Immediate annuities (living at the next level)

Author: Dan Searles, John Stohlman
Posted: Monday, January 25, 2010

Author John Maxwell, in his authoritative book, “Living at the Next Level: Insight for Reaching Your Dreams,” wrote, “Every time you discover something new, ask yourself three questions: Where can I use this, when can I use this, and who needs to know it?”


This truth applies in life and finances as well. Very few financial products, like stocks, mutual funds, annuities and CD’s are bad.  They are most often badly applied to the customers’ needs. Applying John Maxwell’s three questions before you invest will help you ensure that the investment product you are considering meets your goals.

Let’s go to this month’s question:


“Hi Dan and John,


I am a 79-year-old widower. I put away money in the 1970’s: $40,000 in the stock   market and $20,000 in a tax-deferred annuity, and I feel quite lucky. As a result of the income I receive from these investments, a small pension and my social security paychecks, I have more than enough to live on. I recently went to an estate attorney to set up a will. I mentioned that I live on my stock dividends but that I felt I would never need the tax deferred annuity that was now worth $120,000. It has a guaranteed lifetime interest rate of 5%. The attorney said I should annuitize and buy a life insurance policy. I’m not sure I’m comfortable with that suggestion. What should I do?”


Gaithersburg, MD

(Name withheld by request)


Dear Confused:

That is a great question. The reason the attorney suggested a life insurance policy instead of a tax-deferred annuity involves taxation at death of these instruments.

The growth on a tax-deferred annuity is taxed to your heirs as ordinary income, rather than given a stepped up basis, like stocks or real estate. This can be a big tax burden to your heirs.


A life insurance policy, assuming your estate is under the Federal estate tax limit of $1.5 million, is a non-taxable event to your heirs, hence the attorney’s                   recommendation. However, there are two   catches your lawyer may not have considered:When you annuitize the annuity (i.e. turn your principal into income) for life, part of that income is taxable to you.


Furthermore, you stated your annuity was paying 5% guaranteed. That is much better than the products available today. Remember, the guarantees are based on the claim paying ability of the issuer.


To decide whether you should make this move you would need to calculate the annuity’s growth until your life expectancy. Then you would need to subtract the tax to get the net dollars that would go to your heirs. If this number is greater than the death benefit that could be bought with the annuitized annuity, you should buy the life insurance. If not, the annuity is a better deal. In your case, with your annuity’s high lifetime guarantee rate, transferring it to an insurance policy would not be a good idea. If you would like your estate, stock or mutual fund question answered in our column, please write. If we use your question in our columns, you will receive two engraved collectable drinking glasses, assuming you give us your address.


Dan Searles and John Stohlman, owners of Medallion Financial Group, are CFP®’s, financial planners and Registered Representatives with over 25 years of experience in the financial services industry, offering securities and advisory services through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies. They manage over $250 million of client assets. For further info, questions or comments regarding this article, Dan and John can be reached at 301-990-9704 or 1-800-878-9704 or

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