Last week, I shared a comparison of a 9 year MYGA to Annuity Care I – the product that got the whole annuity-based LTC discussion started decades ago. And, as expected, I received lots of feedback (mostly negative).
Let me share a conversation that I had with an advisor. After our pleasantries, we got into the discussion of my comparison and he said,
“I would never recommend a 9 year MYGA to a client. That is not reasonable.”
If you read the article, you would understand my rationale for electing at 9 year MYGA. It was simply to go apples to apples with Annuity Care I for surrender period. Pushing back, what is reasonable?
“In her case, being 74, I would have gone no more than 5 years – probably 3.”
What would that get her?
“A shorter surrender period, more control, and more options when it comes time to renew.”
So, you are saying that in 3 years, when she is 77 that she will have to decide what to do with the money – either take it in some form or continue the rollover train into another annuity.”
“Well, yeah, that’s the point – let it keep rolling and grow tax-deferred. She won’t need it so she can pass it on.”
So, she’s just going to keep the meatloaf (MYGA) cooking until she either needs the money or dies. Am I right?
“Yeah – that is the objective.”
What if there is a care situation and she needs the money?
“She takes it from the annuity like she planned which is why I would recommend a shorter term MYGA”.
Okay, let’s take a look at the example using your approach and compare.
So, we have $200,000 ($100,000 basis) that we will 1035 into a 3 year MYGA earning 5.00%. (I elected this because it is the same rate that I used in the last example.)
Remember this – after 3 years, our client will have to either take the money (lump sum or annuitize), leave it in the policy, or roll it into a new MYGA with a new guarantee period. This will need to be done in the 30 day window following the 3 year period.
Also, remember, while the crediting is guaranteed for 3 years at 5.00%, there is also a surrender charge for every year. After the guarantee term, the surrender change is zero.
And, in the case of the annuity in our conversation, it has a market value adjustment factor to it if monies exit the policy during the surrender period IN ADDITION to the surrender charges. With an MVA annuity product, that adjustment is not know until a decision is made to withdraw money. (As with last week’s comparison, a market value adjustment will not be factored in.)
So, where does that leave us?
In exactly the same place as last week from an accumulation standpoint. Assuming a 5.00% crediting rate every year, regardless of how you structure it (3 – 3 year MYGAs or 1- 9 year MYGA), the accumulation is the same.
From a distribution standpoint if there is a long term care situation, depending upon what year of the 3-year MYGA a distribution for long term care support & services commences will impact the surrender charges but not the taxes.
Just like last week, when a long term care need arises, the same impact on distributions will result. Taxes will be paid on every dollar that is distributed as gain; surrender charges and a market value adjustment will apply to all of the money that is distributed in excess of the 10% penalty-free withdrawal amount until the guarantee period is over. Then, a decision has to be made what to do with any money that might remain at the end of the MYGA period.
If you recall, last weeks example of 3 years of withdrawals decimated the MYGA. In fact, there was zero value left when forced liquidation occurred.
In the spirit of good will, I removed all surrender charges from the discussion. And, you won’t believe what we found. The 3 year MYGA did not fare any better than the 9 year MYGA from last week.
Meanwhile … Annuity Care I retained $6,201 in cash value along with $20,875 of long term care benefits.
A quick reminder, we are looking at values from the guaranteed Annuity Care I ledger as a point of comparison.
And, one last point, Annuity Care I will continue to grow (cash value and LTC benefits) at its modest 2.65% until the annuity, not a crediting period.
“That’s all well and good, but she won’t need long term care,” was the reply.
Really? Are you willing to put that in writing? Are you willing to impose unnecessary taxation and expenses on your client and their family because you don’t think that she will need care?
The one take-away from this conversation that I want you to have is this – you need to look at the buckets of money and how they will be treated at distribution time. In good times and in bad… a little leverage can go a long way.
Learn more about this strategy – 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
Fridays with Fisher 
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