Ep # 67: What Should I Do With My Old Products?

Benjamin Haas |
  • We don't sell products - 1:44
  • Contracts that may have penalties or timelines - annuities - 3:05
  • Tax implications of doing something different with an annuity - 6:45
  • Moving from one annuity to another - 9:01
  • Annuity with guaranteed income rider - 11:28
  • Life insurance - should I continue this policy? - 14:06
  • Shifting to long-term care - 17:32
  • Don't ignore the life insurance policy - 19:35
  • Structured products - REITs - 21:23
  • Our job is to assess these things and look for ways to create flexibility - 23:28




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Full Transcript:

Benjamin Haas  00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Heyyyy Adam.  How are you?


Adam Werner  00:30

Doing great. How are you? It is podcast Friday.


Benjamin Haas  00:34

It's the best day to cook.  Bad Dad joke.  Fry - Day.


Adam Werner  00:39

Oh man.


Benjamin Haas  00:40

Yeah, really bad. Really bad but looking forward to the weekend. We got a little sunshine.  It's feeling a little warm around here. Lifts the spirits. Love it.


Adam Werner  00:49

Yeah, and if this comes out, you know, a month into the future, it'll definitely be warmer.


Benjamin Haas  00:53

Yeah, right. So let's give the lay of the land for the talk today, AB conversations, peeling back the curtain a little bit. We meet a lot of new people and it's kind of like a box of chocolates when you meet someone and they're starting to talk about investments and kind of what they own. You never really know until you start looking at some statements and digging a little deeper into what it is that they exactly have used or invested in before and we're going to actually go into the conversation on things that we find that our products that are things that people are maybe obligated to or sign a contract for. What do you do in that situation? Recognizing that it's our job to be objective but that's not a world we live in anymore.


Adam Werner  01:44

Yeah. So that's the key for us is that we haven't sold products in a very long time. It just does not align with our philosophies on planning and investing but we do run into a lot of people that have, to your point, have these products. Whatever you want to call them. It's annuities, it's life insurance, maybe it's a structured product or a real estate investment trust, something like that may not be fully liquid. Then the question often is to us, what should I do with it? Is this something I should continue to own? Is this something I have to continue to own? Do I have other options? And then it really does fall to us in a planning process to try to figure out if it's something that is flexible or replaceable, what's the best path forward? And if not, how do we then build around it to have it still be an efficient part of the puzzle as best we can.


Benjamin Haas  02:45

So then let's talk about what are those considerations. If somebody does feel or we need to share with them you're stuck with this, how do we come to that conclusion? What are we really looking to understand about those contracts to make that assessment?


Adam Werner  03:01

Oooh, where do you want to start? Should we start with a specific one?


Benjamin Haas  03:05

Contracts that may have penalties or timelines. I mean, you use the word illiquid. Let's maybe go through that side of it.


Adam Werner  03:14

So the first thing, the most prevalent for us is an annuity. We see those most frequently when it comes to the investment side of the product world because oftentimes, people that have either dealt with another advisor or a bank relationship in the past, that's like the next step up from somebody their savings at the bank. They may have been sold a fixed annuity, which is like a CD but it is usually a much longer contract. Where we see this in the longer term is what is considered a variable annuity and that's not necessarily a fixed rate of return. It is an investment; it can fluctuate but they are contractual as you said and those terms vary widely. We've seen some that don't have an investment term that you must own it for so long before you make a change. Some are seven years, 10 years, longer where you're tied into that for an extended period of time where you can't necessarily access the full lump sum without some sort of penalty back to the insurance carrier and I guess I'll clarify. Not all, well, number one, not all annuities are created equally and depending on what type of an account you own it in, changes your potential options. So okay, well, right off the bat, the simplest, if you own an annuity within a retirement account - IRA, Roth IRA, 403b, something like that is a retirement account, you can move from that annuity to another retirement account. It doesn't necessarily have to be another annuity with more often than not minimal impact from that standpoint. And I should say when I say minimal impact, I mean, from a tax standpoint. You can move from a retirement account to a retirement account, you don't pay any taxes, there still may be that contractual side of it, as you hinted earlier, that may limit what you can do within certain timeframes. Go ahead. I need to take a breath.


