Transform Your Old Annuity into Income

Buy and forget shouldn’t apply to any of your investments, including annuities. So if you’ve ignored your annuity for a while, here are important steps you should take to evaluate and refocus, writes Stan Haithcock of

At last count, there are $2 to $3 trillion in deferred annuities (both variable and fixed) currently owned by the US public. Yes, that’s trillions!

A lot of people receive their annuity statements in the mail, and without even opening the envelopes, throw them into a random drawer. Does that sound like you? Hello? If you have “opted out” of caring about your current annuity(s), then it’s time to dust off those statements and revisit your options.

Annuities were originally designed to produce a lifetime income stream, and should still be used primarily for that purpose. If you have an older deferred annuity, you have some good options for turning those assets into an income stream that you can never outlive.

Below are some of the choices that you can currently take advantage of with your “old” annuity:

  • Annuitize the asset with the current company.

Every deferred annuity allows you the option of “annuitizing” the money to create an income stream.

Annuitizing means that you are giving up control of the money to the carrier in exchange for a series of payments (usually monthly, and usually for your life). However, some older annuities don’t offer the two alternatives that I recommend from an annuitization standpoint.

Ask your carrier if they offer “Lifetime Payments with Installment Refund” or “Lifetime Payments with Cash Refund.” These two choices provide a lifetime income stream with 100% of any unused money going to your listed beneficiaries. If applicable, also ask if the income stream can be set up for both you and your spouse.

  • Transfer to a higher paying Single Premium Immediate Annuity.

If you do explore the possibility of turning on an income stream with your “older” annuity by annuitizing, you need to shop that number on a national basis, as well.

Normally, I find that the annuitization quote you receive from your current carrier holding the money is not the highest quote. With immediate annuity (annuitization) quotes, there is no loyalty with companies. If the company is A-rated or better, go with the highest contractually guaranteed payment.

  • Transfer to a better deferred annuity with an Income Rider.

If you really don’t need the income stream to start right now, and are planning on the possibility of income down the road, you should consider upgrading your annuity to one with an income rider (on a fixed annuity, not a variable!). You can accomplish this upgrade via a 1035 transfer. This is an IRS approved non-taxable event.

An income rider is a benefit attached to a policy that grows at a contractual percentage during the deferral years. Those percentage numbers can be as high as 6% to 7%, compounding for later use as lifetime income.

This is not a yield amount that you can walk away with lump sum, but it can be used for future income and what I call “target date” income planning. Some of the newer income riders allow joint life income (even with IRAs), and others have built in long-term care or Confinement Care coverage.

The best new income riders also provide an ongoing annual income stream increase, as they have been developed to combat current and future inflation. Inflation is the main reason you might explore upgrading to this type of strategy.

Here are other factors to consider in possibly upgrading your “old” annuity:

Joint Income Even if you have IRA assets in an annuity, the newly designed annuities allow you to add your spouse for lifetime income, and in some cases joint Long-Term Care coverage. If your current policy doesn’t have these features, it might make sense to transfer to a better contract.

Risk Level of Current Carrier It’s an ugly world out there, and it looks like it will be getting uglier for all financial institutions. You need to do some research with your current carrier to see if they meet your risk tolerance levels (including current AM Best, S&P ratings, etc.).

Ask your carrier what their Comdex score is as well. This is a good indicator of risk that most people don’t know about.

Is it a Variable Annuity? Pay attention here! Hartford just stopped selling variable annuities. John Hancock stopped selling variable annuities. The list is getting longer every day.

The reason can be summed up in one word…risk! If you have an older variable annuity, you need to consider doing a 1035 transfer to a fixed annuity in order to lessen the risk of the overall contractual guarantees.

At the end of the day, you need to dust off those old annuity statements and determine the best way to maximize that contract for income. If you think that you have a lemon, contact me to see if we can make lemonade. Just remember, there are new options available to you that might make that old “annuity clunker” run well again.

Originally published by – 4.24.2012 –