“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 rate should be at least a guaranteed 3% minimum 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 upon death? Some annuity contracts include MVAs, which are adjustments based on changes in interest rates. If interest rates are lower than when you purchased your contract, the MVA could be positive, benefiting you. However, if rates are higher, the MVA could be negative. These adjustments can work in your favor if the contract is well-timed. That said, it’s important to ensure that any negative MVA is waived in the event of your death. Note that most companies will pass along a positive MVA to your heirs if you pass away.
3) Are surrender charges waived upon death? Ensure that the surrender charges are waived so that her heirs receive the full amount of earned interest without any penalties. Additionally, confirm that the contract includes provisions for a nursing home and medical bailout. This way, if she becomes ill and needs to be hospitalized or confined to a nursing home, there won’t be any penalties for accessing the funds.
4) Is she both the owner and the annuitant? Ensure that she is named as both the owner and the annuitant on the annuity contract. Sometimes, agents or brokers may recommend naming a younger person, like a child, as the owner or annuitant to meet the age requirements of certain insurance companies. However, doing so could result in penalties or surrender charges if the annuity needs to be accessed after your mother’s passing. If she is not both the owner and annuitant, the insurance company may not waive surrender fees or negative MVAs upon her death.
5) What is the annual free withdrawal amount? Typically, most insurance companies allow for a 10% free withdrawal annually. However, some newer, more restrictive plans may offer little to no free withdrawals during the surrender period. At age 90, your mother-in-law may need income from an annuity to support her quality of life. If that’s the case, it’s important to choose an annuity that allows for free withdrawals.
Annuities, like other investments that allow you to name beneficiaries, offer the significant benefit of avoiding probate. As long as there are no surrender charges at death, no negative MVA applies, and her income needs don’t exceed the free withdrawal limit, this could be an excellent option for her, ensuring she’s well-protected financially.
If you want to discuss in person with a licensed financial professional, please do not hesitate to contact an Annuity FYI expert for more information.
