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What happens to fixed annuities when you die?

BOB PRIESTsummit daily news

Last week, one of our readers asked if it would be wiser to leave his life insurance policy in tact, or take the cash value out and fund a fixed annuity since he really didn’t need the policy to fund his children’s college any longer. This week we cover some of the implications with having a fixed annuity as opposed to life insurance in your estate when you pass away. Dear Readers: As I mentioned last column, life insurance proceeds are received by your beneficiary tax-free. In other words, if you own a $1 million dollar life insurance policy, upon your death, your beneficiary will receive $1 million dollars (minus any outstanding loans on the policy).

When your beneficiary receives this money upon your death, they will not have to pay any taxes associated with it. On the other hand, if you own a fixed annuity, there may be taxes due on the growth of that annuity. Although you may not have to pay taxes on the annuity during your lifetime as it accumulates, your beneficiary will be responsible for those taxes when they withdraw the money. Therefore, if you are comparing the benefits of keeping your life insurance policy versus taking the cash out and funding a fixed annuity, you must consider the tax implications to your beneficiaries. Although this may make keeping the life insurance sound more appealing, there is more to consider. Your life insurance may have another disadvantage associated with it in the short term depending on your estate tax situation. For instance, did you know the value of the death benefit of your life insurance policy counts in your estate for estate planning purposes? That’s right! Many people assume that it is the cash value in the policy that counts not the death benefit.

Let’s look at those implications for a moment: Let’s assume that your life insurance has $250,000 in cash value and $1 million in death benefit. When you pass away, Uncle Sam will add $1 million dollars to your estate for estate tax purposes. If you were to cash out the policy and fund a fixed annuity, your estate would only be liable for $250,000 additional assets when it comes to estate tax purposes. Depending on your estate tax situation, that could translate to big bucks owed by your estate. Of course wherever there is a problem there is usually a solution, and this is no exception. I’ve written about the advantages of using a trust to own your life insurance policy in certain situations.



This may be a case where such a trust, otherwise known as an Irrevocable Life Insurance Trust (ILIT), could be advantageous. With a properly executed ILIT the beneficiaries would still receive the life insurance death benefit tax free, however this benefit would not count as part of the estate for estate tax purposes. This gives you some idea of just how complicated some of these issues can become. As I’ve said before, your choices depend on your specific situation and it is oh so important to take a look at the big picture when making some of these important financial decisions. Next time we’ll talk about gifting money out of your estate to help reduce estate taxes and benefit your beneficiaries. Happy planning!Bob Priest, MBA, CFP, is a certified financial planner serving clients locally and nationally. He can be reached at (970) 513-7077 or visit his website at http://www.BobPriestFinancial.com. All opinions herein are that of the author and not that of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.


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