Question on annuties

Discussion in 'Business, Investing & Finance' started by NovaGator, Aug 27, 2019.

  1. NovaGator

    NovaGator Well-Known Member

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    Sometime around 1991 little wifey and I invested $50k in a Northwestern Mutual annuity. When I turned 62, the annuity had grown to a little over $150K. The contract called for a minimum of 3.5%, which pays us a monthly amount of $442. My accountant claims it as $5300 payout all fully taxable. Over the years my statement has always shown that the amount in the account has remained at $150K. My question is this: Upon my death, what becomes of the $150K? My accountant claims that it is an asset of my estate. From what I have been able to glean from the internet, the insurance company keeps it. Any info is appreciated.
     
  2. FireFoley

    FireFoley Senior Member
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    It depends on the wording of the contract. A zillion years ago, most annuities had the insurance company as the beneficiary, which was to their advantage. As time has gone on, most enable you to pass any cash value left on the contract to your estate/beneficiary. But here is the big rub, in my opinion, with variable annuities. Besides the huge fees and limited investment choices, there can be confusion as to how much the contract is actually worth. Most of these contracts have year end step up values, which is what your monthly payout is based on, regardless of actual value. So in theory the actual value could go to zero, yet you would continue to get payments for a specific term or life. However at death the value would be zero. So in short, determine if the 150K is the "actual current" value or is that the value that your annual payout is based on. And since you have begun withdrawls the actual value will decrease by a good amount each year, so if/when you check out, your estate will get the actual cash value of the account, the 150K will be irrelevent. Hope this helped. BTW unless the 50K you originally invested was pre tax money (which I doubt) the only taxable portion would be the earnings within the contract, not any part of your initial investment
     
  3. FireFoley

    FireFoley Senior Member
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    If for some reason the insurance company is the beneficiary, I would get out of that contract immediately if not sooner unless that can be changed, as I am certain you are well beyond the surrender period. And conservatively speaking, if you have 120K or so left, you can invest that and get 5300 a year without losing hardly any of the principal if invested in the correct common stocks. As long as you are in the annuity your principal will get drawn down yearly.
     
  4. 78

    78 Dazed and Confused
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    Based on your description, it's a deferred annuity. The entire 150k would be passed to your beneficiaries, and in your case without tax. You've stripped out all the gains over the years.

    Your accountant assumed it was a Single Premium Immediate Annuity, which, with the election of a life-only payout, would have zero value at the owner's demise. SPIAs don't earn the 3.5% floor, deferred annuities do.
     
  5. FireFoley

    FireFoley Senior Member
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    '78, can you help me understand? I did not think it was a SPIA either, but why do you say the 150K will be passed to his estate? If he is has turned on the "income" (term used loosely) stream and is getting about 5300 a year, that would draw down on the actual cash value of the account, assuming he is not earning that amount on whatever the annuity is invested in. That 150K does not remain unchanged over time correct? Thanx
     
    • 78

      78 Dazed and Confused
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      150,000 x .035 = 5,250. He's only taking the interest. He's in a 1991 contract, when the interest rate floors were much higher than today.
       
    • FireFoley

      FireFoley Senior Member
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      Oh I see. I thought the 50K had grown to 150K, then he turned on the income rider, I thought the 3.5% was was the amount of the payout, not an interest payment. I thought that annuities were either a term payout like 20 years or lifetime, and the balance would eventually get to or close to zero over that span. Thanx for the help
       
    • FireFoley

      FireFoley Senior Member
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      And back to my thought can he cash that annuity in, take the 150K, spread it say over 10 common or preferred stocks probably yielding between 4 and 6 percent, take in more annually, and potentially increase his 150K? What do you think?
       
    • 78

      78 Dazed and Confused
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      He certainly can. It obviously would involve market risk, but, yes, he could. He could buy securities that offer tax-advantaged distributions, too.

      There are many things he could do. The annuity is well past maturity and there's no tax on surrendering it.
       
    • FireFoley

      FireFoley Senior Member
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      I figured that from my earlier commentary, but since it is an annuity his investment choices are limited and I am sure there are still a good amount of fees attached, since it is back from '91. And what are those fees for basically nothing? I say cash out, build a portfolio that could yield 5%+, with some risk but not too high IMO, but it could be done easily!!! Thanx for the lesson.. Annuities are not my strength, but I still don;t like them :)
       
    • 78

      78 Dazed and Confused
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      There are zero fees when you've got all your money in a fixed annuity or the general account of a variable annuity. You've not undergone any sort of risk transfer. The insurance company bought a bushel basket of bonds to back the rate at the time of purchase, in this case 1991 when interest rates were much higher. Their profit is the spread.

