Annuity Cash Outs

From a JG Wentworth Press Release:

With more than $1.6 trillion of assets backing annuities in the U.S. alone, annuities have become a major personal finance tool for consumers looking to lower their tax profile and plan for retirement. So why would they sell their annuities, which can provide payouts of up to $1 million or more? For the same reason they sell any other investment, whether a security like equities or bonds or real estate — liquidity to make other financial decisions.

“Despite the enormous success and size of the annuity market in the U.S., we estimate that 5-10% of annuity owners would consider selling all or part of their annuities under the right circumstances,” said Michael B. Vaughan, managing director of the J.G. Wentworth Annuity Purchase Program(TM). “Some annuity owners have had life changes and require a lump sum of cash to deal with them. Others want to transfer wealth to the next generation in a more tax-efficient manner. And still other annuity assets are inherited, where the beneficiary is younger and has different financial objectives and needs than the original annuitant. The common denominator in all of these decisions is the need for liquidity.”

Based on J.G. Wentworth’s own customer experience, here is a list of the top 10 reasons consumers sold their annuities in 2005:

1. Tax-efficient wealth transfer planning.
2. Starting a business.
3. Buying a vacation home.
4. Generating more current income.
5. Inheriting an annuity where there is a significant divergence between
the financial objectives of the original annuitant and the heir.
6. Helping a friend or relative.
7. Meeting a large and unexpected expense, including medical expenses.
8. Changing jobs.
9. Change in needs for a life policy where the annuity payments were
financing the life premiums.
10. Regrets over the initial purchase decision.

Vaughan added, “Tax-deferred annuities have been a valuable personal finance tool for many consumers and offer the benefits of stable, secure and guaranteed income. Unfortunately, annuities can also become a very inflexible solution for many consumers when they face the need to review estate planning or investment goals, or simply realize that their life circumstances have changed.”

From Forbes.com:

A new rule proposal put forth by the NASD aims to keep the products from being aimed at unsuitable investors. The proposal has some industry analysts worried about life insurers becoming hamstrung by age restrictions that could crimp their ability to jump into the fast-approaching baby-boomer retirement market. Dubbed proposed rule 2821, it’s under review by the U.S. Securities and Exchange Commission.

NASD officials have said they reacted to myriad customer complaints over the product’s confusing conditions over the years, such as unsuitability for older customers and early-withdrawal charges. While the SEC often tinkers with rule proposals before giving final approval, some analysts are leery of too much focus on age.

The proposed rule doesn’t specify an industrywide age over which customers could not be sold variable annuities. But it does assert, along with stipulations on customer liquidity needs and fee transparency, that it would be illegal to sell the product to someone “over a specific age as established by the member [meaning the carrier].” That means a firm that sets a lower age bar to protect itself on the legal front risks losing out on a lot of business. At the same time, the vague age standard would open the doors to potential lawsuits from 60- and 70-something clients whose fund performs poorly, experts say.

“It might open a can of worms for plaintiffs,” says Lewis Lowenfels, an expert in securities law at New York law firm Tolins & Lowenfels, who thinks anyone who wants an annuity should be able to buy one. “While these contracts should be open with everything fully disclosed, you don’t want to start babying the customers.”

I’m interested to find out how the SEC will react to this proposal. While something should definitely be done to protect consumers, they need to make sure the insurance companies are still able to do business properly without fear of frivilous lawsuits.

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