Benjamin Haas  05:30

Take it take a deep breath. Yeah, so contract penalties. Liquidity. We're probably going to go taxes then; we sometimes see somebody that may have chosen or been recommended a non-retirement, a non-qualified annuity and that is where it gets really sticky. So I'll maybe try to pick up I think, where you were leaving off there. What you've really done and I don't want to confuse this matter, but what you've really done in purchasing a non-retirement annuity is made that money feel like it's retirement dollars. Not only regardless of contract, not only does it now mean that you can't really access it without certain penalties before the age of 59 and a half, which is a magic age in IRA world. But you've deferred all the taxation on any growth or income that you would have had until that time when you start taking money out. It really can create a little bit of work on our end to help people consider that to me, is probably where you feel most stuck, right? Because yeah, regardless of the contract, there may be more significant tax implications if you try to do anything different.


Adam Werner  06:45

Yeah, and so that last part is the key. That is the biggest hurdle because they are, as you said, what was non-retirement dollars and you're almost putting it underneath a retirement umbrella from a tax perspective.


Benjamin Haas  07:00

It's like a weird hybrid thing.


Adam Werner  07:02

It absolutely is and here's the worst part, by doing that, let's say you put $50,000 into a non-retirement annuity, it grows to $100,000. Hey, great, we participated, we got growth, when you go to pull that money out or you want to change direction, those gains are not taxed at the capital gains rate as you would in any other investment account, they are taxed as ordinary income because that's how retirement dollars are taxed. So what was sold, may have been sold as a way to avoid some taxes along the way.


Benjamin Haas  07:38

It's a short-term thing.


Adam Werner  07:39

You're now trading that in for potential to pay more taxes later in life. Or, again, it may just hamper your ability to be flexible with that account. So it can get complicated pretty fast but the biggest downside is to make that move with a non-retirement annuity, any gains that you have are taxable at your ordinary income tax rate.


Benjamin Haas  08:02

Right. So when we say are you stuck, it may not be those contractual obligations. We would want to be really thoughtful on the tax side, where doing something different, you don't want to trigger dominoes that are going to affect everything else and I know that we've said this in different iterations of this conversation. But, so many of the things around retirement, whether it's healthcare expenses, social security, taxation, yada, yada, yada, it is what you pay on income taxes is really relative to what the income sources are. What healthcare credits you may get may be dependent on your income. So you really, especially at that phase of life, need to be so much more sensitive to how you're claiming income in a given year and making a switch with an investment like this may trigger taxation that you didn't know about. So really have to be thoughtful and careful about making changes when there are products, as you said, kind of behind that.


Adam Werner  09:01

Yeah. So I guess the good news is that there are other options. So I'll throw this one out there. If it is this specific case where it's a non-retirement annuity, you have gains, you don't necessarily want to trigger more taxation but you don't love the investment or the product that you have. You can do what's called a 1035 exchange. That's just the IRS code. You can move from one annuity to another annuity without triggering that taxation. It's like a retirement plan rollover, right? You can take money from a 401k you roll it into an IRA, you're not triggering any taxes. You're moving it from like account to like account. So you can do that same thing within the annuity space, move from one annuity to another. You would want to be mindful of what is that other product because of your product then that you're replacing it with. The annuity world has come a long way even in the time we've been in the business, that there are very, I would consider I'm using air quotes, light annuity wrappers that you can essentially get access. Keep the taxation the same but not pay for a whole bunch of added bells and whistles that you don't want or need in the future. So you can do it in a much more stripped-down way to keep fees and expenses more reasonable and still avoid any trigger of taxation through that process.


Benjamin Haas  10:27

So bells and whistles triggers for me, something else that we would want to look at before you make any changes because I think, again, just going down the path of history annuities, yes. The conversation could have been how do I create more tax deferral but over time, there were other benefits that may have been chosen to be added on to annuities. Whether that's a promise on an income stream later in life or even locking in a certain death benefit for your heirs. I think annuities more than anything, somebody may come to us, you open that box of chocolates, like I said, it's an annuity. What's the likelihood that the consumer really knows everything about that contract? It's probably very low and we would just want to make sure that if they were promised some sort of guarantee in the future, that you're not moving on from that annuity because you didn't like it for this reason or that reason. But now you're inadvertently giving up some sort of other benefit that may still fit your situation.


Adam Werner  11:28

Yes. So I'm glad you said that because that was one of the things that I was hoping we touch on because it is in this scenario, I'll throw out another example in that situation where you have an annuity, whether it's in a retirement account or not. If it does have that guaranteed income rider, it's how these insurance companies name it, it's an addition to your policy that's going to allow you at some point in the future to take that lump sum, or at least access to a lump sum and turn it into an income stream for the rest of your life. If it is that scenario, where we don't let the cons outweigh the pros on making a change, then again, it's our job and maybe with the client to just shift the perspective to okay, this may not be the most flexible to me, if these are my limited options here. I'm going to look at it as the income stream, then we would from an asset allocation standpoint, thinking of how we would invest holistically, not just this account but all of your investable assets, maybe we look at that guaranteed income stream as a bond alternative; meaning you can now change your allocation with your other accounts, knowing that if this is what you're, quote, unquote, locked into, you at least have that in your back pocket. You can adjust your entire portfolio to take that into account now rather than you stick your same, you know, 60/40 allocation over here and now you feel like you're way over-weighted towards bonds with this guaranteed income stream. It's just another way to try to piece all of these things together that feels like you get to an end result that still feels comfortable.