      Still, 3.5% guranteed in today's low-interest environment is pretty good stuff.
       
      • FireFoley

        FireFoley Senior Member
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        You are right about that. My career was mostly in interest rate futures before I transitioned to equities. Anyway I bought a decent amount of 3.5% AA rated tax free munis a few years ago and one of my friend's thought I was crazy, thinking rates were going up. I was one of the few, but I thought rates were going to remain low and go lower and as I aged, I wanted that tax free income. Well not even I saw 30 yr. treasurys going sub 2% nor did I ever think these munis I have would be trading at a premium to par. Strange days indeed
         
        • 78

          78 Dazed and Confused
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          Munis to a certain degree march to their own drum. Investors are drawn to the tax-free yield and less apt to trade. You'd be hard pressed to find good yields on any high-quality debt these days. It's been tapped out for awhile.
           
          • Concrete Helmet

            Concrete Helmet Hook, Line, and Sinker
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            Good info to know. I've often wondered why people in the field sometimes recommend annuities and without understanding how they work I've been put off.
             
          • Concrete Helmet

            Concrete Helmet Hook, Line, and Sinker
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            Would anyone consider bond or bond fund laddering a good alternative to annuities?
             
          • FireFoley

            FireFoley Senior Member
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            I am of the opinion almost any strategy is a better alternative to annuities. However, the problem with bonds of any duration, are yielding such a low return that your money will be frozen at those returns. And if rates do rise miraculously, then you are stuck with a lower yield and a lower priced bond should you want out. And if you reach for junk bonds, those yields are super low also. Heck Popeye's owner just auctioned junk rated bonds at a 3.88% yield. JUNK. Junk should be twice that at a minimum. You can probably find some higher yielding corporate bonds with very long duration, but unfortunately you run the risk of them being called (retired) or you have to hold for a long time. All that said, it is just very difficult to find reasonably decent yield that is safe. Sure the stock price could fall, but hopefully the dividend acts as a cushion I have taken to try and find good dividend paying stocks when they fall b/c of the overall market. I am not talking about the highest yielders, I am talking about 4 or 5% yields of companies I know and trust, when their shares sell off. Maybe an electric utility (if they ever sell off), a JP Morgan, maybe a Verizon if it ever falls, or some of the real estate investment trusts. You are into mortgages, there are a lot of real estate investment trusts who business is mortgages, such as the symbols NRZ and TWO. Very big yields, but I am just not sure what they own so I have avoided them. And if you think fossil fuels are going to still be around there are plenty of oil companies yielding between 4 and 7%, and I mean the biggest ones. But all this is just food for thought
             
          • Concrete Helmet

            Concrete Helmet Hook, Line, and Sinker
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            You seem to be very well versed as far as investments go so I appreciate your input.
            At this point I'm not looking for income from my investments as I plan on working for another 10-12(?) years, however at 55 I need a little better balance(real estate and stock heavy) and potential future income starting in about 10 years....I also mentioned in another thread I am coming into a small(little less than 100K)chunk of cash.

            I'm not really that impressed with the annuity income that would net me not to mention giving up control of those funds. What I've been exploring is Bond funds with set maturity dates(Blackrock I believe) and other funds that have a floating rate. If I'm understanding right these funds can be traded vs straight up bonds? This would give me control of the investment and supplemented with about half of my annual investable income over the next 10 years(knock on wood) would give me a better all around investment than an annuity or risking to much in stocks?
             
            #17 Concrete Helmet, Sep 9, 2019
            Last edited: Sep 9, 2019
          • FireFoley

            FireFoley Senior Member
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            You seem to have a good handle on it Crete and I have no issue with your thinking. Since I now know you do not need immediate income, your thinking is fine. totally agree with you regarding the lack of investment choices within an annuity, and I like to control mine. As far as funds go, just remember to distinguish between an open end fund (mutual fund) and closed end funds. Mutual funds are priced only once daily after the close at their Net Asset Value, so regardless of when you enter an order, that is the price you get. Closed end Funds trade like stocks and have a bid/ask during the day. Also ETF's trade like stocks and there are bond ETF's that mimic Treasury's, Corporates, High Yield, Muni's etc. Keep up the good work.
             

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