From time to time my life insurance agency refers potential clients to me who need to make a decision with an existing life insurance or annuity contract and are no longer in touch with the agent who sold them the contract. This happened recently with an older retired couple who received a letter from their life insurance company informing them that their annuity contract was maturing in a couple of months.
By way of background, all annuity contracts have a maturity date. In the case of a deferred fixed income annuity, the maturity date is the last date on which you can begin receiving payments from your annuity. Older contracts tend to have a maturity date that’s a fixed number of years from the date the contract was issued. Newer contracts usually define the maturity date based on the annuitant’s age, e.g., age 90.
The Smiths (not their real name) purchased a deferred fixed income annuity in 1984 from a large, well-known life insurance company that matured 30 years from the issue date in 2014. They received a letter from the company in January informing them that their annuity was maturing in March and they needed to choose one of three options:
- Cash out the annuity and take a lump sum equal to the current value
- Select an annuitization option and receive periodic annuity payments
- Invest in another annuity
After preparing a detailed analysis for the Smiths, I determined that annuitization using a 10-year certain monthly payout was the best alternative in their situation for a number of reasons. My analysis included preparation and review of various period certain and installment refund payout option illustrations for their existing annuity contract as well as a potential replacement contract with other highly-rated life insurance carriers and preparation of income tax and cash flow projections.
To make a long story short, it turned out that the payout from the Smith’s existing annuity contract would provide them with monthly income that was 22% greater than the best alternative from any potential replacement contract. The reason for this is that the interest rate assumptions that were used for calculating annuitization payout amounts with their existing contract were much higher than those used in new annuity contracts. 6-month CD rates were approximately 9% in 1984 when the Smith’s contract was issued vs. less than 1% today.
Whether you have an annuity contract that’s maturing in the near future or you’re considering doing a tax-free exchange to replace your existing contract, don’t overlook annuitization options on your existing contract. If it’s an older contract, the payout amounts may be significantly greater than those on new contracts.
There are other issues to keep in mind when deciding whether to replace an existing annuity contract which are beyond the scope of this post. These include, but aren’t limited to, potential surrender charges and the overall purpose of an annuity, including particular types of annuities, as part of your investment/retirement income portfolio.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.