Annuities serve many purposes, but you might want one to safely and efficiently transfer assets to your heirs. One popular annuity feature offers an increasing death benefit in order to guarantee growth each year.

This rider might be appropriate for someone who does not anticipate needing their funds. Perhaps they have ample liquidity and investments elsewhere. The annuity would only be accessed in an emergency, but would otherwise grow and increase in value.

Understanding Annuity Death Benefits

First, it’s important to understand almost all annuities offer a death benefit of some kind. Usually it’s the accumulated contract value – and usually surrender penalties are waived at death. That’s not the case 100% of the time, however. It’s a good idea to ask your agent just in case.

But in this low interest rate environment, some companies offer a rider that allows your death benefit to grow each year. Your account can grow for 10-15 years with some contracts. The growth would be locked in for the life of the rider. For example, one popular annuity policy is offering a 7% simple interest increase that’s guaranteed for 15 years.

This is a very smart way to lock-in growth and pass wealth to your beneficiaries. You’ll always know the value of your account and you don’t have to worry about market fluctuations.

Who Might Benefit From Guaranteed Annuity Growth?

With an account like this, it’s best to set it and forget it. You may not want to take regular withdrawals unless it’s absolutely necessary. That’s not to say you can’t, but any withdrawals would reduce your death benefit. That could defeat the purpose of the rider.

Thus, this policy might not work well for an IRA account. Why? Because IRAs have Required Minimum Distributions as you get older. Those forced withdrawals would decrease the death benefit.

It’s better to use post-tax money to fund this type of annuity. These are called non-qualified annuities. You are never forced to take any withdrawals from a non-qualified account.

Our clients who are most interested in this strategy usually already own a non-qualified annuity. In many cases, their existing contract hasn’t performed very well or it’s settled in at a low rate. They usually haven’t touched the investment – and don’t anticipate any regular withdrawals.

In this case, we would set up a 1035 tax-free exchange and transfer the old annuity to this new one. Any gains in the old annuity are deferred and no taxes are due. The account then rolls up at the established rate for the term of the rider.

Let’s take a look at an example using a $200K deposit with a 72 year old client.

Guaranteed Death Benefit:

Non-Guaranteed Death Benefit:

Outperforming The Guaranteed Value

In the above example, we used a $200K deposit for a 72 year old client and assumed no withdrawals. The annuity death benefit increases at a 7.00% simple interest rate guaranteed for 15 years. As of the writing of this post, these are real numbers with an existing product. None of this is made up.

You can see each year how the value of the death benefit increases. Should the owner pass away in any given year, the full listed death benefit would pass to their beneficiaries. After 15 years, you can see the annuity death benefit would be worth $410,000 on a guaranteed basis.

But this does not tell the whole story. There are guaranteed and non-guaranteed values at work here. The $410,000 assumes zero growth in the underlying investments in the annuity. In other words, this is the worst case scenario… and a highly unlikely outcome.

This particular indexed annuity offers several investment options. We used historically accurate data to show how the death benefit would increase assuming normal growth in a popular 2 year indexing account.

After 15 years the annuity death benefit (and contract value) would be worth much more. Assuming modest historical returns in the future, the death benefit would be over $500,000. But no matter what happens, the $410,000 is always guaranteed.

You always have the guarantees to fall back on, but if the annuity performs even reasonably well, your death benefit (and contract value) will be more than the guaranteed amounts. There is little risk in investing more aggressively. Most of our clients want to maximize growth using the indexing options available to them.

What Is The Cost? What About Taxes?

This particular death benefit rider has a .50% yearly cost to the policy. If you look at the contract values in the above example, you can see they decrease each year by 50 basis points. This fee does not decrease your guaranteed death benefit, however.

It’s important to note that this is not a life insurance policy. This means, yes, taxes are do on the gains when they are withdrawn. That occurs when the owner passes away.

Only life insurance passes income tax free to your beneficiaries. That’s why fixed and single premium life insurance policies are popular as a wealth transfer strategy. But not everyone can qualify health-wise for life insurance. An annuity policy like this one asks no health questions and has no medical underwriting.

At passing, your heirs (or the estate) would pay any income taxes due on the growth… same as all other annuities. So it’s only tax-deferred, but not tax-free. But that’s no reason not to try and grow the account as much as possible. Your beneficiaries might choose to withdraw the funds over 5 years to help reduce any income taxes owed.

Request Illustrations & Information

There’s a lot of creative ways to efficiently grow your money and transfer it to your loved ones. You could also use this to provide for a favorite charity. At Hyers and Associates, we specialize in annuity and life policies for wealth creation, tax mitigation, and asset transfer.

Contact us today to learn more about this guaranteed annuity strategy.

With increasing interest rates, you may want to know how your business can invest in an annuity account. In most cases corporations, partnerships, trusts, and other entities can own an annuity. This process works much like it would with individual ownership.

That’s the good news, but there are subtle differences in how these accounts operate on a tax and operational basis. You’ll want to understand what to expect from this structural change to avoid issues later.

