jo has presented a balanced, reasoned critique of variable annuities. While long surrender periods are certainly a downside, VAs do offer some benefits. Among these are tax deferral, a guaranteed death benefit with an optional annual increase, and in some states, protection from creditors. This last item is one of VAs’ most favorable features. It is available because VAs are considered insurance products, and many states (Texas, Tennessee, etc.) exempt insurance contracts from the claims of creditors.

    If one asks “Is a VA a good idea?” Amy Jo’s answer, like the answer to all serious questions, is “It depends!” Seeking wise counsel from a team of advisers from various disciplines is always a good idea. The book of Proverbs was written about 2,900 years ago. In Chapter 11, verse 14 we read: “Where there is no counsel, the people fall; but in a multitude of counselors there is safety.” Some things never change.

  2. Amy & Robert make good points. The one that is left unspoken is:

    Would those that sell VAs be as passionate about their use if they paid little, or no, commission up front rather than the 7-8% that is common practice? After all, that’s what those big surrender charges are there for. They protect the issuer from the commission they paid, nothing more, nothing less.

    • There are “no load” variable annuities available, I used them with a prior company to 1035 clients out of existing contracts because the fees were lower and there were no surrender charges. To Bob’s point, whether one is appropriate or not depends heavily on the individual’s circumstances. To use an old adage, “When the only tool you have is a hammer, everything looks like a nail.” I try to keep as many tools in my toolbox as possible.

  3. Amy Jo, I hope that you will next address Equity Indexed Annuities. I have seen some that have 19 year surrender periods! Yikes!

  4. Cheryl says:

    If the original investment was about $235,000 and is now worth about $650,000 in death benefit and have passed the 7 year surrender time, what options do you have without loosing a lot? wE started out with wanting a retirement income and got tricked into this variable annuity but realized too late we were trapped. Now the death benefit is so great but the surrender value is about the same as we started with (less all the commissions and charges), but we are close to retiring now and want the monthly income. What options do we have? We don’t have much life ins. outside this, but my husband will be 68 in Sept and I am 65. What can we do now?

    • Cheryl, I would like to take this conversation off-line where I can address your unique situation and provide you with some thoughtful ideas, suggestions, and considerations. Feel free to email (ajlauber@lauberfinancialplanning.com or phone me (716) 430-1634.

  5. Lee Morgan says:

    The more I read about investing, the less I understand. Does anyone else feel this way? And, no matter what I do, I feel I am being “taken”.

    • I certainly can understand how you feel, Lee. I don’t know how else to mitigate these fears besides working with someone who is credentialed (CFP R) and who is a Registered Investment Adviser, and getting really educated about investing. There are lots of good books I recommend; one includes “Yes, You Can” by James Stowers, goes over sort of the biography of money. Easy to read and understandable.

      • Lee Morgan says:

        Thank you much. I will seek out this book. Also, one of my “gripes” I suppose is the fact that in comparison to many, I have little money at the age of 59. But, the money I have is as important to me as larger amounts are to others. So many advisors, I think, are unwilling to help those of us who have just a “little”. I inherited from my Mother, went with a broker of my sister and brother-in-law’s (they are now leaving him–I guess I will, too– but where?)—-that broker had me to buy a variable annuity (totally new to me at the time). Otherwise, he buys and sells quite often “for me”. Seems to me his commissions add up to as much as I gain or more. Another investment he tells me must be sold for a capital loss. I have been with this broker for about a year. I have been a “wager earner” all my life–did not save much—now, I feel my inheritance from my wonderful Mom is going to disappear.

  6. Lee, just like Cheryl’s questions, I think they’re better addressed off-line. I invite you to email me at ajlauber@lauberfinancialplanning.com

  7. victor mulligan says:

    My mom paid $30,000 into a lifetime innuity and has collected $195 a month for 5 yrs about $12,000 theres $18,000 left now this $195 a month isnt doing her any good.she cant pay deposits for a new place i got her in and shes gonna get evicted she needs a car she needs her money now what can we do ?

  8. Emma Nilsen says:

    Hi my mum is in the same situation as Victor Mulligan above……she does not have enough money to live on and this annuity is only £32 a month she is getting that will not even buy a weekly shop never mind receiving this monthly, she has £14,000 in this is there anyway of her just getting it back?????? she had to take early retirement due to ill health this is scandelous its HER money she saved up for and when they sent her documents to sign they did not tell her this “little £32″ amount would be all she would be getting each month, surely there is a way for her to get her money as its HERS not THEIRS?????

    • Good morning Emma, I understand your frustration. Your mom has enetered into a contract with the insurance company providing the annuity payments. They are in exchange for a lump sum of, you’re right, her money. She made a trade. I’m sorry it isn’t working out. Perhaps you would benefit from hiring an attorney to see if the contract may be amended.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s