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 licensed financial professional, please do not hesitate to contact an Annuity FYI expert for more information.