In his book Living at the Next Level: Insight for Reaching Your Dreams, John Maxwell wrote,
Every time you discover something new, ask yourself three questions: ‘Where can I use this?’ ‘When can I use this?’ and ‘Who needs to know it?’
This truth also applies in life and finances. Very few financial products are inherently bad. It’s just that sometimes they are not the right fit for a client’s particular needs.
Applying John Maxwell’s three questions before investing will help ensure that the product you are considering makes sense to you and whether it applies to your specific circumstances.
Thinking About Annuities?
Hi Medallion Group,
I am a 79-year-old widower. In the 1970’s, I put away money in stock market investments and a tax-deferred annuity, and have been quite lucky. As a result of my income from those investments, a small pension, and my Social Security paychecks, I have more than enough funds to live on. I recently went to an estate attorney to set up a will.
I mentioned that I live on my stock dividends but feel that I will never need the annuity, which is now worth a good amount. It has a steady lifetime interest rate for me, but the attorney said I should annuitize and buy a life insurance policy instead. I’m not sure I’m comfortable with that suggestion. What should I do?
Uncomfortable, Gaithersburg, MD
There is a good chance that the reason your attorney suggested a life insurance policy instead of a tax-deferred annuity is that it may not be fitting your financial goals or needs at this time in your life:
- The growth on a tax-deferred annuity is taxed to your heirs as ordinary income, unlike stocks or real estate. This can be a big tax burden to your heirs.
- A life insurance policy, assuming your estate is under the federal estate tax limit of $5.43 million, is a non-taxable event to your heirs, hence the attorney’s recommendation.
However, there are two more considerations here:
- When you annuitize the annuity (turn your principal into income) for life, part of that income is taxable to you.
- Your annuity is paying a certain rate, which, depending on your exact rate, could be better than the other products that are available. But remember, the guarantees are based on the claims-paying ability of the issuer and they do not adjust for inflation.
Factors When Moving to an Annuity
Everyone’s situation is different and what you decide, in part, depends on what your attorney is trying to help you achieve and your specific situation.
You need to consider a number of factors, including fees and charges that may be included in the product or applicable during transfer. You should also find out how much you look to gain if you switch, a financial adviser in conjunction with your attorney can help you find that out.
Though your situation is your own, you will still need to take the annuity’s lifetime rate and how that compares to your current financial situation and goals into consideration when moving money or adjusting accounts.
Of course, the best thing to do would be to set up an appointment with a financial planner to talk it over, just to make sure the right direction is being taken with your money. You have options, and it’s important to make sure you’re taking the right one.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply.
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.