Let’s compare

We have been talking about the Annuity Care base-only opportunity for clients 85 and under.  (For a quick overview, check this out.)

And, we are approaching a perfect tax storm for deferred annuities.  Owners are getting older and are being forced into taking money from them in order to fund their long term care. 

Remember, if the annuity is Pension Protection Act qualified, the gains taken from the annuity will be tax-free! And, both Annuity Care I  and Indexed Annuity Care align with the PPA. 

Let’s consider what a multiyear guaranteed annuity (MYGA) offers compared to Annuity Care I.

In all cases, our client will be age 74 (the average age of an annuity owner according to a survey Gallup).  We will also have an annuity balance of $200,000 with a cost basis of $100,000. 

With a 9 year MYGA, let’s assume that it comes with a crediting rate of 5.00%.  As with most MYGAs, the account value and surrender value at end of year 9 will be equal (a 9 year surrender charge). 

I selected to use a 9-year MYGA for this comparison in order to be as close to apples to apples as possible with Annuity Care I  based upon the surrender period for Annuity Care I  which is 9 years.

WHAT YOU SEE IS DECEPTIVE – its more than how much you earn!

Despite providing a higher earnings, there are consequences that could be significant. 

Let’s consider a situation where she experiences a health issue where long term care support and services are required. 

In every case, using a MYGA will result in a taxable event when monies are withdrawn.  With Annuity Care I, when monies are withdrawn for long term care, the money is tax free.

When this situation occurs (the need to distribute money to pay for LTC support & services), let’s assume that she will only need to pull $80,000 for 3 years and that will commence at the start of year 7 – her age 80. In aggregate, we will assume total LTC expenses of $240,000.

I will cut to the chase. 

Between taxes on distributions (assuming a 20% rate) and surrender charges, the MYGA will be completely exhausted in 3 years.  Using Annuity Care I, 3 years of long term care expenses will be funded tax-free AND after 3 years, a cash surrender value of $21,171 would remain to be passed to her heirs.

	claim  year	LTC cost	EOY AV	EOY CSV	10% from AV	new AV	need (penalized distribution)	20% income tax on distribution	need + income tax	new AV after distribution
80	1	80,000	268,019	255,958	26,802	241,217	53,198	16,000.0	69,198.1	172,019.0
81	2	80,000	172,019	168,579	17,202	154,817	62,798	13,715.7	76,513.8	78,303.3
82	3	80,000	78,303	77,520	7,830	70,473	72,170	0	72,169.7	(1,696.7)

Remember, during the guaranteed accumulation period (9 years), she will be able to access up to 10% penalty-free.  If she withdraws more than that 10%, the amount withdrawn will incur a surrender charge (in some MYGA’s, a market value adjustment may occur as well).  And, remember, the gain will be taxed as ordinary income.

Now, if she never experiences a care event and simply passes on, the MYGA

will outperform Annuity Care I on the accumulation front.  This is simply based upon its crediting rate being higher.  In this comparison, the rate is 5.00%. 

Keep this in mind, Annuity Care I is fighting with one arm behind its back – the guaranteed crediting rate is 3.65% in year 1 and 2.60 thereafter for as long as the annuity exists.  Here are select intervals.

	MGYA 9 Year			Annuity Care I
BOY AV	EOY AV	Surrender Value	Year	BOY AV	EOY AV	Surrender Value
$200,000	$210,000	$191,100	1	$200,000	$207,300	$190,716
$231,525	$243,101	$227,786	4	$218,220	$223,893	$208,221
$268,019	$281,420	$271,289	7	$235,687	$241,815	$232,143
$310,266			10	$254,553	$261,171	$261,171

I mentioned earlier that there would be a decision that will be necessary at the end of year 9, the client will be 83 and she will have to decide what to do with the MYGA.  She can:

• let stay and continue to earn the guaranteed rate for years 10+ which is 1.00%;
• roll it to a new MYGA at whatever the prevailing rate might be at that point in time (maybe higher / maybe lower);
• elect a settlement option; or
• take the money and trigger a taxable event.

With Annuity Care I, once the surrender period has elapsed, the client is not required to take action.  She can simply let it remain in the policy and earn a guaranteed 2.60%.

Now, remember this – Annuity Care is a defensive strategy intended to leverage money for long term care.  A lower crediting rate during the accumulation phase is negated when distributions are made for long term care support and services.

For someone from 70 to 85, the question to ask is simply this … is that annuity in the right place?  What is its purpose? 

If it is in a position to liquidate to fund care, contact Justin Fox at (844) 658-3725 or justinfox.isp@oneamerica.com or Nick Angelov at (844) 623-4251 or nick.angelov.isp@oneamerica.com