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July 27, 2006
UNDERSTANDING ANNUITIES
Annuities are one of the most popular investment purchases today. People are purchasing about $18 billion-a-month of these investments. Should you be buying one?
What is an Annuity? –An annuity is basically an insurance contract. If you purchase an immediate annuity you receive a stated string of payments for a certain period of time. Deferred annuities account for about 98% of annuity sales and provide for the earnings to accumulate tax free. You only pay tax on them once you start making withdrawals.
Why are annuities so popular? One of the biggest reasons people have been buying annuities is a high initial interest rate that you earn on your investment. We all know that bank interest rates are down dramatically. Can you remember back when you could get an 18% interest CD? Nowadays, people are searching for the highest rate of return they can get for their money. This, combined with the very high commissions earned by annuity salesmen, is driving the sales of annuities. Did you know that the person selling you the annuity will receive up to 12% as a commission?
Are annuities appropriate for seniors? In general, the answer is no. In March of 2005 I wrote about the lawsuits filed by the Massachusetts Secretary of State against many firms selling annuities for Dishonest and Unethical Practices and Failure to Supervise. The problem is that deferred annuities contain penalty provisions similar to what happens if you want to break a bank certificate of deposit. If you needed to get your money back you might have to pay a penalty of 5% to 10%. Many seniors are forced to pay this penalty because of a change in circumstances when they need access to their money.
If you are over age 75, and have purchased a deferred variable annuity, you should contact the Secretary of State. They will help you get your money back without paying any penalty.
What happens if you need nursing home care? Annuities, because you may request a refund of your money (less penalties), is a countable asset. There have been many cases where a person gets sick, needs nursing home care, has to liquidate their annuity and pay the penalty to get their money back.
If you need nursing home care there is another option. You could make an irrevocable election to take equal payments over your life expectancy. If you died prematurely, the balance of the annuity would be paid to your heirs.
Massachusetts issued “emergency” regulations on July 1, 2006 that attempt to change the treatment of these irrevocable annuities as a result of the Deficit Reduction Act (DRA), signed by President Bush on February 8, 2006. These “emergency” regulations go too far by requiring that annuities purchased after February 8, 2006 be required to name the Commonwealth as a priority beneficiary if you ever need nursing home care.
By the time you read this article I will have already testified at a hearing before the Massachusetts Office of Medicaid, stating that the “emergency” regulations do not comply with Federal law and must be changed. The federal regulations are clear that if you purchase an annuity with IRA, or other retirement funds, or purchase an annuity that is actuarily sound, the Commonwealth need not be named as a beneficiary. This means that if you were in a nursing home and died prematurely, the balance of the annuity will be paid to your heirs instead of the state.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org