Maximize the Benefit of a Losing Variable Annuity

I had the chance back in the 01-03 bear market to help some clients with variable annuities maximize the benefits of investments that had gone sour, and just this past week ran across another opportunity to help a potential client with this same strategy. Here is what to look for:

• You purchased a variable annuity that has lost value.
• The death benefit of your annuity is calculated based on a dollar for dollar reduction for withdrawals.

Here is how this strategy works:

Let's say you originally put $100,000 in the annuity and the value has now dropped to $70,000. The death benefit of this annuity equals premium payments less withdrawals on a dollar for dollar basis. You withdraw most of the money from your annuity, leaving only enough to keep the policy active. Let's say you must leave $5,000 in the policy so the insurance company can't cancel the contract. That means you withdraw $65,000 from the policy and move that money elsewhere to recover as the markets recover. Your death benefit on the annuity falls from $100,000 to $35,000 refecting this withdrawal.

What you have done in effect is to create a synthetic paid up whole life insurance policy that will pay out one day to your heirs. Meanwhile your remaining value can be invested to create even more wealth and income for you and your heirs.

This opportunity may also apply if you have a 403b plan that utilizes group variable annuities.

This strategy will not work if the death benefit of your policy is calculated on a pro rata basis, and the insurance industry has caught on to this ploy so most new policies have a pro rata calculation. So before you exchange an old annuity or just give up on it check to see if there may be a better way to skin that cat.

Understanding Your Variable Annuity

Variable annuities are often confusing and hard to understand. In addition to the fees charged for managing the sub- accounts (read mutual funds) within the policy consumers also pay for the insurance portion of the policy (mortality expense) and various riders and options offered with the policy. If you want to compare the expenses of owning or buying a variable annuity, this months issue of "Money Magazine" offers up a simple grid that you can take to your insurance agent ( yes your broker is an insurance agent if she is offering you an annuity) for help comparing.

E-Z annuity fee disclosure checklist

Before you buy any annuity, ask your advisor to fill in the blanks.

What you pay each year Annual fee (as % of account value) for: Number Typical The insurance (a.k.a. mortality and expenses) _____% 1.35% The investments within the annuity _____% 0.95% Riders and options _____% 0.65% Total annual fee: _____% 2.95% What you pay to get out Max. surrender charge (as % of withdrawal) _____% 7% Number of years before surrender charge expires _____ 8

Source:Morningstar, National Association of Variable Annuities, Money research
Note: Max. surrender charge may not apply to all withdrawals.

You can read the full story here.