Annuity Maximization Strategy: Part 2

In our last article, we wrote about how a person can use a life insurance policy to leave their heirs more money. Any retirement vehicle can be used but using an annuity or maximizing an annuity is the best way to ensure one’s legacy and provide the resources needed for the family’s future.

Most individuals during retirement may wonder how they should handle their annuities when they no longer need additional retirement income, especially with a deferred annuity. It can be a great way to guarantee income. Still, it is generally not a reasonable way of leaving more wealth or assets for heirs/beneficiaries due to the possibility of double taxation at the annuity owner’s death. This taxation will notably affect the death benefit’s value. The gain on an annuity is subject to both estate and income taxes. Various strategies and approaches can be used to increase the amount of wealth earmarked for your beneficiaries and decrease the amount of estate taxes paid to state and federal governments. The Annuity Maximization Strategy is one promising approach to repurpose your annuity with a more tax-efficient asset.

What is Annuity Maximization?

It is simply a strategy of repositioning assets by purchasing a life insurance policy financed by the deferred annuity income stream. Either by a Single Premium, taking out the lump sum to buy the life insurance, or by spreading out premium payments such as converting the annuity to a Single Premium Immediate Annuity (SPIA), which provides an income stream for a certain number of years to fund a life insurance policy.

Single-Premium

You can surrender your annuity and take a lump sum of money to fund a Single Premium Life (SPL) Insurance completely. Single-Premium requires a one-time upfront payment that guarantees a death benefit, substantially tax-free, which may also finance beneficiaries’ living expenses. SPL’s benefits include a reasonably large payout to beneficiaries.

Single-Premium Immediate Annuity (SPIA)

Purchasing a Single Premium Immediate Annuity (SPIA) generates an income stream. The after-tax income stream is subsequently gifted to a third party or Irrevocable Life Insurance Trust (ILIT), which funds the premiums annually instead of a single payment on a life insurance policy.

Both options have advantages and different approaches depending on your goals. Either way, both increase the amount of wealth to pass unto heirs. Life insurance can be a highly effective free vehicle to transfer wealth out of an estate tax and provide income for life to the surviving spouse or the next generation.

Essentially, you are creating a significant legacy and growing your future wealth by leveraging your current assets into a larger and full-scale prosperity structure for your remaining family.