In a flailing, underperforming economy, many people are livid at how young college graduates are working overqualified jobs and struggling to pay off student loans. The other side to the spectrum is no less alarming; baby boomers are fired from their jobs when they near the age of 50 because a younger replacement will do their work for much less. A recent article on The Wall Street Journal highlights how baby boomers without well-paying jobs are “Spending their late 50s and early 60s running down their savings just to cover the costs of daily life… as a group, [they] are unready for two or even three decades of life after they stop working.”
There are those that make an outcry about an unfair economy that has left them unprepared. Then there are those blaming boomers for not making wise, informed financial decisions. Decisions like choosing to spend rather than save as much as possible, therefore making them a huge liability for the government. If you are a baby boomer that has done the latter, you have a better chance for stability and safety in your future. For those of you with a whole life insurance policy that you bought early on, you more likely than not have a decently sized current cash value to it. Now would be the best time to dip into it and convert it into an annuity that can guarantee you a steady, or even growing, income for the rest of your retirement.
Understand What’s in Your Whole Life Policy
Make an informed decision by understand the pros and cons of keeping your money in a cash value policy versus withdrawing it and using it in an annuity. You will not only have to face taxation on the money drawn but also have to contend with your beneficiaries receiving a smaller death benefit.
Explore your surrender charge options with your agent. Consider the pros and cons between 100% surrender versus partial surrenders. Surrender charges are usually reduced on the anniversary date of your policy, so plan your conversion around then if this is the case.
If you allowed the cash value in your policy to be depleted so that you could pay for premiums before the 16th year (typically the case in most permanent life insurance policies), this option is not for you. Taking the money out prematurely is a terrible idea; for a decently sized annual income, you should have accrued a cash value that was earning at least upwards of 2% in dividend returns and has remain untouched for eight years. This varies from policy to policy, so calculate the returns with your agent.
The taxes you’ll pay for this conversion depend on several factors. If the cash value you have withdrawn is more than the total amount of premiums you’ve paid, the difference is taxable when it is taken out of the policy. This usually happens in the 16th year of a typical permanent policy. Find out if the 1035 transfer form (for tax-free exchanges from one investment vehicle to another) is applicable in the case of your WL to Annuity conversion. If the tax on your withdrawal is severe, consider partial surrenders to fund a deferred annuity.
When you withdraw from your whole life insurance policy, the death benefit due to your beneficiaries reduces significantly. However, if you don’t have significant liabilities anymore, your beneficiaries are well off, and you’re looking only to cover your own funeral charges and a nominal amount of expenses, conversion to an annuity makes even more sense.
Understand the different types of annuities
There are essentially two types of annuities; immediate annuities and deferred annuities.
An immediate annuity is straightforward and easy to understand because it doesn’t have much flexibility in terms of growth. After you make your initial investment, you start to receive payments immediately.
If the annuity is showing better performance than the growth offered on your whole life insurance policy and you don’t need the income immediately, consider a deferred annuity. You should consider converting this to an immediate annuity to when you’re ready to receive a predictable, steady income.
Immediate and deferred annuities can be fixed or variable depending on your appetite for risk. A fixed annuity guarantees a steady rate of interest with low investments that work for the cautious investor. A variable annuity allows returns on a diverse portfolio of investments which pay returns depending on how they performed in the markets. Variable returns are a great way to factor in growth that beats inflation. Keep in mind they do have high sales commissions and management fees which will cut into your returns if your investments on the stock market are not performing. Both grow in tax shelters until the time of withdrawal. Understand also that steep charges kick in when you prematurely withdraw from an annuity.
Choose your annuity company wisely
Choose a company that has greater chances of sticking around even in a boom and bust cycle. The AIG fiasco in 2008 has many scurrying in the opposite direction, with several people afraid of investing their hard earned money in annuity investments. However, there are companies that are earning steady rates of returns and outperforming predictions and investor expectations in reassuring, not flamboyant, ways.
You took your time to find a great company that offered you the best life insurance that helped you substantially grow your cash value. Do the same when purchasing your annuity. Research, review and compare annuity products available, and get quotes from multiple companies when possible. Get recommendations from other friends who are using annuities to their advantage in retirement. Use free services online, such as informational literature and resources, annuity performance reviews and free quotes.
When you’re ready to convert
You’ve done your homework. You understand tax ramifications, death benefit reductions, performance and rates of return. You’ve made calculations as to when you’ll need the money and how much of it. There’s not much left to it, is there? Move the money when you’re ready, don’t make hurried financial decisions.
As a word of advice to baby boomers reading this:
Try extending your working years as much as possible if you’re planning for a long haul of retirement up ahead. This will not only help you leave your savings untouched but also give your deferred annuity a gestation period in order to earn a good rate of return.Above all, make a fully informed decision. Understand all fees and expenses including surrender charges and market value adjustments. Understand the financial strength and ratings of the annuity carrier. Understand that the money put away in an annuity should be left for a considerable amount of time before its real value kicks in. And understand the reputation of the agent who’s giving you the advice.
And if you currently have term life insurance and want the benefits of a whole life insurance policy for you and your family as well, talk to your insurance company to see about term conversion today.