Forced Annuitization: EDU #2624

Chris's Summary
Jim and I continue our discussion on Forced Annuitization in a highly appreciated non-qualified variable annuity owned by a 90-year-old listener’s mother. We examine LIFO taxation, IRD, IRMAA, period certain annuitization, beneficiary options, IOVAs, and the difference between a codified annuitization approach and the less certain non-qualified stretch. The distinction between a noun annuity and a verb annuity does a lot of work here.

Jim's "Pithy" Summary
Chris and I pick back up with a listener’s situation involving Forced Annuitization, a 90-year-old mother, and a non-qualified variable annuity with a tremendous amount of gain. This is not the insurance company being nefarious. These contracts have annuitization dates, and in an older contract, age 95 may once have seemed far away. Now it is an iceberg. The first question is still simple: what does mom want to do? From there, the insurance company’s actual annuitization options matter, preferably in writing, because every policy is unique.

We get into the black-and-white choices and the gray area. A life with period certain option may spread payments beyond the forced annuitization point if the insurer allows it. If death occurs before annuitization, a non-spouse beneficiary generally faces two cleaner choices: annuitize within one year based on actuarially sound life expectancy, or use the five-year rule. Then we look at investment-only variable annuities, where the insurance company may provide the annuity wrapper, the assets remain in separate accounts, and one company Jim contacted allows new contracts up to age 95 with forced annuitization pushed out to age 121.

The gray area is the non-qualified stretch. Jim explains why he has softened, but not flipped, on it. The SECURE Act changed Section 401, not Section 72(s), and that matters. Still, the comfort level depends on PLRs, insurance company practice, and how much uncertainty someone is willing to tolerate. One path is the verb annuity: give up access and control in exchange for a lifetime stream of income. The other keeps the noun annuity alive, with more flexibility, but less certainty. Same problem, very different wrappers.