Underwater Annuities?

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Sep 18, 2009 8:10 pm

I’ve talked to a few clients that have Variable Annuities that they have bought in the last 3 years. Obviously, most have a lot higher income base compared to their contract value. What are you thoughts about turning the income on now and putting the money into a new contract? My reasoning is that if you leave the money in the current contract, it is going to take awhile to get a step up; by opening a new contract, the new portion would be able to take advantage of any big market gains, if we have any big market gains in the near future. Here is an example of what I’m thinking:


-Client has a Contract Value of 700K with a benefit base of $1mil; they can take 5% of the benefit base guaranteed for the rest of their life. They plan on taking income in about 5 years and they do not have a roll-up that increases the benefit base regardless of market performance.


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-My idea is turn on the income and take the 50K a year and place it into a new VA with a living benefit. That way if the client has a 20% increase next year, the income base is increased.



Any thoughts? Is there something I'm missing or something I need to watch out for with this?

Sep 18, 2009 8:21 pm
lowertown651:

I’ve talked to a few clients that have Variable Annuities that they have bought in the last 3 years. Obviously, most have a lot higher income base compared to their contract value. What are you thoughts about turning the income on now and putting the money into a new contract? My reasoning is that if you leave the money in the current contract, it is going to take awhile to get a step up; by opening a new contract, the new portion would be able to take advantage of any big market gains, if we have any big market gains in the near future. Here is an example of what I’m thinking:


-Client has a Contract Value of 700K with a benefit base of $1mil; they can take 5% of the benefit base guaranteed for the rest of their life. They plan on taking income in about 5 years and they do not have a roll-up that increases the benefit base regardless of market performance.


<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 


-My idea is turn on the income and take the 50K a year and place it into a new VA with a living benefit. That way if the client has a 20% increase next year, the income base is increased.



Any thoughts? Is there something I'm missing or something I need to watch out for with this?


 
 
Run that by your compliance department and get back to us.
Sep 18, 2009 8:32 pm

How old are the clients that you are planning to do this with?

 
When do they plan to LIVE on this money - particularly the money you are taking out?
 
What would the fees and expenses be on the NEW VA?  Costs have gone up considerably, and so from an expense standpoint, it may be 2x the cost of the current VA.
 
Remember that MOST VAs withdraw from the CASH & investments component of the VA for all withdrawals UNTIL the cash is used up.  THEN the guarantee takes true effect.  So, in effect, you are locking in the loss on the sale of the securities withdrawn from the large VA to put into the smaller new contract.
 
Remember that even NQ annuities are subject to early withdrawal taxes of 10% on gains before age 59.5.  Unless you are planning to do a 72q distribution strategy.
 
Too many variables to consider.
Sep 19, 2009 8:26 am

Me thinks that would be considered churning. Why would you give up the the very guarantee, ie the increase in the factor that they get paid from if the market value tanks and realize a loss at the same time? Isn't that guarantee the reason they are paying outrageous fees, to protect them from an 08?

 
Can you say arbitration?