By Dr. Shelby Smith
of The Retirement Pros
Confusion in the investment markets continues to decimate account values while shell-shocked investors look for answers. As mentioned in this retirement blog, you’ve experienced it everyday for the last year – growing losses, shrinking values and more bad news.??
Some losses have been so severe that again attaining the last high water market seems impossible. If you’ve lost 50%, or more, you now know your tolerance for loss is not as great as you thought, but still?many are holding onto the hope that staying put is the best strategy. That may not be the case. Let’s look at a real world situation.
While no investor has been immune to the downturn, many variable annuity owners are feeling better because of their investment’s “highest anniversary value”, or ‘high watermark’, death benefit lock. This “high watermark” feature awards the greater of the actual account value or the highest anniversary value as the death benefit. ?If you have ridden your variable annuity from its peak value of late 2007 down to today’s paltry sum, the “locked in” death benefit exceeds by a wide margin the current account value. Only problem is: you’ve got to die to get the high watermark value. ?Ironically, it is this “death feature” that could be prompting you to keep the variable annuity. If so, read on because you have another option.
Mary Smith is a 72 year old retired school teacher in New Mexico. She put $100,000 into a non-qualified variable annuity in 2001. Her account value grew and peaked near $225,000 in late-2007 before plummeting back to $140,000 at the end of 2008 (parenthetically, had Mary hung onto her variable annuity the current value would approximate $105,000). Under her contract provisions, Mary’s beneficiary will receive the greater of (A) the account value or (B) the high watermark death value. Had Mary died at the end of 2008 her daughter would have received a $225,000 pre-tax benefit – $85,000 greater than the actual account value of $140,000
$100,000 variable annuity cost basis
$140,000 account value
$225,000 variable annuity ‘highest account value’ death benefit
Mary got professional help and learned about another alternative. She was torn because she needed to protect her account value from future market losses, but she also wanted to maintain the high watermark death benefit. The financial advisor who sold her the variable annuity in 2001 said “keep the account as it will surely grow back to $225,000 in her lifetime”, and this was Mary’s position until?she got better advice.
Mary’s current advisor recommended a single premium life insurance contract that could provide a higher death benefit for her daughter, reduce her equity market exposure and reduce the incometaxes paid on the annuity. Plus, he recommends a rider on the life policy that gives Mary access to the entire death benefit under certain conditions if she ever needs it. Here’s what it looked like
$125,000 single premium life insurance ($140,000 minus $15,000 income tax)
$300,000 death benefit (guaranteed to age 125)
$12,000 per month LTC benefit, if needed (25 month benefit)
By addressing Mary’s concerns with life insurance as a wealth transfer solution, the new advisor helped Mary increase the death benefit amount for her daughter by $75,000 and he created access to $300,000 should she ever need long term healthcare – that’s nearly triple her variable annuity account value. Additionally, by withdrawing the $140,000 during her lifetime, Mary has reduced the income taxes due on her annuity gains by 50%.
The moral of the story: before you decide to stay put in the market when you’re sick over the risk of more losses or no recovery from the current market meltdown, get a second opinion. Of course, it helps to work with a financial advisor that thinks outside the traditional “stock market” box. ?Financial planning is simply too complicated for the average investor; thus, don’t be shy about going with the pros when it comes to your money.
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