Annuity Audit App

This is the 10th exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can read the backdrop for the exercise HERE, or just jump right in with the instructions given below:

It is my hope that this is an extremely brief exercise for you, but many people who have long-term relationships with folks in the insurance, brokerage, or banking industries have a lifetime of annuities built up.  If that is your scenario, it is very important that you do this exercise to get a handle on where your money is and what it is doing (or not doing).

When you did your Personal Balance Sheet or Mutual Fund Audit App, you probably pulled together the statements for any annuities you own.  These statements often lack the information you’ll need for this exercise, so I also want you to pull together each of the contracts you received at the inception of your annuity policies as well.  Then, using the App (link below), fill in the information cataloging the following: owner[i], annuitant[ii], beneficiary[iii], contract value, surrender value, cost basis (the sum of your contributions), and the surrender schedule.  Some of this will be on your statement, but the remainder will be in your policy contract. You may have to do some digging.

Once you’ve collected the information, the analysis should start with a diagnosis of the investment value.  If it is a fixed annuity, you’ll know very quickly if the rate is competitive with today’s rates.  If it is a variable annuity, examine how it has performed versus the various benchmark indices.  If it is an equity indexed annuity, the chances are very good that it is not a phenomenal investment, but it also probably has a very long and steep surrender charge which may make it prohibitive to move at this time.

If you determine you’d prefer to be out of an annuity contract, here are the questions to ask:

  • What, if any, surrender charge exists?
  • Is the surrender charge cost prohibitive?
  • How much longer will the surrender charge last?
  • How much have you contributed (what is your cost basis)?
  • How substantial would the tax impact be (would you have to pay a lot in taxes)?
  • Is there a gain on which you would have to pay a penalty if you are under age 59½?

Again, remember to make these decisions slowly because there are many moving pieces with annuities.  It is best to speak with a fee-only Certified Financial Planner™ practitioner AND a Certified Public Accountant prior to making any final decisions.

Click HERE to access the Annuity Audit app!

[i] The person who made the investment in the annuity

[ii] The person upon whose life the actuarial calculations in the annuity policy were based (this is often the same person as the owner)

[iii] The person or people to whom any annuity proceeds will be directed upon the death of the annuitant

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I’m a speaker, author, wealth advisor and Director of Advisor Development for Buckingham and the BAM Alliance. Connect with me on Twitter, LinkedIn and Google+.

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