First There Must Be An Annuitant

Annuity accounts are annuitant-driven. This means even though a trust, partnership, or corporation can own an annuity, the investment must be based on a living person. The same is true with life insurance. Entities can own a life insurance policy, but it’s still based on someone’s life.

So there must always be an annuitant. While this person(s) may not own the policy outright, the contract is based on their life. In other words, the owner (corporation, trust, etc.) and the insured (person) are different.

Once the last annuitant passes away (some policies have joint annuitants), then the policy would end based on the contract terms.

A corporation, trust, or other entity cannot continue contracts indefinitely. There must be a living annuitant listed on the policy. Once one or both annuitants pass away, you cannot appoint a new insured. The policy would end at that time.

An entity can own an annuity contract so long as it’s based on a living person listed as the annuitant(s). This person might be an owner, president, or officer of the company.

Annuities Have Unique Tax Features

Annuities grow tax-deferred. Owners can defer taxes for their lifetime if they wish. The annuitant (or the annuitant’s estate) pays the taxes on that growth at passing. This setup takes advantage of compounding interest.

The taxation of annuities works differently when owned by an entity. A trust, partnership, business, or corporation that owns an annuity cannot defer taxes like a natural person.

All corporately owned annuity accounts are non-qualified. If the owner was a person, then yes, taxes can be deferred. However, IRS rules state when a business entity owns an annuity, it would be subject to normal yearly income taxes based on the policy gains. The tax ID of the corporation, partnership, etc. would receive the 1099 each year.

One advantage of annuities is tax-deferral. This feature is lost if a non-person is listed as the owner. When interest rates are high, however, investment growth might outweigh tax-deferral.

How Do Annuities Work With Trusts?

Most trusts are revocable and simply set up to avoid probate. Annuity accounts avoid probate by way of beneficiary designations. Thus, you may have a couple of choices on how to establish ownership.

Some consumers make their trust the owner of the annuity while others will make their trust the beneficiary. Your best way forward may depend on the type of trust you have and how your wish to bequeath the proceeds.

When working with trusts, it’s best to talk with your lawyer and tax advisor to confirm you’re taking advantage of all the benefits annuities offer. In some cases, you and/or your beneficiaries will unnecessarily lose tax advantages if your annuity is established improperly.

Are These Contracts Safe & Insured?

Other than tax implications, most other annuity features are the same when owned by an entity. Contracts are insured for up to $250,000 in most states. You’ll want to refer to your State Life & Health Guaranty Association to view their rules and requirements.

Distributions, liquidity, income withdrawals, and surrender charges would all be the same as listed in the contract.

Some annuities carry more risk than others. Variable accounts buy into the market and go up… and down. Fixed, indexed and deferred accounts do not own market instruments and do not lose value when the market drops.

Your best options depend on your risk tolerance. Most of our clients look for the reliable returns of indexed and fixed annuity quotes. We can help you compare your best options.

Contact Us To Learn More

Hyers and Associates is an independent insurance brokerage. We offer policies from several highly-rated companies. We’ll help you find the corporate annuity account that best suits your needs and risk tolerance.

Investors like annuity policies for a lot of reasons, but a new feature is adding even more certainty to these guaranteed products. Some companies are now offering a death benefit rider on their contracts to assure policy growth every year.

This optional feature allows your death benefit to grow each year by a guaranteed rate no matter how the contract performs. This is a great benefit for those who are most interested in leaving a legacy for their beneficiaries.

How Do Annuity Death Benefit Riders Work?

With this innovative rider, you will have a second annuity value at work. A sub-account is created that will increase for a guaranteed number of years – usually 10-15. At passing, this value is available to your beneficiaries in a lump-sum or over a longer period of time if desired. Most accounts are required to pay the full amount over 5 years, but a lump sum option will always be available

It’s common for these riders roll-up at a 5-7% rate each year. This could be a simple interest credit, while others will compound your interest. We help our clients compare all scenarios to see which plans offers the largest guaranteed death benefit.

Death benefit riders will have some stipulations. Most will only roll-up for a maximum of 15-20 years. And they are only available to annuitants/owners who are 80 years or younger. Ones missed at 80 years might only offer an annual step-up for ten years.

An in most cases, annuity contracts with and Enhanced Death Benefit can stack policy interest growth on top of the rider. This means your death benefit value can increase above and beyond what is offered by the guaranteed rider. This is allows for growth even after the rider term has ended.

Do I Pay Taxes On My Annuity Death Benefit?

The short answer is, yes. Almost all annuity growth in a non-qualified account is taxable as ordinary income. Annuities that are in an IRA or 403(b) (referred to as qualified accounts) are taxable in full. However non-qualified accounts only tax the growth of the principal – whether it’s through a death benefit rider or regular interest and/or investment growth.

Life insurance is the only product that pays out income tax-free at passing. This is why a lot of consumers use life insurance for wealth transfer and estate planning. However, you cannot exchange an annuity account for a life insurance policy through a 1035 tax-free exchange.

