Question, 10% Withdrawal

[galoisi]

Ran into client that has a 14year index annuity (good company) that is 2 year old 10% bonus product, had about 500k in it from 401-k rollover. Son is going into the business, his manager wants to take the 10% withdrawal amount and transfer it into another company (good company) also 10% bonus, with 10 year surrender...........8% on 50k = 4000 commission. I get what he wants to do, but
#1) could you actually transfer that 10% to another company to avoid taxes ?
#2) Because of suitability, this wouldn't work would it...?
anyone run into this type thing ????

Thanks for your replies....
Guido...

 

[NPCOACH]

The law allows partial 1035 exchanges of annuities. Some companies do - some companies don't so to some extent it depends on the carrier. A 1035 exchange would keep it from being a taxable event.

Ethically, on the surface, there is nothing wrong with this as his current annuity has 12 years of surrender charges left and the new annuity would only have 10. Plus he gets a bonus.

However, how are these bonuses credited? Does the contract cause them to be lost if money is "surrendered" as this type of withdrawal would be deemed? Policy language matters. Some 10% bonuses are 1% a year for 10 years and some are 10% up front. Some are only paid on annuitization or on lifetime withdrawals. Some are earned right away. Will he lose the bonus on his old annuity?

How old is the client?

What is the existing company and what is the replacing company? Is there a difference in company strength, ratings or financials?

Most important - how do the features, benefits, index crediting and/or interest rates of the new annuity compare to the old one.

Obviously much more information is needed for anyone on this forum to make an intelligent recommendation on the best interests of this client.

 

[galoisi]

Thanks for your reply coach.......
Client is 57, exsisting company North American,(charter product).........new company was to be Aviva.
If this is ethical..........no tax, no change in bonus credit, and a shorter surrender period........I guess it would make sense then........the client is and will probably never use the money for retirement.........he has other income.
Thanks for your input....
Guido...

 

[Winter_123]

The law allows partial 1035 exchanges of annuities. Some companies do - some companies don't so to some extent it depends on the carrier. A 1035 exchange would keep it from being a taxable event.

.

I am trying to figure out how a 1035 exchange comes into play here. The account would be qualified funds if it originated from a 401k plan so it would be a partial rollover wouldnt it. Don't know. Just asking.

 

[insuranceexec]

I am trying to figure out how a 1035 exchange comes into play here. The account would be qualified funds if it originated from a 401k plan so it would be a partial rollover wouldnt it. Don't know. Just asking.

1035 paperowrk is also used with some companies to execute a direct rollover for qualified funds. I hope this helps.......

 

[NPCOACH]

I am trying to figure out how a 1035 exchange comes into play here. The account would be qualified funds if it originated from a 401k plan so it would be a partial rollover wouldnt it. Don't know. Just asking.

You are right. I glossed over the 401 k part. It would be a rollover - not 1035. And insurance exec is also right. Many companies use the same paperwork. But technically it is ust a rollover.

Either way, not a taxable event

 

[galoisi]

Thanks for your replies, yes after further review, either way roll over or 1035 it would work for no tax..........and if the bonus part of both products are credited in the same manner..........it would seem a fair choice for the client.
Is anyone else out there doing this?? If it's ethical and reduces the surrender period.........why not??

 

[insuranceexec]

Thanks for your replies, yes after further review, either way roll over or 1035 it would work for no tax..........and if the bonus part of both products are credited in the same manner..........it would seem a fair choice for the client.
Is anyone else out there doing this?? If it's ethical and reduces the surrender period.........why not??

There are many exit strategies with annuities. The one you are talking about is very common.

Another good strategy right now is evaluating the MVA on annuities that were sold 2-5 years ago. The MVA was created to help ease the burden on insurance companies and early surrenders.

With the current environment they are actually working in favor of the clients giving them a positive number and decreasing, and in some case eliminating, the surrender penalties.

An agent can then roll the money and lock in a lower "indice reading", and decrease their investment time horizon. I hope this helps.......

 

[Norwayguy]

Thanks for your reply coach.......
Client is 57, exsisting company North American,(charter product).........new company was to be Aviva.
If this is ethical..........no tax, no change in bonus credit, and a shorter surrender period........I guess it would make sense then........the client is and will probably never use the money for retirement.........he has other income.
Thanks for your input....
Guido...

I just want to point out that there is a change in surrender period...the 50K that would be transfered is free withdrawal of the first policy and as such has no surrender charge on it...your then putting it into a new 10 year surrender and the free withdrawal on the 2nd policy would only be 5K...

I am also assuming that the plan would be to continue the free withdrawals each year lumping the free money into a new 10 year surrender.

I personally believe if the client is informed about the pros and cons and wishes to do this then let them...however if your son is securities licensed and his B/D makes him run Index products through the B/D, the compliance department might have a different take.

Also most bonus products I have reviewed the client gives up profit...I just reviewed this example yesterday with Annuity Investors Flexmax 7 and 14

Flexmax 7 is 7 year surrender no bonus
Flexmax 14 is 14 year surrender 5% bonus on deposits years 1-5

But that is not the whole story pt to pt credit strategy 100% participation rate guaranteed both products up to cap...cap pn the Flexmax 7 is 8.5% cap on the new Flexmax 14 issued after 1/21/09 is 7% older product is 5.85% so once again I believe if the client is fully informed then this can be fine but they need to know that no insurance company can just create 10% as a bonus and give it to them and that it is coming off somewhere else.