Sell My Variable Annuity
What is a Variable Annuity?
Variable annuities are a unique type of annuity that invests the premiums paid in sub-accounts which typically hold mutual funds. As such, a variable annuity can gain or lose value, like stock accounts. These securities are sold to the public by not only insurance agents, but also financial advisors. This ‘Sell My Variable Annuity’ page is designed to provide information for anyone considering selling their variable annuity.
Variable annuities are the only type of annuities that are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Given their tax-deferred status and the ability to appreciate over time, variable annuities are a deferred annuity purchased for retirement.
Variable Annuity Risks
Variable annuities have very high fees, often between 3%-4% per year, which over time can cause funds invested in variable annuities to drastically underperform.
Critics refer to the study by Washington State Accounting Professor Richard Toolson that compared the returns (break even points) on an investment in a variable annuity versus a standard low-turnover stock mutual fund. The study revealed that higher earning investors (in a 36% tax bracket) never came out ahead investing in the variable annuity over the index fund.1
Additionally, some variable annuities received lots of criticism for the commission the brokers or advisors were paid when they sold the contract to a customer. These were reportedly as high as 8%. Granted, these commissions were paid to the brokers from the annuities issuer, not directly from the customer but it creates an obvious conflict of interest. They typically have long surrender periods, (which is part of the reason the commissions are so high for the selling broker). FINRA is in charge of assessing the suitability of variable annuities sold by financial advisors.2
Sell My Variable Annuity
Variable Annuity with Death Benefit
There are annuity buyers who will purchase your variable annuity for cash, under certain conditions. These are typical conditions for selling a variable annuity containing a death benefit.
- The annuity must be transferable
- The annuity must be non-qualified meaning not held in a retirement account such as an IRA.
- The annuity must still be in the accumulation stage.
- For a buyer to be interested, the death benefit should be larger than the account value.
How Much Can I Get when I Sell My Variable Annuity?
The amount varies by funding company and market conditions but a rough estimate is about 110%-120% of the account’s value. The buyer will also receive the death benefit. Here is a hypothetical example:
A retiree has a variable annuity that has lost value or is “underwater”. He invested $200,000 in the variable annuity (which he invested in mutual funds in the sub-accounts). The stock market tanks and your annuity loses as well, down 40%. The variable annuity’s value is now $120,000. The annuity owner may choose to sell the annuity to a third party, assuming the aforementioned conditions are met.
The third-party annuity buyer offers you $138,000 for your variable annuity (plus death benefit). This represents 115% of the account value. Since the losses on a variable annuity can be written off, there is also a hypothetical tax benefit of around $21,000. The total value the variable annuity seller would realize in this example is $59,000 ($138,000 + $21,000).
This could be a better alternative to withdrawing your variable annuity. Assuming the same situation as above, if the annuitant decided to withdraw the remaining account value of $120,000 (they would probably only be able to take $119,000 to keep the account open.
Continuing the example, if you decided to do a 1035 exchange, the remaining death benefit would be just $81,000 for your heirs. This is calculated by taking the original cost ($200,000) and subtracting the total amount withdrawn (119,000) giving you $81,000.
These numbers are hypothetical and for informational purposes only. You should consult with your tax professional to go over numbers for your unique situation. Your annuity buyer can also provide additional information.
Common Living Benefit Riders
Living benefit riders are often purchased as add-ons to an annuity contract. As the name implies, any living benefit aids the annuity owner while they’re living. There are three common variable annuity riders that owners purchase are:
Guaranteed Minimum Income Benefit (GMIB)
This rider guarantees that the annuitant receives some level of income every period. This rider only help annuity owners during the annuitization, or payout, period.
Guaranteed Minimum Withdrawal Benefit (GMWB)
This popular rider ‘guarantees’ the principal value of the variable annuity. It is often compared to a seat belt for the inevitable bumpiness that investing in stocks entails. It sounds like a no brainer to have this rider but here’s a few things to remember:3
- Every year, you must need and request withdrawals up to the maximum percentage covered by the GMWB rider.
- If you choose to initiate the principal guarantee, it might take you 20 years to recoup your full principal (5% withdrawal per year for 20 years).
- Even after you dutifully contact your insurer and withdraw the allowable amount, every year, on a present value basis, you still only recoup 62% of the purchasing power.
- For someone in retirement, to recoup your principal by withdrawing money over such a long period (twenty years) would mean withdrawing money right away, which would mean incurring taxes on gains you might have continued to defer.
If you own a variable annuity and are considering buying these “too good to be true” riders, understand the intricacies of them. If you feel like the annuity isn’t the best fit for your situation, you might consider selling the annuity for cash today instead of continuing to spend cash buying riders to [hopefully] protect or recover your investment over a couple decades.
2http://www.finra.org/industry/variable-annuities
3http://www.investopedia.com/articles/retirement/07/annuity-benefits-fine-print.asp