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With thousands of baby boomers retiring by the day and life expectancies increasing, it’s not surprising that annuities are increasing in popularity. Data confirm as much and advisors are hip to that theme – one that’s true across the various annuity genres.
Variable annuities help clients access tax-efficient income. For financial professionals looking to articulate the benefits and inner workings of variable annuities, it boils down to a few simple premises: a long-term approach, access to top investment managers, tax-deferral and lifetime income. Variables are just one form of annuities, but the point is these instruments are experiencing a renaissance.
The annuities refresh appears to have legs and with that comes some obligation for advisors to become proficient in the various issues associated with these products, including how annuities can be passed down to heirs.
Annuities Inheritance Issues
An easy starting point for advisors in terms of helping clients that have inherited an annuity is examining the contract – an exercise many advisors are already well-versed in.
“If your loved one had an annuity, the contract will serve as your guide. It will clearly identify the beneficiary and potentially outline the available payout options for the death benefit. Having this information handy can help you navigate the process of receiving your inheritance,” according to Bankrate.
From there, the death benefit can be examined and that side of the equation is dependent on the type of annuity that was purchased. The standard benefit is most prevalent, but some annuities have annuity death benefit riders while others feature a guaranteed increase death benefit. The guaranteed increase death benefit is akin to the standard death benefit, but boosts the annual payout.
Annuity death benefit riders are “optional clauses offer a higher payout compared to the standard option, and are added to an annuity contract for a fee. A stepped-up benefit rider guarantees the beneficiary receives the highest value the annuity ever reached, minus any fees and withdrawals, or the current value, whichever is more. This protects against market downturns but comes with a higher annual fee,” adds Bankrate.
Considering Distribution Options
Another important issue advisors can help annuity inheriters is the distribution option, which typically boils down to taking a lump sum payment or rolling the annuity over.
The first scenario is self-explanatory. In an annuity rollover, the recipient can roll that cash into an individual retirement, though further contributions to that account are prohibited. Still, the capital can be allocated to stocks, bonds and other assets and the option is potentially attractive to clients because the growth on that account is tax-deferred.
“Beneficiaries can roll funds into an inherited IRA, a unique account specifically designed to hold assets inherited from a retirement plan. Spouses have the most flexibility, and can take withdrawals for the rest of their life. Other types of beneficiaries generally must withdraw all the funds within 10 years of the owner’s death,” concludes Bankrate.
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