With the vast federal borrowing and spending programs of the current recession, it has become more likely that future Social Security benefits of affluent retirees will be "income-related," as Medicare benefits already are. To understand why income-relating creates greater income tax impact, see: Help Your High-income Senior Clients Plan for New Tax Complexities

Liquidity – In annuitization decisions, liquidity is just as important decisions as a need for current income. Liquid retirement funds give retirees the freedom to maximize the value of assets by annuitizing when interest rates and immediate annuity quotes are highest.

Concerns over insurance company financial strength – In today's uncertain financial climate, it's important to help clients evaluate their faith in each insurance company's ability to honor guarantees and pay income over several decades. The liabilities associated with living benefits have weakened insurers' balance sheets, and many leading VA writers are now scrambling to manage risk by restricting VA investment choices.

Step 5: Making a Choice

Here are several choices that clients can evaluate in this analysis:

Annuitize now. Convert 100% of the Benefit Base into annuity payments.
Withdraw now, annuitize later. Take a dollar-for-dollar withdrawal (if available) and postpone the decision to annuitize. This can be attractive if age-reduction factors will decline over time, or if the client has not yet finished the 7-10 year waiting period before GMIB annuitization is allowed.
Transfer and annuitize. If a competitive annuity quote is better than the GMIB rate quote, it can be accessed by making a tax-free annuity-to-annuity exchange and then annuitizing. Be sure the new insurance company is at least as financially strong as the old.
Do nothing. A contract with a 6% guaranteed annual increase in the Benefit Base and a dollar-for-dollar withdrawal privilege is equivalent to a 6% guaranteed savings account. If clients don't need current income, doing nothing may be the best choice, especially if they: 1) are in good health and expect to live a very long time; 2) would like to defer taxable income. Make sure clients know the contractual age limit for exercising GMIBs.
Let an enhanced death benefit pay off. If clients are old or not in good health, it may be advisable to let the second option embedded in the contract, the guaranteed death benefit, pay off. This choice can make sense if an enhanced death benefit is substantially higher than contract value. Any withdrawals will only reduce the death benefit dollar-for-dollar.
Estate-building strategy. Determine the amount of death benefit that the client would like to leave to their heirs income-tax free. Annuitize enough of the benefit base (or contract value) to fund permanent life insurance premiums for a policy with a death benefit in the same amount. Then, let the remainder of the policy accumulate tax-deferred and pay out the greater of contract value or death benefit at the annuitant's death. The tax-free life insurance proceeds can be used by the VA beneficiary to pay income taxes owed on the death benefit.
Go to cash – If clients are not under water by much in their VAs and also are concerned about insurance company financial strength or higher inflation, it can be feasible to take a full withdrawal, put the money in cash for a year or two, and then shop around for annuity quotes ? perhaps at higher rates. In a year or two, we will know better how much damage the downturn has done to insurance companies and which ones have survived in strongest condition. The internal rate of return analysis described in step 2 of this process can help to compare the rates embedded in annuitization with current CD, bond or money market rates.

In Summary

Some VA owners may be in a panicky mode right now because their contract values are falling, and they may think GMIB rights will expire or evaporate if they don't take action. This is rarely true except at fairly old ages. In many cases, clients have a great deal to gain, and not much to lose, by taking time to make up their minds.

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How to Help VA Owners Make the Most of Living Benefits

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