Where To Invest From My RRSP?

The Canadian government has established a program for its working citizens called the Registered Retirement Savings Plan, or RRSP. The following article will provide information on the advantages of this plan, its eligibility requirements, and how to get started.

Before we get into what the program is, let’s be clear on what it is NOT. It is not, by itself, an investment. It is an account which HOLDS investments. It is very similar to a brokerage account one would open at Canada’s Royal Bank or TD Canada Trust, for example. A person cannot buy an RRSP. What is “bought” is an investment in a retirement plan account which one then contributes into.

This retirement plan has many advantages. It is registered by the Canadian federal government, legally recognized as a trust, and can hold many different types of investments. However, the major advantage the plan provides is its unique tax benefits.

When one contributes money to any retirement plan it grows over time and the contributor earns profits in the form of interest, dividends, or capital gains. The purpose of such being that, once the person reaches retirement age, they will have enough money to continue a certain level of lifestyle without working a “normal” job. Thus, allowing a person to do anything his or her heart desires while still being able to pay any and all necessary bills. One of the two major tax benefits of an RRSP, tax deferred growth, involves these profits.

I must point out that tax deferred does NOT mean tax-free. Any profits made to the account in the forms mentioned above are not immediately taxed by the government as income, but ARE taxed upon withdrawal. This is a benefit for two reasons. Firstly, most other retirement programs established in other countries tax profits made into these accounts immediately upon accrual as well as upon withdrawal. Secondly, most income of retirees tends to be lower than income in peak earning years.

The other benefit of an RRSP is tax credit. This simply means that the more a person contributes to their account, the less income is taxed by the government, although there is a limit, or cap. For example, if Mary the accountant makes $34,000 in a year and the cap on contributions for that year is 18% or $15,000 (whichever is less), Mary may only contribute $6,120 that year since that is 18% of $34,000.

So, who is eligible to open a Registered Retirement Savings Plan? The following paragraphs will cover the requirements/criteria involved.

The good news here is that virtually any working-age Canadian is eligible. However, there are criteria a Canadian must meet. The following lists these criteria.

Work in Canada.

Be under 69 years of age.

Have contribution room.

You file income tax with the government of Canada.

Any of Canada’s financial institutions are able to open an RRSP to eligible Canadians in person or online.

Canada’s Registered Retirement Savings Plan allows a citizen to take control of their retirement due to the many benefits provided. Most Canadians will fall into the range of eligibility and, once eligible, have many options in opening an account.

Learn more about investing in RRSP and many other ways to invest.

What Is The Best Way To Buy Real Estate?

The chief predictable way to pay money for real estate is through a real estate agent, who will give you an idea about a variety of properties that are based on your specific criteria.

These requirements could be what areas you want to live in as well as the price you’re going to purchase the home for.

There is not anything incorrect with going the direct system of working with your real estate agent, however, keep in contemplation that there are many other ingenious ways to come across property with not having to rely on a real estate agent.

If you come to a decision on a realtor, keep in mind that they work off of a fee that can be anywhere from 6% to 10%, and is dependent on the home as well as the realtor that you decide upon.

They can give you recommendation on the good things as well as bad things that you want to look for in a probable property. Some of these negatives might not be so perceptible if you’re not well-informed in this business.

The path of acquiring real estate through a representative is by far the straightest and most suitable course for a person to take specially when looking for aid in buying houses.

Even experienced investors sometimes use an agent because they spend so much time regularly monitoring the housing market.

A Realtor can give you present information on trends in the area as well as let you be familiar with how long it’s been on the market and whether the properties are shrinking or escalating.

Of course a real estate agent is not required; you can generally come across homes for sale in the area you want by just reading the classified ads in the newspaper. You could even drive in the area and find for sale signs that are in front yards of houses.

Melvin Bojacavich has been an investing for the past 3 plus decades. He has a web site that is about Denver Co Homes for Sale. It is an useful blog on the Denver Co Homes for Sale market and how he has made a money in this area.

Inside The Foreclosure Process

When a homeowner is incapable of fulfilling his mortgage obligations, the procedure of foreclosure allows the banks to have a public sale of the home in an attempt to obtain their money back from the defaulted loan.

Always bear in mind, banks are in the industry of lending money, and not buying houses. So, the objective for the bank is always to put up for sale the houses as quickly as possible.

The grounds of foreclosure always start with a notice of default that the home owner will acquire from the bank. This memo notifies a homeowner that they are in non-payment of the loan and the bank will commence the course of foreclosure proceedings if the loan is not brought up to date.

