Time for a new twist on a classic - annuity maximization. 

In case you forgot what that is, the crux is taking a very tax inefficient asset - an annuity - and turning it into a tax-efficient asset - life insurance.  This assumes that the annuity is not needed for income, and makes even more sense if the client is also subject to estate tax (bonus points if you can determine the answer to that question these days!). 

The upside can be huge - avoiding as much as a 75% reduction in net-to-heirs value with the annuity by flipping to an amount that may in fact be larger with the leverage of life insurance.  Sounds great, right?  If you're thinking "OK, where's the twist?" you are right on time.

The twist is the motivation.  In the scenario outlined above, it is all about taxation.  Today we are talking about another source of pain and asset shrinkage - surrender charges.  All of us have heard horror stories about 20 year surrender schedules and bonuses that are tied to keeping the money in the contract forever and a day.  Some of us may even have sold that type of product at one point in our careers.  Hey, stuff like this happens, and the only thing we can control at this point is the advice we continue to give the client.  It's time to present a solution.

Here's how it works:  Assuming we have identified a client with a product like those described above.  Most will have a 10% free annual withdrawal.  Do the math to determine what that amount is each year.  Great, now what?  Call the office!  Without giving away the farm, we can put together a life insurance policy with the following parameters:

• 10 annual premium payments
• Guaranteed death benefits that far exceed the annuity value
• Cash accumulation that is roughly equal to premiums paid by year ten

So what do we accomplish with this?  Here are the high points:

• Huge leverage on the annuity value.  The heirs will now receive the balance of the annuity as well as the death benefit from the life insurance policy.
• Access to a nice bucket of money.  In the case outlined above we paid in $125K and the surrender value at the end of year 10 us $117K.  At this point the client can make a decision to reposition that asset, or to keep it in the policy.
• Gave the client (and the advisor!) a way to gracefully exit from a product that may be a source of frustration.  If the current product performance is lagging due to the current economic environment all the better.

There are a few other asset classes that may benefit from this type of thinking - qualified plans for instance are very well suited.  Some others may also be appropriate - muni's and CD's if they are not needed for income during life.  The surrender charges may not be the issue, but the taxation sure could be.  The bottom line is if assets are intended to pass to the next generation, we should reposition to an asset that is designed for that purpose.  Seems obvious when you think of it in those terms.

Happy Halloween.  May your trick-or-treating be trick free!