Annuity FYI Blog

Our series of real world scenarios continues.

A bank executive talked my 90-year-old mother-in-law into purchasing an annuity to increase her yield from a CD. Is this a mistake (considering her advanced age), or was it a good move to avoid probate in the case of her death?

Whether the annuity purchase was a wise move depends on the terms of the annuity she purchased. Call the insurance company and ask them the following questions:

1) What is her current interest rate, and what is the guaranteed minimum rate in future years? The minimum rate should be at least a guaranteed 3% return, and the company should have a strong renewal rate history if the contract is not guaranteed at a specified rate for the entire term of the contract. Ask for a copy of their renewal rate history to see how they’ve treated other policyholders in past years.

2) Is there a Market Value Adjustment (MVA), and if so, is it waived at death? Some annuity contracts contain MVAs or excess interest adjustments. These adjustments can be positive if rates are lower historically than when you purchased your contract, or the adjustments can be negative in the event that interest rates are higher than when you purchased your annuity. These MVAs can be very advantageous if the contract was properly purchased. However, at death you want to make sure if it is negative the company will waive the negative MVA. Note: most companies will pass along a positive MVA to the heirs in the event the owner passes away.

3) Are the surrender charges waived at death? Make sure her interest rate is pro-rata so that her heirs will receive 100% of the earned interest penalty free. Also, make sure that there is a nursing home bailout and a medical bailout, so that if she becomes ill and needs to be admitted to a hospital or confined to a nursing home there are no penalties.

4) Is she both the owner and the annuitant? Make sure she is. If they named an heir as an annuitant, some life insurance companies will not allow owners and annuitants over a certain age, so agents and planners and brokers will recommend that you name a younger owner or annuitant (i.e. a child) in order to qualify for the annuity. Understand that this may mean that the annuity will not be available without penalty upon the death of your mother. In other words, if your mother is not the owner and annuitant it is likely that the insurance company will not waive any surrender fees or negative MVA upon her passing.

5) What is the annual free withdrawal amount? As a rule of thumb, most insurance companies allow for a 10% free withdrawal. However, in recent years some more restrictive plans allow for low or no free withdrawals during the surrender period. At age 90, your mother-in-law may want income from her annuity to maintain her quality of life. If this is the case with you mother-in-law, you’d want an annuity with free withdrawals.

As with any investment whereby you can name beneficiaries, annuities allow you to avoid probate, which is a major benefit. Provided that there are no-surrenders at death, a negative MVA is not applicable, and her required income doesn’t exceed the free withdrawal amount, then she’s going to be just fine and this could be one of the best annuities for her.

If you want to discuss in person with an Annuity FYI Expert, please do not hesitate to contact an Annuity FYI expert for more information.

During the first quarter of this year annuity rates increased by 6%, according to the Annuity News Journal.  Henry Steelman’s article, “Annuity Rates Jump 6% in 1st Quarter,” says that this significant increase is just another reason that investors should look into annuities.  It is a great time right now to look into investing in annuities for those purchasing retirement plans and those looking for a way to finance their retirement.  Since annuity rates are high right now, it is a great time to transfer 401k annuities and other savings plans to traditional annuities.

The aging populations in America and Europe are likely to cause annuity rates to decrease again.  The article points out that it is strictly a case of supply and demand.  As people get older they are more likely to look to annuity products for a lifetime stream of income.  The more people searching for annuities, the less banks are willing to pay out in annuity rates.  MGM Advantage specializes in retirement plans and has been offering annuities throughout the recession.  Their director forecasts a decline in annuity rates and suggests looking into alternate retirement options if you don’t plan on taking advantage of increased annuity rates now.  Equity linked CDs and certain mutual funds can be good for investors as well.  Speak with an expert to find out if annuities are the right investment for your future.

The Kehrer-Jackson Monthly Bank Annuity Sales Survey showed a continuing increase in sales of variable annuities last year.  Insurance News Net’s article “Recovery in the Works for VAs in Banks?” by Kehrer-LIMRA summarized the annuity findings.  Fixed annuity sales remained stable, while sales of variable annuities increased each month in the fourth quarter.  There was a 4% increase in combined sales of fixed and variable annuities through banks, for a total of $2.7 billion.  That was around the same increase that the products had in November, but 7% above December of 2009.  Since the low sales number in January of 2010, total annuity sales have increased 24%.

Sales of variable annuities were $1.6 billion in December of 2010, a 21% year over year increase and a 6% increase from November.  This was the second straight month with an increase and brought the sales back up to the levels from springtime of last year.  The gap between sales of variable and fixed annuities is widening by the month.  Back in December of 2009, $.84 in variable annuities was sold for every dollar of fixed annuities.  After a complete turnaround, there is now $1.48 in variable annuities sold for every dollar of fixed annuities.

Fixed annuity sales in banks were relatively stable in the fourth quarter of 2010, staying around $1.1 billion.  The December sales of $1.08 billion were just a slight increase from November’s sales of $1.07 billion.  Fixed annuity rates and 5-year CD rates are being closely monitored because of the spread.  It is now at 34 basis points, with fixed annuities being above CD’s with five year time-frames.  Kehrer-LIMRA is expecting a sales increase because of this larger spread.  Whether looking at fixed or variable annuities, it is best to consult an expert for your individual situation.

According to “Annuity Sales Languish at Banks” in Bank Investment Consultant, annuity sales in banks were less than people had hoped.  Author Howard J. Stock points out that variable annuity sales were higher than fixed annuity sales in October for the second consecutive month.  With $1.4 billion of variable annuities sold through banks in October, they actually sold the same amount as in September.  Fixed annuity sales had a small decline from $1.2 billion in September to $1.1 billion in October.  Since variable annuities offer the potential for a market upside, they have been outselling their fixed annuity counterparts.

Low interest rates have really hurt sales of fixed annuities recently.  In the past, fixed annuities were at the top of bank brokerage programs, but have been competing lately with bank CDs.  The two products currently have the same interest rate of 1.63%, as a five-year average yield for one and an effective five-year rate for the other.  Equity linked CDs, a kind of hybrid of the two products, are becoming more popular because they carry benefits of both annuities and CDs.  The indexed CD products are selling more than fixed annuities for some of the same reasons that variable annuities are; that potential for a market upswing is drawing investors in.  Financial experts expect annuity sales to increase around tax time and to steadily climb from there.

In the Expert Click article “Fixed Annuities vs. CDs: Is One Better Than the Other?,” financial planner Greg Womack weighs the pros and cons of the different investments.  Whether fixed annuities or bank certificates of deposit (CDs) are best depends on each individual situation.  Investors can also look into equity linked CDs, which have some characteristics similar to both annuities and CDs.  CDs and fixed annuities are both safe investments, however unlike the FDIC insurance banks provide CDs, fixed annuities are backed by the insurance companies who sell them.  If you want to invest over the long term, annuities are more the investment for you because CDs tend to be useful for short term investments.

Consider the rate of return you will receive with your investment.  While fixed annuities and CDs tend to offer similar interest rates for similar products, the longer you hold an investment you usually receive more interest.  Since fixed annuities are meant for the long term, you most likely will get more guaranteed interest with this investment.  The equity linked CD criteria is different from both fixed annuities and traditional CDs because your interest is based on a stock market index, more like a variable annuity.  There are definitely tax benefits associated with fixed annuities, so if you have any concern over paying taxes the deferral and social security calculations offer great benefits with your annuity product over your CD.  Annuities are meant to provide you payments over your lifetime, while CDs are beneficial when you want to take a lump sum out at maturity.  Weigh the pros and cons of all investments with your future goals to see what investment is best for you.