Jim Feit is a freelance writer in the greater Palm Beach area. He may be reached at (561) 734-5510 Updated
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Some Other Considerations That Could Be Important to You
Part 5
By Jim Feit,
Your Friend and Neighbor
In Part 4 we examined the unique Annual Reset feature that, after a Bear market downturn, in general allows your earnings to start growing again far sooner after the market begins to recover instead of having to wait until it regains all its losses. We also considered the relative merits and bad points of various time frames for keeping money in Equity-Index Annuities, concluding that those with maturities of from 5 to 12
years offer the best prospects for growth that the longer the term, the better the chance for increased market gains that will translate into higher earnings for your annuity.
In addition to the attributes we've discussed in past articles, there are other features of Equity-Index Annuities that are oriented to seniors and certainly worth considering.
One such feature is the ability to access your money in the event you are one of the unfortunate people who at some time in your life would require nursing home care. The best and easiest way to protect your assets from being liquidated by the ever-increasing costs of long-term care is to purchase a long-term care insurance policy with the right kind of protective benefits. I have never suggested to any client that any annuity can or should replace the benefits provided by long-term care insurance. I firmly believe in such insurance, have significant coverage protecting both my wife and me, and I have personally sold long-term care insurance to many of my clients. However, right or wrong, if you are reluctant to spend money for a policy you may never use and have chosen instead to self-insure by spending your own money for care (a very risky decision!), or if you remain underinsured by a small policy with limited benefits and/or no inflation rider to cover projected cost increases, you'll be happy to know that many Equity-Index Annuities will allow you to withdraw any portion or all of your money as needed, without any penalty, to pay for the cost of nursing home care. Most such provisions require that you be under care for from 30 to 60 days before being allowed to make a penalty-free withdrawal. Note, however, that there usually is no waiver of penalty for care administered in your own home or in an assisted living facility; that waiver is limited to nursing home care only.
In most instances, penalty-free total account access also is permitted if (Heaven Forbid!) you were to contract a terminal illness and be advised you had no more than one year to live.
If these benefits are important to you, it is essential to realize that not every Equity-Index Annuity offers the same access to your full account value without penalty under either of these circumstances. Some offer only very limited access, and some provide no such access at all. A knowledgeable agent or advisor will make certain you are aware of the existence, and to what degree, of these benefits, or of their absence in any annuity you may be considering for purchase.
Another important consideration is what happens to the money in your Equity-Index Annuity if you should die before your annuity matures. One highly desirable benefit is that if you have named one or more beneficiaries in and as part of your annuity contract, your heir(s) should be able to avoid the expense and inconvenience of probate with respect to inheriting that annuity. It does not have to be specified in any will or trust.
Annuities may either be qualified (part of an IRA or pension plan) or non-qualified. It will be impossible in this article's limited space to provide an exhaustive analysis of all the general and specific rules governing withdrawals. However, I will attempt to outline some you will probably want to know.
Briefly, If your annuity is qualified and you are over age 70-1/2 at your death, you likely will have been receiving the amount annually that is designated as your Required Minimum Distribution (RMD). In that event, if you have named your spouse as your beneficiary, she or he can either withdraw the entire account balance, usually without a contractual penalty but not without taxes, or can replace you as owner and continue receiving an RMD based on her or his life expectancy until the maturity date of the annuity.
If your beneficiary is not your spouse, that person's life expectancy becomes the basis for determining the RMD he or she is required to receive annually. Of course, non-spousal beneficiaries also have the option of withdrawing total account balances or withdrawing any portions at various times to suit their needs. However, the tax consequences of doing this could be extremely high.
Note that other rules not stated here would apply in some cases where the annuity is qualified and the owner's death has occurred prior to the date when the first Required Minimum Distribution must be taken.
If you own a non-qualified annuity and you die prior to maturity, your spouse would not be required to take any distribution, or would have a right to take the entire balance, usually without a contractual penalty. A non-spousal beneficiary would either have up to 5 years to withdraw the entire account balance, or could take annuitized payments computed over his or her life expectancy. Note that an annuity's contractual penalties could be in effect in varying amounts on single or periodic withdrawals prior to maturity.
In the case of either a qualified or non-qualified annuity, just how these withdrawal options would apply or might be treated by a specific Equity-Index Annuity or any annuity for that matter, and whether any contractual penalties for early withdrawal might apply in any instance, would depend on the wording of the contract governing that annuity. Moreover, the tax consequences of any withdrawals you'd like to make should become well known to you and carefully considered before taking any action.
The statements I have made in this article are in no way meant to provide complete information on the subjects they address. Annuity contracts will vary in how they handle the transfer of funds to heirs after the death of the owner, the options they provide, and the penalties, if any, they may charge. The agent you deal with must be prepared to furnish you with complete details on these matters with regard to each of the specific annuities that interest you.
If you are concerned about potentially significant income and/or estate taxation of any annuities or IRA's destined to be inherited by your children, then it would be advisable for you to investigate whether any strategies may be available for minimizing or possibly even eliminating such taxes. I would be happy to discuss this idea further with you without charge if you will make me aware of your specific circumstances on a strictly confidential basis (Toll-Free No. 1 - 800-267-4933).
Next month in Part 6 I'll go back to basics, highlighting some of the harsh financial realities facing us as fellow seniors today and some mistakes in our past mishandling of investment dollars at substantial losses to many of us that we will be hard put to recover. The danger is that once again the market appears to be showing some slight semblance of recovery, while still evidencing some volatility, and it would be so easy for us to overlook the lessons of the past and be lulled into believing once again we can make a bundle in stocks and throw caution to the winds, forgetting how close we came to losing our shirt not too long ago. In simple terms, I'll present some realistic alternatives that will enable you to earn well with safety, so you can relax, be comfortable, smile, and sleep soundly every evening.
If you have any questions regarding this or prior articles or would like some free information from me purely as a gesture of friendship and good will, without cost or obligation and held in strictest confidence, call me at (561) 734-5510 or send me an E-mail at JIMFEIT@aol.com. I'll be glad to help.
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