In the Deep Dark World of Supplemental Annuity Contracts; Owners Rights May Not Be Protected!

gm-bioSo, what’s the big deal, anyway!  I don’t believe too many agents, CPAs or attorneys have seen a supplemental annuity contract.  Supplemental annuity contracts are issued by carriers when owners elect to either partially or fully annuitize their existing deferred annuity contracts or life insurance policies.  What many agents and individuals don’t realize is there is no state filing requirements for supplemental annuity contracts!  This leaves the door open for carriers to use whatever language they see fit and manage these contracts without having state big brother looking over their shoulders.

A supplemental annuity contract can be anything from the carrier’s state filed SPIA contract, to a special SPIA contract (not filed) or even merely just a one page letter or certificate (not filed) describing the payments.  It’s important to get a state filed contract and not just a letter or certificate.  State filed contracts typically outline property rights, and are reviewed by the states for what the owner can and can’t do.  For example: if I’m age 70 and annuitize my deferred annuity of life insurance policy, using one of the settlement options at the settlement rates in the contract or policy and only receive a letter or certificate void of owner’s rights language, I may not be able at say age 75, transfer title to my trust or make a gift of the contract to a son, daughter or sibling, etc.

This could have important income tax ramifications for the former owner and the new owner.  Unlike deferred annuities, currently, there are no income tax ramifications to former owners who elect to transfer title on supplemental annuity contracts and SPIAs in general to new trusts or non-spousal owners.  Just like the former owner, the new owner merely pays income taxes at their income tax rates on the taxable income portion of the annual annuity income.  Perhaps the owner of the supplemental annuity contract wants to make a payee change or commute the payments.  He or she will most likely not be able to do so unless the carrier grants this right in his or her supplemental annuity contract.

In fact, the agent should weigh in the replacement decision whether or not the current deferred annuity contract or life insurance policy carrier intends to grant contract owner disposition rights after the annuitization event.  If not and the supplemental annuity contract doesn’t grant owner’s rights, the decision to replace a deferred annuity or life insurance policy with another carriers’ SPIA filed contract containing these rights becomes much more favorable and just another good reason to support a replacement decision.  Because of higher interest rate guarantees and older unadjusted mortality tables guaranteed by older existing deferred annuity contracts or life insurance policies, annuity rates for supplemental contracts may be better than current rates available for new SPIA contracts.  However, you may have to sacrifice owner’s rights to obtain them.

Prior to any annuitization decision regarding an existing deferred annuity contract or life insurance policy, the best thing to do is; query the existing carrier about their supplemental annuity contract and ask them to send a copy of what they intend to use.  This way a full disclosure regarding owner’s contract rights can be reviewed prior to initiating an annuitization request.   You might have to move up the food change to find anyone at the carrier home office who knows what you’re talking about.  If, after several attempts, you can’t get any satisfaction perhaps, it’s best to just dump that carrier.  Always keep Your Hands Up!

New Podcast Interview

David Macchia's Outstanding Advisor Podcast S01 E04 - Gary Mettler | Outstanding Advisor Podcast #004 >LISTEN HERE<