Thus, if you already own an annuity with sizable gains, a death benefit rider might be your next best option for capturing those gains and then guaranteeing future growth for several more years to come.

Many of our clients also ask about probate. We don’t give legal advice, but generally speaking, annuities are not subject to the probate process. So long as your beneficiary status is up to date and in good order, probate is not required.

What If I Surrender The Annuity Before Passing?

The other account with these types of annuities is what’s called, the walkaway value. It might be more or less than the death benefit value, but in many cases, it will be lower. If you surrender your annuity before passing, you’ll get the walkaway value and the death benefit will be void.

There is almost always a cost to add a death benefit rider to a contract. It’s usually close to 1% of the contract value each year. While this is deducted from your walkaway value, it does not decrease the value of your death benefit. Thus, it’s disadvantageous to surrender your contract before passing unless you simply have no other choice.

In other words, it’s unwise to spend 1% of your contract value each year for a rider that was not used. However, if the walkaway value outperformed the death benefit value, then it might be a good idea to exchange your annuity for a new one. This is something you should speak to an experienced agent about before making an exchange.

Many of our clients are using the 1035 exchange rule to transfer, on a tax-free basis, their underperforming fixed and indexed annuities. The death benefit roll-up is a great way to rescue an old policy that might only be paying 2-3% each year. Guaranteed growth for your beneficiaries makes good sense in many cases.

Contact Us To Learn More About Your Annuity Options

Let’s face it:  If you’ve ever shopped for annuities, you know there are many options. One size does not fit all. Some are designed for growth, others are for income, and still others can be used to account for long term care needs.

An annuity with a guaranteed death benefit is more designed for growth and wealth transfer. It might be more suitable for owners who do not intend on accessing their money but are most interested in passing on the largest amount possible to their beneficiaries. No matter your needs, we can help. Contact us today to review your best options.

We are all working toward a comfortable, financially stable retirement. We want to enjoy more time with our loved ones while immersing ourselves in the activities that bring us peace and joy. The Hyers & Associates team is here to help you achieve your retirement goals.

The fact is you need a plan to create a reliable income stream to support your lifestyle during your retirement years. You want to wake up each day knowing you have a solid foundation in place that provides regular income. One way to facilitate your dream is to buy an immediate annuity.

What is an Immediate Annuity?  

An immediate annuity is a way of ensuring a regular income throughout your retirement years. An immediate annuity is usually purchased in a lump sum – and then an agreed upon amount is paid out when you’re ready. Essentially it acts like a pension plan, supplementing your other income.

Your investment grows while in deferral and with some accounts, your income can increase each year. There are several different ways to establish your personal income stream. One size does not fit all. We’ll help you find the plan that best accomplishes your financial goals.

The insurance is that you will have a set income guaranteed by the policy. The insurance company will look at the type of annuity policy being purchased, the term and the person’s life expectancy. Based on those factors and others, your chosen insurance company will issue you a check for the agreed upon amount for the agreed amount of time.

Things to Consider With An Immediate Annuity

There are several factors to consider when shopping for and purchasing an immediate annuity account. Are you looking for the highest payout immediately? Or would you rather have a lower payout for a longer period of time? Is the income just for you or for your spouse as well? Are survivorship benefits important beyond you and/or your spouse? Do you want the income to have the ability to grow or even double for long term care expenses? These products can be tailored in several ways.

With income annuities, you can choose to have an agreed upon fixed amount paid regularly, a guaranteed payout over the contract, or a payout based on certain stock market indexes. A policy that moves with inflation will generally pay out less initially than one with a guaranteed amount. Plans that pay income to spouses or have survivorship benefits will usually pay less up front as well.

When purchasing your policy, you will choose how long your income lasts. It can be a fixed number of years or for your entire life. Your income can begin after only one month or it can be postponed (deferred income annuity) for several years in order to grow your investment – and returns.

When considering an immediate annuity contract, most insurance companies show you the payout rate. The payout rate is not the same as the yield or rate of return. Your rate of return can vary depending on how long you live. That being said, it’s easy to compare the payout streams of several different companies at once. This will allow you to see who’s offering the best rates.

Making a Commitment

One important note:  It can be difficult if you change your mind after purchasing an immediate annuity. You need to think of this as a commitment to gain a guaranteed income in your retirement years. There are few contingencies for a change of heart further down the road. You may be able to change when your payouts begin, but it’s often not possible to get a return of your initial premium back in a lump sum.

Several policies will provide flexibility in your income start date, but this is along term investment for your future. It’s a very smart way to supplement your other investments. If the market takes a turn for the worse, or interest rates drop further, you will still have a significant income stream to rely on to fund all the things you want to do in retirement.

Call Us For More Information

The Hyers & Associates team members are available to discuss annuities and which types might fit your needs best. Planning and considering your financial goals is the important part of making your retirement happen. Contact us today so we can get started on your future income quote.