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Deferred Annuity - Annuitization Sales Script

Mr. and Mrs. Sample, we recently had a conversation about the deferred annuity that you purchased 5 years ago. The current value is $100,000, funds that you have concluded are not likely to be needed and your intentions are to leave this asset to your children.

I suggested to you during that conversation that there are financial strategies, which can substantially increase the current and future value of this asset to your heirs. I have a proposal that will illustrate a simple, safe, and sensible way to redirect this deferred annuity to accomplish that.

In the first section of the proposal there are some assumptions that we need to agree on:

I.

(1)

The current value is $100,000.

(2)

The cost basis, your investment, is $70,000.

(3)

The rate of return is 6%. Assume no future change.

(4)

Your income tax rate is 28%. Assume no future change.

(5)

When your family inherits this asset, they will be taxed

on the gain as ordinary income. Their tax rate,

under current law, is 39.6%. Let's assume 31%.

(6)

Let's assume that the future value of your taxable estate

does not exceed the exemption and will not be taxed.

May we proceed based on these assumptions?

II.

The second part of this illustration is a look at the future performance of this asset based on our assumptions.

One year from now, the annuity value will be $106,000. (Column1)

The cost basis will still be $70,000, the gain, $36,000. Inheritors would owe $11,160 in income taxes, leaving a net $94,840. (Column 2)

If the inheritance occurs 10 years from now, the net would be $145,268.

Twenty years from now, the net is $242,992. The income tax (Column 4) would be 11% more than your original $70,000 investment 25 years ago.

The gain the 20th year could likely result in a 39.6% income tax rate, further reducing the net value.

If $100,000 today pays out a net $242,992 twenty years from now, the average annual rate of return would be 4.5%, little more than the past 20 years average rate of inflation.

If over the next 20 years your estate grows to an amount over the current exemption schedule, the current minimum estate tax rate of 37% would have the effect of approximately 1.5%. Factoring in an annual inflation rate of over 1% could result in the inheritance being worth less 20 years from now than it is today.

Deferred annuities are a good strategy to accumulate funds for future retirement income. Deferring taxes on the annual gain until the future need, then only paying taxes on the gains that represent part of your annual income allows you to spread out the taxes on the gain over your lifetime.

If you, Mr. And Mrs. Sample, however, have come to the realization that you will not need income from this annuity and will likely leave it for your children, the tax advantage of the deferred annuity becomes problematic. Deferred annuities are not good wealth transfer vehicles. The total gain in an annuity at transfer becomes ordinary income to the recipient and often increases his income tax rate as well.

III.

Here are the actions necessary to redirect this annuity to greatly increase its value to your heirs and eliminate the income tax all together.

(1)

Use this deferred annuity to do what it was originally meant to do - provide income by converting it to a $100,000 immediate annuity.
(2)

Receive an $8000 annual payment guaranteed for as long as either of you are living.
(3)

Pay income tax in the amount of $1,361 per year.
(4)

Purchase a last survivor life insurance policy paying the annual premium with the $6,639 net proceeds from the immediate annuity. The face amount of the death benefit will be $442,600.

To keep the $442,600 from being included in your estate, you should consider making your children the owner and beneficiary of this policy. The simple way to do this is to make a $6,639 annual gift to them and let them pay the premium. You can also consider having an irrevocable insurance trust own the policy and make the annual gift to the trust to pay the premium.

Keep in mind that the $8000 annual payment comes to you and you have no obligation to pay premiums nor make gifts in the future.

IV.

Now let's examine the results of redirecting the current value of your deferred annuity and compare the difference.

The red boxes represent the future values of the deferred annuity net to heirs years 1, 5, 10, 15, 20 shown in column 7 of page 1 of the illustration.

The blue boxes represent the death benefit from the life insurance policy.

If your children get their inheritance during the next 20 years, the difference you leave can be between 2 to 5 times as much. One of you would have to live past age 96 for the red box to equal the blue box.

Mr. And Mrs. Sample, when you ultimately inherit the proverbial pine box, your children can inherit either the red box or the blue box. Which do you prefer to leave them?

	(c) 2009 CatMark, Inc.