I’m sorry that your MIL was sold this annuity. (By the way, the current name of the insurer is Brighthouse, not Brightstar).It was purchased Oct '09. The most recent report she has is from Aug '23 (I've of course asked her to get a current version) shows a roughly $3,600 surrender charge ($175k contract value, $171k surrender value, $246k contract death benefit amount). So, roughly a 2% surrender charge is probably worth eating to avoid fees which seem to exceed that per year (1.35% mortality & expense fee; 0.25% admin fee, $30 account fee, 1% GMIB Plus II rider charge; 0.75% Enhanced Death Benefit rider charge; presumably high expense ratios on the mutual funds; possibly the whole investment included in an AUM fee by the advisor). But I'm not sure how to think about the in-the-money death benefit, tax consequences of unwinding it, etc.
You’ve already gathered some good information. If she had an annual report from August 2023, I expect she should have gotten one in August 2024. She should also be able to sign up for online access to her account, which should give her up to date information. Or she could just call the company. Before you take any action, get more current financial info on the annuity.
I’m a little surprised that a 15 year old annuity would still have surrender charges. Has she deposited additional money into the annuity after the original purchase? Anyhow, as you note, the surrender charges are fairly nominal.
Those fees are an absolute killer. It sounds like they’re aggregating out to about 4% per year. So on her $175k account value, she’s paying probably $7-8k per year in fees. I agree with you that the fee drag would justify paying a surrender charge (absent finding value in the riders).
Before ditching the annuity (which I’ll describe later), she/you need to decide what value, if any, there is in the riders. You mention two riders -
—- The GMIB rider could have value to her if (a) she wants to take a monthly income from the annuity funds, AND (b) exercising the rider provides a greater monthly income than using the annuity funds to purchase a SPIA. If she wants to consider getting a monthly income from the annuity funds, she should get in touch with Brighthouse to see how much she would get per month if she “exercised” the rider. She could then compare that to using the surrender value to purchase a SPIA.
—- There is definitely some value in the additional death benefit. Whether or not it justifies keeping the annuity depends on the relationship of the 4% fee drag to the additional $80k or so death benefit. If my fee estimate of $7-8k of fee drag per year is correct, then it would take about 10 years of fee savings to offset the foregone death benefit. (A reasonably healthy 80 year old woman could easily live 10 more years).
One additional thing to pursue is what happens to the additional death benefit if she “partially surrenders” the annuity. Many annuities have a “pro rata” reduction in the death benefit upon partial surrender - that is, if she took out (say) 90% of the account value, then the death benefit would decrease by 90%. But some older annuities have a “dollar for dollar” reduction, so a partial surrender of (say) $165k would reduce the death benefit by $165k. If her contract has a $ for $ death benefit provision, then it almost certainly makes sense to pull out about $165k, leaving her with a $10k account value and an $81k death benefit. Then I would keep that little stub of an annuity forever, to collect that additional $71k death benefit.
Now to taxes. You say this is non qualified. That means that taxes, at ordinary income tax rates, will be due on the excess of the surrender value over the “basis” of the annuity (possibly the premium that FIL paid for the original annuity). If she were to surrender the whole annuity now, she would have taxable income reported for the full gain in 2024. Also, note that annuities do not get stepped up at death, so if she doesn’t pay the taxes due during her life, then her heirs will. Finally, even if she keeps the annuity until death, the death benefit proceeds will be taxable to her heirs at ordinary income rates.
While she can’t avoid the taxes (unless she names a charity as the beneficiary when she dies), there are some things she can do to cushion the tax hit -
—- If she decides to surrender, she can spread the surrender over several tax years, to avoid being pushed into a way higher tax bracket all at once.
—- If she decides to keep an annuity for any extended period of time, she could do a 1035 exchange into another annuity to reduce the fee drag. The best choices would be a MYGA if she wants CD-like fixed income returns, a low fee variable annuity like the Fidelity product if she wants the option of equity returns, or a SPIA if she wants monthly income.
—- If her marginal tax rate is higher than that of her heirs, she could transition to one of the alternate annuity choices, hold the annuity until death, and then her heirs will pay the taxes at their lower tax rates.
Whew!! That’s a lot of information, and I didn’t go into all of the nooks and crannies of the possible option.
Post back with questions.
Statistics: Posted by Stinky — Fri Nov 22, 2024 4:49 am — Replies 3 — Views 321