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How to Maximize Your Annuity Dollars for Your Beneficiaries

Annuities are an excellent financial tool that can help you plan for retirement. They offer many advantages, mainly the ability to save a larger amount of cash and defer paying taxes. However, if you are planning on leaving an annuity to a beneficiary, it’s important to take into consideration the tax implications.

The gains you earn on your annuity are generally considered as ordinary income tax to your beneficiaries. Also, the full value of your annuity is included in your taxable estate which could result in a diminished inheritance. If you’re looking for a way to help maximize your annuity dollars for your beneficiaries and have a need for death benefit protection, consider purchasing a life insurance policy. Here are a couple of examples of how this strategy can work for you:

Option 1: Maximize Annuity Proceeds

If you no longer need the income stream your annuity is providing, consider using the funds to purchase a guaranteed death benefit life insurance policy. The full value of annuities are included in your taxable estate, which could mean a diminished inheritance for your loved ones. By purchasing life insurance, you gain death benefit protection while maximizing your annuity funds for beneficiaries.

Option 2: Spread Annuity Payments to Life Insurance Premium Payments

Another option is to spread out the premium payments from your annuity into a permanent life insurance policy on your life. This way, your beneficiaries can receive the life insurance death benefit generally income tax-free. Please consider that you may be giving up the guarantee of an income stream, but if this is not your main focus, keep in mind that some permanent life insurance policies offer living benefits, loans and withdrawals should the need arise.1

Maximize Your Life Insurance Policy

Maximizing your annuity with a life insurance policy can help you gain financial protection and leave a legacy for future generations. It's important to explore your options and to work with your life insurance representative to gain a clear picture of your needs. There are also some important considerations that you need to be aware of before you purchase a life insurance policy to determine if it fits your needs. These considerations include the cost of insurance charges or other charges, maintaining the death benefit, modified endowment contracts,3 loss of premium and surrender charges. Talk to your legal or tax advisor about your situation and decide which annuity maximization strategy is right for you and your beneficiaries.2,3

Watch this video to learn more:

1. Life insurance policies have terms under which the policy may be continued in force or discontinued.  Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured gets older.  These deductions may reduce the cash value of the policy.  Current cost of insurance rates and current interest rates are not guaranteed.  Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity.  

2. Removing funds from an annuity may result in surrender charges and/or income taxes.

3. For most policies, withdrawals are free from federal income tax to the extent of the investment in the contract, and policy loans are also tax-free so long as the policy does not terminate before the death of the insured.  However, if the policy is a Modified Endowment Contract (MEC), a withdrawal or policy loan may be taxable upon receipt.  Further, unpaid loan interest on a MEC may be taxable.  A MEC is a contract received in exchange for a MEC or for which premiums paid during a seven-year testing period exceed prescribed premium limits (7-pay premiums).

Neither Sammons Financial Group nor its agents give legal or tax advice.  Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

AD18-2623 10/18

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