10% Penalty on Annuity

[scagnt83]

I always refer to the disclosures on the application. Ive never seen it specifically say "taxable amount" when referring to pre 59.5 withdrawals. It always just says "withdrawals" from what I have seen over the years.

You might be right. Id have to look up the IRS code and read it. Ive never sold a NQ Annuity to someone under age 59 so Ive never really researched the fine details of that scenario.

 

[scagnt83]

I always refer to the disclosures on the application. Ive never seen it specifically say "taxable amount" when referring to pre 59.5 withdrawals. It always just says "withdrawals" from what I have seen over the years.

I just made a really good point for the OP though... the tax treatment is disclosed on the application. Often in big bold lettering.

For the agent/advisor to say "consult a CPA", is totally negligent on their part. The OP needs to get that statement in writing via email. That guy would be toast if it went to court.

Yes, the OP did sign the contract. But honestly, we all know that people do not read every line of the contract. So does the Insurance Carrier. That is why the Carrier puts the onus for compliance and proper disclosures on the Agent and not on the Consumer.

 

[scagnt83]

Off-topic: In fact, this reminds me to check on MEC life insurance contracts because (if I remember correctly), their taxation is exactly like non-qualified annuities. And if they aren't earning much of anything these days, MEC contracts can be a great deal for the right kinds of people.

Single Premium or 3/5 pay premiums are making up a larger part of my life business these days. There are some great options out there. There are also some cool Simplified Issue options for those in their 60s. A few of the SI options have Chronic Riders that do not require permanent impairment. Great for low earning CDs or to pass funds to loved ones.

 

[DHK]

True, but I do like thinking about the "banking" or borrowing aspects against life policies, so I'll be checking on that aspect using MEC contracts.

 

[scagnt83]

DHK, you were correct. Sorry to say otherwise. I always assumed that since carriers never specified "taxable amount" and always used the general term "withdrawals", there was a reason for that. Guess they just dont want to get too specific with their tax advice.

Here is a difinitive resource, NAIC Annuity Buyers Guide. Notice the app just says "withdrawals". But in the NAIC Buyers Guide at the end, PDF Page 22 says "if you draw the accumulation" when talking about the penalty.

https://www.standard.com/annuities/eforms/packets/14390-fra-wa.pdf

I should know better than to use definitives when talking taxes... lol.

 

[DHK]

DHK, you were correct. Sorry to say otherwise.

No problem. Let's look at this from the OP's perspective: You would've OVER-estimated her tax liability on the contract... and then she would've been surprised that it was less. A far better situation than not giving ANY tax guidance on the contract as she's been getting from her current representative. (I can't use the term "advisor" for this clown.)

But with you and I on the case, we'd get to the bottom of it.

 

[VolAgent]

If you watch the different videos I posted above with Ilya Lerma, she talks about consumers rights in regards to contracts and that you can't expect the customer to have "buyer beware" when they are relying upon the advice of a (supposed) professional. A good attorney will "blow that up" for you and put the contract back on the COMPANY for failure to fulfill their part of the agreement.

I'm not in favor of completely abandoning "buyer beware". A buyer needs to have some responsibility for their actions, otherwise you invite just as much fraud, if not more, than you prevent.

That said, a buyer is entitled to receive honest answers to questions and to be presented with pertinent facts. The buyer should then be responsible for any and all actions taken on that basis.

 

[scagnt83]

True, but I do like thinking about the "banking" or borrowing aspects against life policies, so I'll be checking on that aspect using MEC contracts.

Loans are taxed as income and subject to IRS early withdrawal penalties when it is a MEC.
Most illustrations will put that in the disclosures if you make the policy a MEC.

NA has a whole "MEC Discolusre Page" that generates and must be signed when its a MEC. And their ECV product is great for single premium cases.

Ive looked at various angles and scenarios. Other than the usual, the only thing ive found is some possible advantages of using it in a 401k.

 

[DHK]

I'm not in favor of completely abandoning "buyer beware". A buyer needs to have some responsibility for their actions, otherwise you invite just as much fraud, if not more, than you prevent.

That said, a buyer is entitled to receive honest answers to questions and to be presented with pertinent facts. The buyer should then be responsible for any and all actions taken on that basis.

Yes, I generally agree... but with insurance contracts, it is generally understood that consumers don't know how they work. And if the representative selling it doesn't know how it works, how can a consumer make an intelligent and informed decision?

We're not talking about a traditional IRA where these rules may be generally known (such as the Ed Slott article about the FINRA arbitration award posted earlier). Heck, you just saw that between scagnt83 and I had a disagreement, until we looked up the source material - and, dare I say with all humility - he and I are rather knowledgeable about life insurance and annuities on this forum, as are you and a few others, such as Tahoe Ray.

We can also cite various sources that our jobs as financial advisors & insurance agents is to help with consumer behavior to help ensure a successful future. Now, let's take a different example: Years ago, I had a client who bought a variable annuity with a pension rollover/direct-transfer. While she had agreed and understood how the annuity worked... she still took out far too much too soon. I simply documented the files, including suspecting that the client had a gambling problem. No complaint would've come from it, but my job was to simply notify that they were eroding the guarantees of the contract and it won't do what they would've needed it to do. The contract was liquidated within 2 years from the original sale date.

I'm not their parent, but I can give guidance to help ensure that our products are used with sound mind and judgment... and simply document the conversations as I go. It's not my fault that the client liquidated their annuity with their entire retirement funds. Nor would that have been something to consider during the original sale. Clients don't say "I want to rollover my retirement so I can use it to gamble in Vegas." It wouldn't have come up. However, surrender charges and re-calculations of living benefit riders would come up if they withdraw past 5% (for example) or 10% in any given year.

My job is simply to inform people of their choices and consequences of their choices. Their job is to use that information and make a (hopefully) intelligent decision.

 

[DHK]

Right now, I'm really wondering who this company (the brokerage) is?

I'm going to GUESS that it's an MLM company - Primerica, World Financial Group, People Helping People... or some other company along those lines.

To have the rep be this clueless is one thing, but the compliance officer to ALSO get this wrong... is another. I've had one really nice compliance officer, but while all the other ones were "as tough as nails", they all knew what they were doing.

I just want to know who to avoid working for... but it's really not that important to know either.