Q: I have two variable annuities and was advised to roll them over to a universal life single-premium policy that pays at least 5 percent. There are no taxable consequences involved in the rollover. I do have death benefits with the existing annuities, which are quite large. I was told that I could roll over all the money, but that it was better to leave $1,000 in the annuities to keep the death benefits. Because of the rollover, my beneficiaries would avoid federal taxes. Should I do this?
R.K., Woodmere, N.Y.
A: You are not allowed any kind of a freebie "rollover" or exchange from a variable annuity to a life insurance contract, says Geordie Crossan, president of financial planning firm NBS Financial Services, in Westlake Village, Calif. But it sounds to him as if you've lost money in your annuities and thus have no taxable distributions. So you're taking what's left to fund a life insurance policy.
Mr. Crossan suggests that you to ask yourself if you are looking for additional life insurance or an investment. If you want insurance, make sure you understand the costs associated with the policy, including surrender charges and renewal interest rates. Also be aware that commissions can be large and sometimes influence a salesman's recommendations.
If you're looking for an investment to use during your lifetime, understand that the cost of insurance can substantially reduce the interest earnings quoted to you. It may make sense to maintain your existing annuities, as this would preserve the death benefits. But you'll probably want to reexamine your investment selection if your existing asset allocation has lost money, Crossan adds.
Numerous other options - including mutual funds and bonds - may generate a better return with considerably lower expenses than variable annuities and life insurance contracts. Last, be sure to preserve your death benefits available under your existing annuities. If you fully surrender these annuities, they'll be lost.