In a recent article, I introduced a very interesting variable annuity (VA) purchase program. To summarize, there are billions of dollars out there in VAs that have CSVs of far less than the initial premiums paid. Traditional options for these clients are to: keep the annuity and hope the account value comes back; surrender the annuity for the surrender value; or strip the annuity.
Now that the VA purchase program is available, a better option for many clients will be to sell their VAs for 110 percent to 120 percent of the CSV and in the process, receive a loss that can be used against ordinary income.
Getting paid when a VA is sold
Previously, I forgot to mention one significant point. If you are securities licensed, you can earn a fee of up to 7.5 percent of the excess price the client is paid for his/her VA. For example, if your client sells a $500,000 annuity and receives a payment of $600,000 ($100,000 more than the CSV), you would be paid 7.5 percent on the excess payment which would equal $7,500.
Do you need a securities license to deal with this concept? The answer is no. The firm that offers this program has securities licensed team members who will talk with your clients about it and will then allow you to deal with the repositioning of the money.
Taking a loss on the sale of a VA
Most people think that when they sell an investment that is worth less than was paid for it, the loss is limited to a capital loss (short- or long-term capital loss). That's better than nothing; but when selling an upside-down VA, the loss can be applied to a client's ordinary income. That's right.
So not only do clients win because they can receive 110 percent to 120 percent of the CSV when selling, but they can also take an ordinary income tax loss. This significantly improves the financial viability of selling an upside-down VA.
Client, age 60, earns $500,000 a year. He bought a VA back in 2002 for $500,000 that currently has an account balance of $300,000. Assume he sells the VA for $350,000 cash.
He could then choose to reposition the money in the annuity to a FIA with a 10 percent bonus with an 8 percent roll-up rate where, at age 70, he would have a guaranteed income per year for life of $49,871 (something he's never going to have if he stays in the VA). Or, he could let the money grow until age 75 at which time his guaranteed income for life would be $73,227.
Tax deduction -- The client would also receive an ordinary income tax deduction because of the $150,000 loss on the sale of the VA. If he's in the 40 percent combined income tax bracket, this will save him $60,000 in income taxes, meaning that the sale price was really $410,000.
In essence, the VA purchase program is a double-benefit program providing more cash now, which allows clients to reposition money wherever else they see fit, and a tax deduction that can be used against ordinary income.
Do you think clients who have underwater VAs will have an interest in the VA purchase program? Absolutely.
Do I think all financial planners/insurance advisors should know of this purchase program so they can provide the "best" advice to clients? Absolutely.
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