Good, Bad or Ugly Decision

[street]

Today I exchanged an annuity and a smaller amount in an account that was getting 3.4% interest for life. The annuity was in mutual funds with a death benefit tied to it and I got rid of the 1.2% charge from that annuity. No charges from them now going forward. This was a 10-day window offer they had going.

The exchange was for 5.5% interest rate for 9 years I put in 400K. It is money that I don't expect to use so I did the exchange. No taxes will be required on it till I start taking the money out. I also can take 10% each year from the account without any penalties.

Not sure I did the right thing, but I bought the annuity back in 2003 and at that time it seemed like a good thing to supplement my later years. As it turned out it was a tool, I didn't need in my tool bag.

So, was it a bad move?

 

[PatrickA5]

Not sure if the exchange was good or bad, but 5.5% for 9 years with interest deferral doesn't sound bad to me.

 

[Texas Proud]

So let me see if what I am thinking is what you are saying...


You changed the investment option on an annuity and now have 5.5% for 9 years...


But, the annuity has a death benefit to it.. IOW, it is also life insurance... is this correct?


If so, my mom had one of those she bought back in the 80s... I did not know about it until it had grown a lot (interest was HIGH back then)... so we just kept it as an investment IF she ever needed the money... she never did so when she passed we got a big amount of gain for free... and it was a good amount over the cash value since the life insurance part has to be more than cash value...


It might not have started out to be good, but it did end up to be good... not as good as if invested in stocks but good none the less...

 

[pb4uski]

Today I exchanged an annuity and a smaller amount in an account that was getting 3.4% interest for life. The annuity was in mutual funds with a death benefit tied to it and I got rid of the 1.2% charge from that annuity. No charges from them now going forward. This was a 10-day window offer they had going.

The exchange was for 5.5% interest rate for 9 years I put in 400K. It is money that I don't expect to use so I did the exchange. No taxes will be required on it till I start taking the money out. I also can take 10% each year from the account without any penalties.

Not sure I did the right thing, but I bought the annuity back in 2003 and at that time it seemed like a good thing to supplement my later years. As it turned out it was a tool, I didn't need in my tool bag.

So, was it a bad move?

No, I don't think it was a bad move. 9 year Treasuries are 4.85% and 9 year CDs are a bit lower than that so 5.5% seems fair given that the annuity has a smidgeon more credit risk.

One thing to check is whether the 5.5% interest rate is guaranteed for the whole 9 years or not. A 9 year guarantee of the 5.5% interest rate would be unusual, but a 9 year surrender charge schedule would be quite typical.

From what you wrote it sounds like perhaps the 1.2% charge was a mortality cost for the death benefit or something along those lines.

Just be aware that withdrawals from annuities are interest first and principal second, so it is likely that if you take advantage of the 10% penalty free withdrawal that all of the amount withdrawn will be taxable income to you.

Also, there is no step-up in basis for annuities so if you don't get taxed on it then your beneficiaries will.

 

[street]

No, I don't think it was a bad move. 9 year Treasuries are 4.85% and 9 year CDs are a bit lower than that so 5.5% seems fair given that the annuity has a smidgeon more credit risk.

One thing to check is whether the 5.5% interest rate is guaranteed for the whole 9 years or not. A 9 year guarantee of the 5.5% interest rate would be unusual, but a 9 year surrender charge schedule would be quite typical.

From what you wrote it sounds like perhaps the 1.2% charge was a mortality cost for the death benefit or something along those lines.

Just be aware that withdrawals from annuities are interest first and principal second, so it is likely that if you take advantage of the 10% penalty free withdrawal that all of the amount withdrawn will be taxable income to you.

Also, there is no step-up in basis for annuities so if you don't get taxed on it then your beneficiaries will.

Yes, guaranteed 5.50% for 9 years doesn't go up or doesn't go down. Also, I can take 10% each year out without any penalties but then of course I would be responsible for taxes on any amount withdrawn. I'm not sure on the 9 year surrender charge but I wouldn't be doing that and with being able to take 10% each year if I wanted would be more than I would withdraw.

Yes, I am aware of the step-up process.

Thanks pb4uski.


To answer the question about being a life insurance it was not life insurance product. It did have a death benefit along with the annuity itself and that annuity cost me 1.2% to have it each year.

 

[pb4uski]

Great!

 

[DrRoy]

Looks like an improvement to me.

 

[street]

Looks like an improvement to me.

I hope so. I always disliked the annuity and have asked them before if there is any way I could move that money to something else. The answer was no, so I was surprised when I got the call of this opportunity. He did many are taking advantage of the 2 week offer.

 

[Chuckanut]

I hope so. I always disliked the annuity and have asked them before if there is any way I could move that money to something else. The answer was no, so I was surprised when I got the call of this opportunity. He did many are taking advantage of the 2 week offer.

It's always good to read about somebody has who improved their situation and made their future more secure and trouble free. Good thinking!

 

[COcheesehead]

Within the framework of the annuity, I don’t think it’s a bad move.

I look at the alternatives. I just did a query and you can get 9 year non callable high investment grade bonds that yield in the 6.5%-6.8% range with almost complete liquidity the whole time you own them.

Pulling the money out now you’d owe the tax so individual bonds probably wouldn’t work for you, but the paradigm of what is possible with today’s yields should be considered by anyone owning low yield products.