Last week the Department of Labor finalized a change to its definition of fiduciary standard, which will begin requiring brokers-dealers, insurance companies and some advisers to adhere stricter guidelines when recommending and selling investment products inside retirement accounts, such as an IRA or 401(k). As a consumer, you will most likely notice the change in the way annuities are sold.
Brokers, insurance agents or advisers operating under the suitability standard can sell annuities as a fixed-income investment, provided a fixed-income investment was suitable to the investor’s situation. The drawbacks have been the high up-front fees for the investor and the conflict of interest created by the commissions received on the sale of such products. While annuities will not likely disappear, changes should help investors have a better understanding of how the product fits into their plan. Annuities are insurance products, and in our opinion, should never be used to accomplish the dual objectives of guaranteed income with market-oriented growth. At Henssler Financial, we view these products as tools to be used within a comprehensive plan.
For those who work with registered investment advisers who have been held to a fiduciary duty since the Investment Advisers Act of 1940, an annuity may have been put in place to minimize a risk. Others may have been sold an annuity years ago for some reason or another. It has been our experience that variable annuities have challenges when trying to fully integrate into a client’s financial plan. Even if the policy has performed, investors often hesitate on doing anything with the annuity, such as exercise the income or exit the contract, because of the tax consequences.
About six years ago, the annuity industry created a hybrid annuity that features a long-term care component. The product is a base annuity contract that allows the money to grow tax deferred until the money is removed from the policy. However, with the long-term care component, purchasers can choose the amount of long-term care coverage they want and perhaps inflation coverage. Long-term care coverage can be up to two or three times the amount of the initial premium paid for the annuity. If the purchaser needs long-term care and meets the qualifications of the policy, funds can be accessed tax-free. If there are no benefits paid to cover long-term care expenses, you still retain all of the tax attributes of an annuity. Additionally, because of the initial deposit, we have found that these products offer less stringent underwriting, which can present a nice option for clients who may have medical impairments.
Investors who have ignored their annuity contracts because of the capital gains are in a sweet spot to take advantage of a 1035 exchange. This is a nontaxable event that allows you to exchange an existing variable annuity contract for a new annuity contract without paying tax on the income or the investment gains in your current variable annuity account. The key is to exchange the variable annuity for fixed annuity with an added long-term care feature.
Annuities are investment products that should be periodically evaluated in context with your overall financial plan. However, for those who own variable annuities, there are viable, tax-favored options available that can allow you to gain a benefit from something that may not fit in your overall financial plan.
If you have questions regarding an annuity you may own or how a 1035 exchange may benefit you, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
