Annuity Buyout Case Study

Overview:

A couple came to Chandler & Knowles CPAs seeking guidance after reaching a pivotal point on their journey to retirement. Unable to retire with the funds available in their accounts, the couple was faced with a huge financial decision to accept or reject a substantial annuity buyout from their insurance company. With the help of the experts at Chandler & Knowles CPAs, the couple was given a detailed assessment that helped them choose the best option given their current financial standing and plans for retirement.

Client Background:

Saving for retirement requires a diversified plan that accounts for all unforeseen life events. Our clients, ages 67 and 66, had total gross assets totaling 1mm that placed them in the position where they wanted to retire, but didn’t have the sufficient assets to fulfill their retirement vision. The couple decided that the best option given their current standing was to work for an additional 2 years to help supplement income into their accounts. As part of the couple’s plan for retirement, an annuity was purchased from their insurance company year’s prior, and had accumulated a total of $332k. After some time, the insurance company made a substantial offer that could determine the couple’s timing for retirement, but with significant risks involved.

Challenges in Retirement:

The couple’s plans for retirement were faced with various financial challenges that required careful consideration. As the life expectancy increases in the general population, insurance companies often offer annuity buyouts early on to reduce the amount of money paid throughout the lifetime of the policyholder. Annuity buyouts are often presented as a one-time offer, and often require a response within 30 to 60 days. While the offers are substantial, there are many things to consider before accepting the offer. Our clients were offered three distinct propositions from the insurance company that had the potential to move the couple towards the path to retirement.

1. The insurance company offered our client a total of $499k paid in payments over the next 14 years.
2. The second option offered our client a partial buyout that would create additional asset outside of the annuity of $250k. This offer would reduce the living benefit rider by 50%, which is paid in a sum of $18,250 annually.
3. The final option offered by the insurance company was to keep the annuity and the living benefit rider, and exercise the rider in two years upon retirement. With this option, the insurance company would pay the couple $36,500 annually.

Chandler & Knowles Annuity Buyout Methodology:

The team at Chandler & Knowles CPAs analyzed the couple’s retirement vision, along with the options provided by the insurance company to choose an ideal solution. Using the LEAP model, we assessed the buyout options and the current health of the clients to weigh the pros and cons of each offer. Through our LEAP model analysis, we determined that keeping the annuity was the best option for our clients if the wife lived the normal life expectancy of 85 years of age. Through further evaluation however, we determined that this option was the worst if the wife died prematurely. To help guide our clients towards financial success, Chandler & Knowles CPAs implemented a custom strategy that involved choosing option three and keeping the annuity, but purchasing permanent life insurance to take transfer the potential risk of premature death.

The Results:

Through the custom solutions provided by our professionals at Chandler & Knowles CPAs, the couple was able to make a decision based on the most accurate scientific approach that analyzed the best financial decision for their retirement vision. This analysis and implementation allowed to couple to:

• Retain ownership of the annuity with the living benefit rider that protected their investment.
• Purchase 200k in permanent life insurance that bridges the gap in the event of premature death.
• Customize a life insurance plan to use annual dividends to reduce policy premiums as they age.