The first option for the homeowner is simply to make payments and brings the debt up to current. If this does not come about, the bank will foreclose on the property somewhere between 45 days as long as six months.

The best place to find homeowners that are currently defaulting on a mortgage is as easy as checking the public records at your local county courthouse to find properties for sale specifically in foreclosure. Just go to the courthouse and collect a list of all the attractive properties that match your criterion.

Once you put together your inventory, it’s now time to speak to the homeowners of the properties. Don’t be worried of talking to these individuals even though this could be a worrying time in their life. Remember; you could help out out these people, so it’s very vital not to be frightened to ask questions.

Many people might find it impolite and pointless to meet head-on a person in tough times, but we could resolve the problems by possibly taking over their most important concern and this could be a blessing in disguise. So always take into account and most important never be afraid to ask questions of the homeowner.

Melvin Bojacavich has been an investor for the past 25 plus years. He has a blog that is about Denver Co foreclosures. It is an insightful blog on the Denver Co foreclosures market and how he has made a fortune in this region.

Online Assets and Estate Planning

With the increasing use of online services such as banking, paypal, and the acquistion and accumulation of internet businesses, it’s easy to forget that these are tangible asset and may often be overlooked for one reason or another. Perhaps the oversight could be as simple as privacy, didn’t think it was a big deal, your estate planning/will/trust questionnaire didn’t include them in the planning process or whatever…

Well, these online assets could represent a positive dollar contribution to your estate. This is especially in the case of online businesses that begin to generate passive income and the money perhaps directed deposited into an online/internet only bank such as ING. What about that .com domain name that is now worth thousands or even millions of dollars because of the brand recognition it has received. Or, even, what about that ebay/paypal account that has a chunk of money in it from the sales of your household “treasures”?

Many times spouses are not aware of the online accounts and passwords even for the bank that is right down the street. Certainly, having these types of assets should be included when planning for the eventual transfer of property to your beneficiaries. Of course this would be for the accounts that are worthy.

Mallory Simon of CNN.com discusses this subject in the Technology section. Here is the link to the original article.

New services promise online life after death

Story Highlights:
New services are helping people organize their digital assets after their death.  Customers can designate loved ones to access their posthumous online accounts.  Legacy Locker allows users to set up a kind of online will, with beneficiaries. Eternal Space lets loved ones create customized online grave sites.
By Mallory Simon, CNN

(CNN) — Your husband, an avid gamer and techie, dies of a heart attack, leaving his vast online life ­– one you don’t know much about ­– in limbo.

His accounts, to which you don’t know the passwords, go idle. His e-mails go unanswered, his online multiplayer games go on without him and bidders on his eBay items don’t know why they can’t get an answer from the seller.

Web site domains that he has purchased, some of which are now worth hundreds of thousands of dollars,­ will expire, and you may never know.

It’s a scenario that’s becoming more likely as we spend more of our lives online. And it’s raising more questions about what happens to our online lives after we log off for the final time.

The answer, until recently, was nothing.

But now, as online usage increases and social-media sites soar in popularity, more companies are popping up to try and fill that void created in your digital life after death.

Jeremy Toeman, founder of the site Legacy Locker, recognized that when he was on a plane and wondered what would happen to his online life if it crashed. While his will leaves everything to his wife, including all of his digital assets, Toeman realized how difficult it would be for her to access his accounts.

“My GoDaddy account would belong to her, but it doesn’t solve the practical reality of how she would get access to it,” he said. He experienced a similar scenario after his grandmother died, and he tried to get the password for her e-mail account — only to give up because of the hassle.

So Toeman built his company to change all that. Legacy Locker allows users to set up a kind of online will, with beneficiaries that would receive the customer’s account information and passwords after they die.

“We know it’s a hard thing to think about — to get people to face mortality. We know it’s kind of morbid, but for those who live their entire lives online, it’s also very real.”

A Legacy Locker account costs $29.99 a year. Users can set up their accounts at www.legacylocker.com to specify who gets access to their posthumous online information, along with “legacy letters,” or messages, that can be sent to loved ones.

If someone contacts Legacy Locker to report a client’s death, the service will send the customer four e-mails in 48 hours. If there’s no response, Legacy Locker will then contact the people the client listed as verifiers in the event of his or her death. Even then, the service would not release digital assets without examining a copy of the customer’s death certificate, Toeman said.

Eddie Lopez is the kind of tech-savvy guy for which a service such as Legacy Locker was made. The St. Paul, Minnesota, man has three online banking accounts, a PayPal account, domain names, Web-hosting accounts, multiple e-mail addresses and many social-networking accounts.

