“Unlocking Benefits for Your Heirs through Annuity Maximization”

When relocating your belongings following retirement, you may also choose a single-premium fast annuity (SPIA).

Many people struggle to understand annuities, and are surprised if they need one. Let’s look at an example to help clarify this situation.

Tom, a 60 year-old widower who bought an annuity twenty years ago. Should he exchange or repurpose the annuity for a more tax-efficient asset, such as life insurance?

The Dilemma

Many people who purchase a deferred income annuity find that they no longer need it to generate income at retirement. In many cases, the intention is to transfer the money to beneficiaries. While a deferred indexed annuity can be a great way to save for retirement, they are not always the most efficient vehicle for wealth transfer because it could be taxed two times at death.

Double taxation and deferred annuities

A deferred annuity may be subject to both abnormal income and property taxes upon death, depending on the ownership construction. This is because the gain on an annuity can be taxed as abnormal revenue. The annuity also is part of the consumer’s taxable assets. Double taxation can significantly reduce the value of the death profit. The heirs will only receive a fraction.

The policy owner can fix this problem by repositioning the deferred annuity.

Annuity maximization is a repositioning strategy that involves the exchange or transfer of an annuity to a Single-Premium Quick Annuity. SPIAs provide a revenue stream for an agreed number of years, based on the single premium paid at purchase. This method can provide a predictable, constant stream of income to fund life insurance policies.

Case study

Tom purchased a deferred fixed annuity 20 years ago in an IRA with the intention of using the money as a Social Safety income complement during retirement so that he and Sally could reside comfortably. Tom, who is 5 years away from retirement, finds that his 401(okay), investment and IRA accounts are so full that he does not anticipate the need to use the $100,000 annuity for income purposes.

Tom is now concerned about leaving an inheritance to his son and daughter after Sally passed away three years ago. After Tom’s death, the money will be divided equally among them. Taxes on the cash each beneficiary receives could be applied to it as atypical income, leaving them with less than Tom intended.

Tom is in good health, so his agent suggests that he consider executing a professional transfer of his IRA to an SPIA. He can then use the income generated by the SPIA for funding a life insurance policy. Tom’s good health will ensure low insurance rates, so his money will go further in creating an inheritance for the children.

Here’s the way it would work:
  • Tom transfers $100,000 of his IRA annuity into a SPIA with a 10-year interval, meaning that he and his beneficiaries will receive an annual income of $11,026 over 10 years.
  • Tom, assuming a tax bracket of 24%, would have $8,379 in his account each year after taxes to use for a premium on a life insurance policy.
  • Tom uses the proceeds from his SPIA to purchase a 10-pay life insurance policy.
  • Tom, assuming a Popular fee class, could leave a tax free assured demise benefit of $167.281, which would be split between his daughter and son.

Tom can increase the amount he leaves to his heirs by repositioning his deferred income. His life insurance policy yields a higher death profit and the proceeds of his insurance coverage could be tax-free.

This case study is only meant to be an example. Each individual’s situation is unique and should be assessed individually. All applications would require proofs of underwriting and insurability. The speed courses and individual choices may differ from the case study. It is not possible to guarantee eligibility or a particular tax outcome. We do not provide legal or tax advice. Consult your tax advisor or attorney about your specific situation. Contact your local, independent insurance agent to learn more about the benefits of using an existing annuity as a way to fund life coverage.