Sometime when the market drops precipitously, as we have seen in recent years, the account value of a variable annuities may be less than what the investor originally invested.This is sometimes referred to an annuity that is “under water.” What are your options? Let’s take a hypothetical case of a $200,000 annuity investment where the account value is now $100,000:
- Do nothing. The standard death benefit will give your beneficiaries $200,000 upon your death.
- Withdraw your money. This is also sometimes referred to as “stripping” your annuity. If you are outside of the surrender period, in this example you would withdraw $99,000 tax-free which you could invest elsewhere, such as into another annuity with better guarantees (and keep in mind that some annuities on the market today grow your death benefit up to 5% a year). If you were to do a 1035 exchange, you’ll have a $200,000 cost basis in a $99,000 investment. Either way you would be left with a $101,000 death benefit in your “stripped” annuity for your beneficiaries (most standard death benefits for annuities issued between1995 – 2004 reduce the death benefit dollar-for-dollar for any withdrawals). If you’d like to discuss the feasibility of an exchange, call an licensed financial professional at 866 223-2121 for a no cost and no obligation evaluation of your existing variable annuity, or click here for an online / e-mail evaluation. WARNING: never surrender or exchange your variable annuity to the insurance carrier who provided it to you. You will virtually never get the best return for your investment.
- Sell Your Annuity. Some companies are willing to buy such annuity contracts for their death benefits, paying the annuity owner cash in excess of the account value (typically 110-135% more than the account value). In addition to the benefit of receiving an amount greater than your account value, you can then reinvest the money into other investments. You may also receive immediate recognition of potential ordinary tax losses. Let’s explore this in a little more detail below.
If I Want to Sell My Annuity, How Much Can I Get?
Typically, between 110-135% more than the account value. Let’s take a look at two hypothetical scenarios:
Example 1: Dr. Stevens
Dr. Stevens, 72 years old, invested $400,000 in a variable annuity, but his account value is now $200,000. None of the options presented by his financial professional – waiting for his account value to increase, surrendering it, or stripping it (withdrawing all but $1,000 of the account value) – are appealing. By selling his annuity, he’ll receive $221,000 for the annuity, and a tax benefit of $53,000 – a total benefit amount of $274,000.
Example 2: Mr. Jordan
Mr. Jordan, 72 years old, invested $200,000 in a variable annuity, which he subsequently stripped (withdrew) down to an account value of $1,000. By selling the annuity, he’ll receive $22,000 for the annuity, and a tax benefit of $53,000 – a total benefit amount of $75,000.
How Do I Qualify?
Contact Annuity FYI — we’ll discuss your current annuity with you, and help determine if this program is appropriate for you (it is not appropriate for all variable annuity owners). Among other criteria, the following must apply:
- The variable annuity must be non-qualified – meaning it cannot be part of a qualified retirement plan such as an IRA or SEP.
- The death benefit must be greater than the account value
- The contract cannot be in the annuitization phase
Not Suitable For All Annuity Owners — Contact Us for More Information
This type of program is not suitable for everyone who owns a variable annuity. Before considering the sale of your variable annuity, carefully evaluate your own financial needs and circumstances, including whether or not you have a need for the features of your annuity, such as the death benefit. Contact Annuity FYI at 866 223-2121 or by filling in the form below.