Annuity FYI Blog

There are many reasons why it is crucial to make sure you update the beneficiary on your annuity accounts.  Even if your will says that one person should receive your annuities and other money once you die, the person you have listed as your annuity beneficiary with your insurance company will get your annuity funds.  In the Chicago Tribune’s Local Naperville section, John Seyman answers some annuity beneficiary questions in the article “Beneficiary in annuities and IRAs.” Some of the highlights are below.

If you have inherited an annuity, it is not difficult to get your money once you prove that you are the beneficiary.  You will need to fill out a specific request form with the annuity provider and send them a copy of the deceased’s death certificate.  Even if you have a will stating that you are an annuity’s beneficiary, you still have to fill out the request form and ensure that you are listed on the annuity paperwork as the beneficiary.  If you are not, the annuity money will go to the listed beneficiary.

There may be some tax issues that arise if you receive a lump sum payment as an annuity beneficiary.  You have to pay federal “ordinary” income tax on any annuity gains that are above the paid premiums.  Depending on your tax bracket, this income tax could be higher than the capital gains tax that would have been paid had the deceased still been alive.  There are a few different ways to defer these taxes depending on the type of annuity.  If you are the deceased’s spouse, you can transfer your death benefit annuity to another IRA annuity without tax penalties.  You could also transfer the annuity to a non-qualified “stretch annuity” so that your taxes will be paid yearly as you receive your annuity money.  Another option is annuitizing your death benefits, so that you will get great tax benefits but will lose access to the lump sum.

Non-qualified annuities are those products sold by insurance companies which don’t have ties to other federal or tax programs.  Qualified annuities have an affiliation with other federal or tax programs like an IRA.  These qualified annuities offer you both the advantages and disadvantages of their associated programs.  The difference in taxes is significant.  You will pay taxes on any earnings above the premium basis for a non-qualified annuity that you have inherited.  With a qualified annuity, you’ll pay ordinary income taxes on all of your proceeds as a beneficiary.

Written by Rachel Summit

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MetLife made big news in mid-March by failing a Federal Reserve “stress test” administered to 19 megabanks. Federal regulators are expected to classify it eventually as a “Systemically Important Financial Institution,” i.e., “Too big to fail.”

Should that make you eliminate MetLife from your list of acceptable annuity providers? I don’t think so.

If you follow annuities, you probably regard MetLife as a big publicly held life insurance company that also issues a lot of annuities. In fact, MetLife sold far more variable annuities in the U.S. in 2011—over $28.4 billion worth—than any other insurer.

But the Federal Reserve sees MetLife as a bank holding company, because for the past 10 years or so it has owned MetLife Bank, a multi-billion institution that during the mid-2000s even dabbled in the ill-fated home mortgage business.

So, with 18 other huge banks (but no other insurers), it participated in the 2012 Comprehensive Capital Analysis & Review (CCAR) by the Fed; results were published March 13. MetLife and three others failed the test because they had, the Fed said, risk-based capital ratios of less than 8%.

That was embarrassing for MetLife. But it may not be relevant. For one thing, MetLife expects to divest its banking business this year. For another, by insurance industry standards (as opposed to banking standards) MetLife has a consolidated risk-capital ratio of 450%, according to a statement issued by its CEO.

As an annuity shopper, you might be concerned about all those billions of dollars in MetLife Investors Series variable annuity contract assets that are guaranteed by MetLife to produce lifetime incomes for their owners. But MetLife shouldn’t have a hard time keeping those promises, because most contract owners probably won’t ask it to.

As a GMIB (Guaranteed Minimum Income Benefit), the MetLife lifetime income rider requires contract owners to annuitize their assets in order to trigger the guarantee (which ensures payments for life, even if the account goes to zero before they die). Since most people prefer not to annuitize—they lose direct control over the contents of their account if they do—not many are expected to take steps to trigger the guarantee. Even if they did—in the event of a prolonged recession, perhaps—MetLife is a strong, well-diversified company with a sophisticated risk hedging program. Its failure to pass the recent Fed stress test doesn’t reflect its true strength.

