Principal SPIA

[celiothrkn]

I have a prospective client (age 47) who was considering a 6-year bank CD for $420K of non-qualified funds. (These days, you can get around 2.50% YoY with an online bank.) So I proposed looking at a SPIA with a 6-year period certain. From a tax perspective, because she's pre-59.5 years old, there's going to be income tax on the gains regardless if the client chose a CD or a SPIA.

After running a couple quotes, ANICO was around 5%. EquiTrust was around 6% but they're B rated. Principal Financial came out on top with around 8%, and it almost seemed to good to be true.

Is there any reason why we shouldn't choose Principal?

Are there any other carriers I should be considering?

 

[DHK]

I'm confused: CDs are for accumulation. SPIAs are for distribution. Why would a SPIA make sense?

Make sure that those %'s are for rates of return rather than distribution rates - the way SPIAs are often quoted.

 

[celiothrkn]

These funds are being earmarked for higher education tuition. We were going to stagger the $420K to be paid out over the course of 6 years (1/6th per year), so a SPIA works perfectly. With the ANICO example, after you put $420K in, it would've paid out $443K over the course of 6 years. Hence why I said around 5%.

Actually, I think I answered my own question. It looks like the CD may still pay more because of its compounding effect...

 

[DHK]

Why not fund a SPIA and use the SPIA income to fund an IUL with waiver of surrender charges? Tax-deferral on the life insurance, index-linked gains... 2 sales... better suitability... may work all the way around.

 

[BeeSelective]

How will the spia income going into an IUL pay the college tuition?

 

[DHK]

You borrow against the IUL.

 

[scagnt83]

Square peg, meet round hole.

 

[Allen Trent]

I have a prospective client (age 47) who was considering a 6-year bank CD for $420K of non-qualified funds. (These days, you can get around 2.50% YoY with an online bank.) So I proposed looking at a SPIA with a 6-year period certain. From a tax perspective, because she's pre-59.5 years old, there's going to be income tax on the gains regardless if the client chose a CD or a SPIA.

After running a couple quotes, ANICO was around 5%. EquiTrust was around 6% but they're B rated. Principal Financial came out on top with around 8%, and it almost seemed to good to be true.

Is there any reason why we shouldn't choose Principal?

Are there any other carriers I should be considering?

The client will likely receive little to no interest on a 6 year fixed period SPIA payout in today's interest rate market. I would be shocked if he makes even $20k in interest over that period of time. The carrier, after paying commissions & issue costs & investment costs likely will be paying 1% or less on the money. If Anico is guaranteeing $443k over 6 years, that is nowhere near 5% a year, it is only 5% cumulative, so closer to about .75% annual rate

Are you 100% sure the client wouldn't also owe the 10% IRS early distribution penalty on the $23k of gains distributed? I dont recall a special exemption for an immediate annuity that is not based on IRS life expectancy tables.

Suitability wise, it may not make it through compliance review by the carrier anyway as it sure appears to be a Commission needs analysis proposal

 

[Allen Trent]

Why not fund a SPIA and use the SPIA income to fund an IUL with waiver of surrender charges? Tax-deferral on the life insurance, index-linked gains... 2 sales... better suitability... may work all the way around.

Wouldn't it be better to put the money directly with the life carrier in their Premium Deposit Account. Most of those are paying 3-3.5% on the money while it waits for the money to be moved into the IUL. Not saying the IUL is a solution for this clients short term 6 year need, but selling a SPIA with the potential tax issues & low interest rate for a short payout would seem like an agent cash grab rather than serving the client best

 

[DHK]

I doubt that money in a premium deposit fund would be exempt from FAFSA reporting. I'm certain that having $400k+ in a CD would impact financial aid eligibility and the efc.

Plus, with the money in the SPIA, it will be set aside for the purpose of the life policy.

However, I didn't do the fact-find, so there may be other considerations.