Benjamin Haas  13:12

Bingo. And that's the thing. It is all about perspective, right? I think sometimes you say guaranteed income and that sounds wonderful, and maybe to a more conservative investor that doesn't like fluctuations or somebody that doesn't have an old company pension, guaranteed income stream, something they can rely on. That sounds good and we'll see these types of annuities and 403b accounts. Whether you work for a school system or government agency, whatever it is, it's just to acknowledge, as you said, what is the most efficient way to look at this now, holistically. If that's what you have, whether that was chosen by you or it's a part of the company plan, whatever it is, let's do the best we can to put you in the best spot to meet your needs even if you can't do something different with that product.


Adam Werner  14:03



Benjamin Haas  14:06

I would shift then to life insurance too because annuities may be not as flexible, that's a contract. That's very different from our ability to have an investment account and feel like you can change anything any day of the week. Life insurance, you are contracted with that insurer by saying here's the death benefit, here's what I'm going to pay. When I pass away, this is what my heirs get. So we certainly go through assessments there too on insurance curve of life, things change, people may be needed insurance, and they didn't. They built some cash value. Maybe you know, there's something different to let's maybe just talk about the life insurance world of products and how we would review that depending on their phase of life.


Adam Werner  14:53

Yeah, so I guess like annuities insurance comes in many shapes and sizes. There are different types. What you hit on and I guess where we see the questions on, should I continue this policy is often a question we get when we meet somebody. They are those more permanent policies that have cash value. When I say permanent, that's as opposed to a term policy that has a set timeline. If you buy a 15-year term policy for whatever the death benefit is, at the end of those 15 years, you've paid the premiums, let's assume you didn't die. Great. You didn't need it but you've now paid for it and really haven't gotten any value back out of it.


Benjamin Haas  15:40

And I would associate that most frequently with people that will tie a term or match it up with like a mortgage. Like I'm going to cover if God forbid I pass away, then this mortgage can be paid off. So I've got a 20-year term to cover the next 20 years of my mortgage.


Adam Werner  15:56

So now the other side of that being a permanent policy, meaning as long as you pay the set premium cash value and accumulate. As long as you pay those premiums over time that death benefit is always going to be there until the day that you die and it's going to go to whoever you have named as the beneficiary. Whereas you hit on it earlier, we call it the insurance curve of life, where younger families with kids, without kids doesn't matter. There's usually mortgage, college expenses, all of these things that are liabilities during your earlier years in life. At a certain point where we see the retirees and the pre-retirees, kids are out of the house, mortgage maybe all but gone, if not already and now the feeling of do I need this much insurance at this point in my life? Should I continue to pay for this policy? What am I getting out of it? That's where it can be a little trickier because it ultimately comes down to purpose and while it may not mean that you need the life insurance component purely anymore, where our conversations often lead is, well, what about long-term care? That's a concern of mine in the future, is there a way that I could leverage this insurance that I have? And maybe just change the purpose for long-term care and going back to what we talked about with the annuities, there is this same IRS tax code, the 1035 exchange, where you can move that cash value from one insurance policy to another without triggering any sort of tax impacts.


Benjamin Haas  17:32

Yeah. Well said, I think that's probably a common one that we always want to review with somebody. That if it's not serving the primary purpose to protect loved ones anymore because you're financially independent, you retired, yada, yada, yada. Can we shift it to the next concern? Long-term care. Do you shift it to create a paid-up policy where maybe you're reducing the death benefit but not having to pay premiums anymore? Now, I'm just rambling but are we thinking about estate planning? Does that death benefit serve a different purpose of maybe covering potential income taxation upon your death or estate taxes upon your death? Repurposing is possible before just canceling things.