Written by Kerry Pechter

Indexed annuities have been getting a lot of attention lately, thanks in part to the fact that their optional living benefit riders are a bit more generous than similar riders on variable annuities.

They’ve also taken a welcome step that could lead to greater price transparency, indexed annuity expert Jack Marrion of AdvantageCompendium.com recently explained to me.

The low interest rate environment, ironically, seems to be responsible for this positive effect, he said. As I understand it, prevailing rates are so low that sellers of indexed annuities no longer have the option of supporting the cost of certain standard product features by reducing the interest rate that is credited to the annuity when the rate comes up for annual renewal, starting in the contract’s second year.

To cope with this squeeze, a few issuers of indexed annuities are beginning to explore “unbundling” the product. In other words, they’re starting to let the customers decide which options they want to pay for and which ones they don’t. Think of it as the start of a shift from “prix fixe” to “a la carte.”

While this subtle change in product delivery doesn’t solve the low-yield problem (which Federal Reserve chairman Ben Bernanke promises could last until 2014), it “may one day lead to greater transparency” regarding the component costs of indexed annuity contracts, Marrion says.

Written by Kerry Pechter

Vanguard recently made some positive changes to their annuity and mutual fund products, according to Forbes’ Mel Lindauer.  The article, “Welcome changes at Vanguard,” highlights three important changes made by the company.  First, Vanguard eliminated their Asset Allocation Fund, which allowed the fund managers to use whatever percentage of equities they felt was best.  This Asset Allocation Fund had been used in Vanguard’s LifeStrategy Funds and took away the investors’ ability to manage their risk level because they had no control over their asset allocation.

There are two new annuity funds from which to choose if you have a Vanguard annuity.  The new sub-accounts are the Moderate Allocation Portfolio and the Conservative Allocation Portfolio.  The first has 60% stocks and 40% bonds and strives to appreciate your capital while giving you low to moderate income.  The Conservative Allocation Portfolio has 40% stocks and 60% bonds.  It’s purpose is maintaining your current income while providing low to moderate capital appreciation.

A Guaranteed Lifetime Withdrawal Benefit is now available with Vanguard’s annuity products.  It is an option with the new Moderate and Conservative Allocation Portfolios as well as with their Balanced Portfolio.  The Balanced Portfolio has been around for awhile and gives the option of 60-70% stocks balanced with 30-40% bonds.  The GLWB option has been increasingly popular and Vanguard’s annuity holders are excited for this new choice.  Vanguard welcomes new clients who have an annuity they’d like to transfer to one of Vanguard’s new choices.

Written by Rachel Summit

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Two new articles published by Annuity FYI give us some insight into new annuity riders.  These riders not only guarantee lifetime income, they also protect your money against market risk.  David Port and Kerry Pechter each wrote an exclusive article for Annuity FYI and the press release, “Annuity FYI: New Annuity Benefits Guarantee Lifetime Income and Reduce Market Risk,” highlights the articles and links to them.

David Port’s article, “An Annuity-Based Antidote to Volatility,” talks about Ohio National’s variable annuity rider.  Their ONcore variable annuity has a new feature that will protect your money from drastic losses in market downturns so that your annuity will increase at a faster pace.  Along with this, your money will stay in the equity market so it continues to grow.  This hedging strategy is proven effective and will protect your money as well as leave room to grow, especially as you reach retirement age.  You can also use this annuity to receive guaranteed lifetime income during your retirement.

In “Ohio National Pioneers a Low-Risk GLWB Strategy,” Kerry Pechter talks about how Ohio National is using two different techniques to deal with the risk of variable annuities so that your return is actually predictable.  They are the first company using the TOPS/Milliman volatility controlled, futures-driven, ETF-based investment technology for their funds.  It’s allowing Ohio National to offer 5.25% lifetime annual withdrawal benefits at age 65 versus the normal 5% that is offered.

Read the articles in detail on the Annuity FYI website and see the press release here.