Locking in Long Market Gains

Client Scenario


Jane and her second husband Jay got a call from her advisor about a variable annuity  she purchased ten years ago. She made the investment during her first marriage and hadn’t given it much thought since changing beneficiaries after the divorce.

She was pleased with the investment, and had no plans to move it, or modify it in any way. The decade-long bull market grew it from $100,000 to $220,000.

One of the features that sold her on the annuity was the Return of Premium rider that guaranteed her beneficiaries would receive her full initial investment even if the account value fell. This safety net gave her confidence to invest in the variable annuity in spite of the equity risk.

Since the annuity was out of the 7-year surrender period, her fee-only advisor, Sonya, thought they may want to revisit the asset. She knew that Jane was concerned about a market correction and wanted to visit some options for stepping up the death benefit via a 1035 exchange. This tax-free transfer would lower her cost without sacrificing the Return of Premium rider.

As Sonya explained it, Jane would be able to ‘lock in’ the last decade of additional accumulation for her beneficiaries. Her current annuity’s Return of Premium rider would guarantee only up to the $100,000 value of her initial investment. The new policy would guarantee the full account value of $220,000.

With Sonya’s help, Jane was able to initiate a tax-free 1035 exchange into the new, no-load variable annuity with relative ease. She lowered her internal costs by 55 basis points (rider included), and the low-cost, commission-free annuity didn’t charge surrender penalties. Now approaching her 50s, Jane can access the money, if needed, at age 59 ½ without penalty or surrender charges, and her beneficiaries are guaranteed that, no matter how markets perform, they’ll receive at least $220,000.


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