“I do think this is something people should be really considering these days,” Lopez told CNN when asked about services such as Legacy Locker. He wants to hire a service to handle his digital assets but is concerned about privacy.

“Although I’m glad there’s people breaking ground in this area, I don’t think I would jump at the first opportunity to sign up,” Lopez said. “My concerns are turning over such an exhaustive list of user names and passwords to a single business. That’s one-stop shopping for any hacker to get access to just about every detail of my life.”

Lopez would prefer to entrust half of his digital-security information to a service such as Legacy Locker and the other half to family members, so that each side’s information would be useless without the other’s.

“I hope Legacy Locker and similar services can address these privacy-security concerns with some real-world solutions,” he said. “I just don’t feel comfortable turning over my digital life — built over 15 years — to a kind promise.”

Legacy Locker isn’t the only new company helping techies plan for death in the digital age.

AssetLock (formerly YouDeparted.com) offers a “secure safe deposit box” for digital copies of documents, wishes, letters and e-mails. Deathswitch and Slightly Morbid also offer similar services in a variety of prices and packages, depending on how many accounts are involved.

Not all of these services deal with online assets. There’s also a growing trend towards giving all aspects of death –­ the grieving process, the funeral, the memorial and even the grave site –­ a digital makeover.

FindaGrave.com claims to have cemetery records for 32 million people in its searchable database, while EternalSpace.com offers a new spin on the traditional grave site by offering virtual memorial pages ­full of videos, pictures and tributes.

On Eternal Space, loved ones can choose from different headstones and bucolic landscape backgrounds — the mountain lake is a popular option — to create a customized online grave site. Loved ones can add “tribute gifts” such as roses, candles, stuffed animals and other items, while mourners can access photos and videos in a “Memory Book” and leave remembrances of their own.

Jay Goss, president of Eternal Space president, is trying to bring the funeral experience to anyone who can access the Web. In that way, he hopes to provide a gathering place, and a voice, for mourners who may not be able to attend the real-life memorial service.

“It’d be the equivalent of a funeral where everyone can attend and everyone can spend 30 minutes behind the podium,” Goss said. “It gives everyone a chance to put a 360-degree wrapper on the life the person lived and celebrate that life from how every person knew them.”

Eternal Space’s virtual memorial sites are currently only being offered through select funeral homes, cemeteries and crematoriums. Goss’ hope is that the site will help allow the deceased’s memory to be “eternally” passed on.

“All of these stories and videos are being left, in essence, to this Eternal Space Web site so that everyone can share, not just that day, not the days after, but the weeks after and years after,” he said.

Some funeral-industry professionals believe these online memorials and virtual grave sites provide a valuable service.

“Assuming the site is handled with respect, virtual memorials respond to a basic human need to remember our deceased family, friends and colleagues,” said Robert M. Fells, general counsel for the International Cemetery, Cremation and Funeral Association.

“Based on our members’ feedback, I’d have to say that virtual memorial sites are gaining popularity with the public as a very practical alternative to being present at the grave site,” he added. “There’s nothing ‘weird’ about them as far as we have seen.”

“There are funeral homes out there that will help families create virtual memorials, but … we’ve also seen Facebook and MySpace profiles of deceased persons being turned into memorials,” agreed Jessica Koth, spokesperson for the National Funeral Directors Association. “Consumers have become increasingly comfortable with expressing their grief online.”

“While not a replacement for a funeral, online memorialization can help people work through their grief after the funeral,” she added. “We’ve all become accustomed to communicating and expressing ourselves electronically — via e-mail, Facebook, Twitter. Expressing one’s grief online is an outgrowth of what’s happening in other areas of our lives.”

CNN.com’s Brandon Griggs contributed to this story.

Links referenced within this article

www.legacylocker.com
http://www.legacylocker.com

Anatomy of a Bank Takeover – This American Life & All Things Considered

Usually when you read about yet another FDIC bank takeover, the absence of emotion, the impact on the lives of bank employees, and the on the ground view of what happens on that fateful Friday is almost never portrayed as it is in Episode 377: Scenes from a Recession where a compellling audio story of the Bank of Clark County, Vancouver, WA is told. After all, who cares.  As long as my money is insured by the FDIC, I’m good!

In this episode, the story of a Circuit City store closing is also told.  This post will direct you to the All Things Considered resource.  The story was written by Chana Joffe-Walt.  The audio can be found here.  The abridged article transcript is here. I hope you get to listen to it.  It may not be completely objective or able to tell the entire story.  It is only 12 minutes.  But, you will see some criticisms of the piece from comments posted by readers on the article’s web site.

