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Real World Scenarios: Variable Annuity Transfer


Here is the next installment in our series of questions from people like you.

A broker suggested that I move my grand-fathered life insurance policy into a variable annuity for better performance. Is this a wise move?

We don’t think so. Grand-fathered single premium life policies (SPLs) were such a good thing that the IRS disallowed them on June 21, 1988. People who already owned them were allowed to keep them — hence the term “grand-fathered.” They are tax-free versus tax-deferred, and they transfer income tax free (although not estate tax free if you are the owner) to your beneficiaries.

Some investors are tempted to upgrade because these grand-fathered SPLs are not as competitive as today’s newer life and annuity policies. Annuity FYI typically does not recommend transferring a grand-fathered SPL to an annuity: we believe that anyone who was lucky enough (or smart enough) to have purchased one prior to the tax law change should keep it. It rarely makes sense to go from something that is tax free to something that is tax deferred: by doing so you would need to far exceed the returns of the tax free investment in order to make tax deferred annuity the right choice. Furthermore, this would usually require going from a guaranteed (fixed) instrument to a non-guaranteed (variable) instrument. Rather than transferring your grand-fathered SPL to an annuity, we would typically suggest upgrading your older grand-fathered life policy to a new one if you can qualify. If you can’t qualify, consider repositioning other assets into the annuity and keep the life policy.

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