Adam Werner  18:26

Yeah, and I guess that, like everything that we talk about, ultimately comes back to the individual situation, the goals that people want to accomplish and just how they view things. Exactly what you just said, if not the life insurance side of things because there's debt and mortgage and if I pass away, I need to cover my kid's college education. If that is not the primary goal and long-term care may not necessarily be a concern or maybe they have a separate long term care policy. It can be shifting the mindset to well, I'm going to continue this policy but instead of thinking it's going to cover liabilities, it's going to create that legacy for my heirs. It is still a tax-free death benefit that can be repurposed. Name, the list of things, right. We can go through what boxes that could check in a financial plan but ultimately, that's the point. We, just like the annuity, the insurance fills that same side that we just want to be able to fit that into an efficient piece of your puzzle moving forward.


Benjamin Haas  19:35

Yeah, and what we don't want to see happen is that policy just gets ignored because let's create the scenario where okay, you are retired and you say, alright, I don't know that I need this death benefit anymore. Mortgage is paid off; kids are out of the house but if you've got some value in there, that value even if you stopped paying premiums or maybe you're paying like little premiums, your cost of insurance is still going up every year as you age. You'd hate to see this scenario where somebody just ignored that policy and all of a sudden, your cash value just dwindled down to nothing and you paid for this policy your whole life to really get nothing out of it, if now it needs to cancel. So it's kind of like you're at that fork in the road where you almost have to make a decision with it. Am I going to leverage it? Am I going to stay committed to this? And I'm going to move it into another product or have it been paid a policy? Or am I just going to take the cash out? Because I don't want it to dwindle down to nothing in 10-15 years. So, the point is go through the review. Right?


Adam Werner  20:38

Right, and I think that clearly, that's where we want to play that role, right? It is educating people on their options because it really can be daunting if you're not in our position to really understand everything that's out there. Even if you were to do a quick Google search of your options, the internet is a wonderful and dangerous thing in that it feels like all of the information is at your fingertips. But without some context and some perspective, it may lead you down an incorrect path without fully considering those dominoes that we often talk about - the unintended consequences of any one decision that people would want some people to avoid.


Benjamin Haas  21:23

Yeah, and I guess the only other things that kind of fall underneath that product realm to us where it feels like somebody made either a contractual obligation or they may not have as much flexibility as they would with other financial instruments or depending on how they invest advisory accounts are things that feel flexible. I think you said it up the onset, there are companies that will put out what we would call structured products. It is a very specific offering, usually at a specific time and then we know people like to have those real estate investment trusts, which again, is just a packaged product. I don't know how deep we want to get into this stuff but there definitely are more illiquidity things that you'd have to work through.


Adam Werner  22:10

So that's the key and picking on REITs, a little bit, those are primarily illiquid. When I use, or we use the term REITs, those are what we would fit are non-publicly traded. So there are real estate investment trusts. There are real estate companies that you can buy on the stock exchange, you can buy the ETFs, mutual funds, that stuff exists but in these financial products are non-liquid. So essentially, they are private offerings that you can be a part of and until they either fully liquidate all of their holdings, all of their investment properties, and then send that money back to the investors or they list to go public on a stock exchange, your access to your principal dollars that you put in there is usually pretty limited in scope. And we've, again, been around long enough to see more often than not, it doesn't end well because of that illiquid nature, whether the real estate market is going higher or not, it just that as a product, more often than not, we haven't had good experiences seeing those work out well for clients in the long run.


Benjamin Haas  23:28

Yeah, and I know we're running the risk of sounding like we're giving advice or not giving advice on things that we could or shouldn't at this point. The point I think we're trying to make is, really, it's our job to assess these things with you. If you already own it, you already own it. We want to give you the education on what that now means. On the front end, it's just a core principle of ours that life changes, situations change, people change, economies change, we've seen all of this. Very clearly over the last couple years, maintaining some flexibility in how you go about your planning, we think is really important. So anytime you're looking to sign the bottom line on whatever it is out there, whether it's something that we could get our hands on for you or not, knowing that we're not able to offer a lot of the things we're talking about here. It's just to be very mindful on what you're signing up for.


Adam Werner  24:24

Yes, flexibility is key. I know we talk about that a lot but it certainly comes into play here too. When we're talking about products, oftentimes that level of flexibility is decreased and sometimes to a level that not everybody understands that they're getting down to on the front end.


Benjamin Haas  24:44

So here's the final offering to our listeners today. Right if we're not working together, we think it's really important for everybody to understand what they own and if you don't or you have questions or you want a second opinion, that is why we are here.


Adam Werner  24:58

Yes. Well said.


Benjamin Haas  25:02

On that note, take care, buddy. We'll see you next time, next Friday.


Adam Werner  25:11

See ya.


Benjamin Haas  25:12

Bye. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions. Thanks for listening!


Investment advise offered through Great Valley Advisor Group, a Registered Investment Advisor.

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