We survived one of the toughest winters in recent memory and now it’s time to do some spring cleaning. I’m not talking about cleaning out the closets, garage, basement or shed but more importantly cleaning out your financial portfolio. We all have to pull our financial info together this time of year to complete our annual root canal, filing our taxes! This is a great time to take a look at your investments and insurance policies to see if they still meet your needs or if they can be re-positioned or replaced to provide greater value. We all want a bigger bang for our buck, especially if it doesn’t cost us anything. Over the last 23+ years of doing annual reviews for my existing clients or compiling financial inventories for prospective clients I’ve seen a couple examples where trading in a old annuity might make sense.
The first example involves an annuity that was purchased with the sole intention of passing it on to the next generation, creating a legacy. Some obvious benefits of using an annuity are; the tax deferral on earnings, probate avoidance, as long as the estate is not the named beneficiary and safety of principal if using a fixed annuity. The downside to this strategy is that the tax burden is passed on to the beneficiary thereby reducing the amount of the gift. A more efficient way to pass these assets to your beneficiaries would be to annuitize the existing contract and purchase a life insurance policy, assuming you could qualify medically. The result is a much larger gift to your family or charity and one which is also tax free. Of course, there will be taxes paid on the annuity payments but with proper planning the case can be designed to cover these without affecting your current budget.
The second example I see frequently is an annuity that was purchased several years ago with the sole intention of using it to provide income for retirement. If the annuity is more than 7 or 8 years old there’s a good chance it doesn’t have an income rider as part of the policy. If an annuity doesn’t have the income rider you have two options to access your money. One is to start taking withdrawals and the second is to annuitize the policy to get guaranteed payments for a ‘period certain’ or even lifetime. The downside to these strategies involves the potential to run out of money at some point if taking withdrawals or giving up control of the principal in return for the guaranteed payments. A more efficient way to maximize this asset is to rollover the annuity to a new one with an income rider. Having the income rider not only provides guaranteed lifetime income but also lets you maintain control of the principal. A careful review of any other benefits offered by your existing annuity and surrender costs should be taken into consideration before making any changes.
I understand everyone’s situation is unique and these examples are overly simplified to make a point. So as you’re doing some Spring cleaning this year don’t forget to look in that space where you keep your financial documents to see if you can improve your life or the lives of others you want to reward. If you would like to see how one of these strategies would work for you just send me a email at the address below or visit my website if you would like a copy the e-book ’Savior Retirement’.
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