Losing a loved one is hard enough, so getting their finances in order shouldn’t be an added stress in your client’s life. To avoid unnecessary worry, there are a few resources that both investors and financial advisors should be aware of to help guide them through the process when it comes to annuities.
A recent article in this publication by Dan Jamieson highlighted some of the complicating factors associated with the tax treatment of death benefits from annuities. It raised many important issues, but left advisors without a clear roadmap for navigating this scenario. As a senior life insurance executive for almost 30 years and senior education advisor with the Alliance for Lifetime Income, I know there are a few steps advisors should consider to make the process simpler and less intimidating, while serving their clients’ best interest.
One of the first things that individuals will need to do after losing someone is manage and distribute any investments or assets that their loved one left behind. The process differs for every financial product, and it can be difficult for individuals to know where to start. However, navigating this process for clients is one way advisors can deliver much needed peace of mind and support in a time of need.
Settling a death claim on an annuity is one of the issues that people should be prepared for, but often are not. Annuities—unlike stocks, bonds or mutual funds—are not only investments, but also insurance contracts. This duality makes the process of selling or transferring annuities upon the death of the owner less simple than it is for other investments.
Since non-qualified annuities enjoy the benefit of tax deferral—similar to that of traditional IRAs, 401(k)s, 403(b)s, etc.—upon death of the owner, settlement of the contract to the beneficiary oftentimes requires taxes to be paid on any untaxed gain that might be in the annuity.
This is oftentimes where the challenges for advisors and clients sometimes start. Each insurance company determines which settlement policies to allow, as long as they are in compliance with the current tax code. While a large portion of companies offer the same or similar options, some companies may not offer all of the permitted options. In some cases, this is where confusion can enter the picture—how to settle a death claim and which options are or are not offered for individual annuity contracts.
Financial advisors are in the best position to guide beneficiaries through the process of resolving death claims on an annuity and selecting a settlement option that’s most appropriate and customized to each client’s current situation. The relationship between a financial advisor and a beneficiary during this time is an important one. Not only can the financial advisor help the person through a difficult and confusing time but advising the beneficiary through the settlement process can also be a great foundation for building and maintaining a new trusted client-advisor relationship.
Although financial advisors are great resources for their clients, the different settlement options that each insurance company makes available creates a situation that can be challenging to navigate, and near impossible for financial advisors to know the available settlement options for every insurance company that offers annuities in the marketplace.
Since the settlement options are numerous, there are a few best practices that every financial advisor can utilize to assess which one is best for their client.
The first place to seek accurate and appropriate information is the customer service unit of the company who issued the annuity contract, who are happy to answer any questions and guide financial advisors through the different settlement options they offer. They can also put advisors and clients in touch with claims department personnel, who are experts in the settlement process and can make sure the correct paperwork is sent to the proper individuals.