Anatomy of a Bank Takeover

by Chana Joffe-Walt

On a mid-January night, some 80 agents of the Federal Deposit Insurance Corp. pull into Vancouver, Wash. Their rental cars are generic, their arrival times staggered. One by one, agents check into a hotel, each quietly offering a pseudonym to the guy at the desk.

They’re here to take over the Bank of Clark County, which the FDIC has decided is insolvent. It’s the agency’s job to insure American bank deposits and to step in when a bank fails. The FDIC tries to keep the planning for its operations top secret, to avoid sparking a panicked run on the bank.

At 9 o’clock on this particular Thursday night, FDIC agents call another bank nearby, Umpqua Bank. They tell executives there that Umpqua has been selected to take over the Bank of Clark County. They order them not to tell anyone. Come to a meeting tomorrow at noon, they say, and we’ll fill you in on everything you need to know.

The next day, Ric Carey, an Umpqua vice president, heads into that meeting. “The FDIC had taken a location approximately two miles from the main office of the bank in a hotel under a different name,” he says later. “And they’ve been through quite a few of these. I think one of the gentlemen leading the discussion said, ‘You know, I’ve done over 200 of these over my 25 years, and let me tell you how it’s going to work.’ ”

He agrees it almost feels like a spy movie. “They’ve done this before — quite a production,” he says.

Breaking The News

Todd Zalk is what you’d call a team player, a total bank loyalist to the end and beyond.

Zalk works at the Bank of Clark County — “the best community business bank,” he says, “because we’ve changed the game in business banking and we were winning.” He laughs at himself, but a month after the failure he’s still wearing his Bank of Clark County nametag, still passing out his bank business cards with a warm handshake and calling people by name whenever possible.

Zalk says he had no idea the FDIC was in town and his bank was about to fail. On Friday afternoon, failure day, he was bringing in new business. “I had people that wanted to open accounts,” he says, adding that he opened more than 55 new accounts in the fourth quarter.

He knew the bank was going through a rough time — everyone knew that. The CEO had been saying that the bank was like a ship. The bank had taken on some water in the recent storm and might need a bigger ship, meaning a larger bank, to take it on. But things were basically under control.

On that Friday afternoon, Zalk is out meeting with potential clients.

At 5:01 p.m., a small team enters the Bank of Clark County. They’re a casual group, just two FDIC agents and a Washington state regulator, and they head straight for the CEO’s office. And this is when it happens: They deliver the news. They tell him his bank is undercapitalized and has failed.

At 5:03 p.m., an agent positioned by the CEO’s office door, types the news into a BlackBerry. It is received by everyone on the FDIC takeover team, including the FDIC’s manager on location, Ron Hodges.

“At 5:04, we receive the notification that the bank had been declared failed,” Hodges says. “It’s that simple.”

A minute later, FDIC agents begin closing in on the bank. A few are already inside, quietly and discreetly securing the cash and the vaults.

Carey, with Umpqua Bank, has assumed a position down the street. He’s sitting in his car, waiting and watching.

Gone In A Flash

Zalk, oblivious to all this, heads back into the office after a long day of work. And it’s weird, he says, how tense everyone seems. A teller mentions that there’s a staff meeting at 6 p.m.

“By this time it was quarter to 6, and I went up to someone who was senior vice president at the bank and I said, ‘How are you doing?’” Zalk says. “And they said, ‘Oh I’m doing all right.’ I could tell something was going on and they didn’t want to say. We looked across to the other side of the bank and there were two employees adjusting pictures on the wall. And he kind of laughed and said, ‘Wow, that reminds me of adjusting the chairs on the Titanic before it sank.’ And that really told me something was going down.”

The Bank of Clark County staff gathered in the lobby at 6 p.m. The group included a couple of people in suits whom none of the bank staff recognized.

“Mike Worthy, our CEO, came out,” Zalk says. “It was very short. He stood up and said, ‘Well, I’ve used the analogy that we were a ship that was taking on some water and we needed to pull up next to a bigger ship, and we thought we had a few buyers for that. And now the biggest ship that sails the seas has come alongside us, and they are going to be taking us over — and that is essentially the federal government.”

At 6:03 p.m., down the street in his car, Carey notices his BlackBerry vibrate. He was getting the signal, an e-mail: “It’s time. Come in.”

Two minutes later, Carey gets out of the car and starts walking toward the bank. Meanwhile, in the lobby, a woman from the FDIC takes the stage.

“She said within the next 10 minutes there will be 80 FDIC employees coming into the bank. And I looked out there, and it was dark so I couldn’t really see,” Zalk says. “Then all these people, mostly in suits and professional clothing with attorney-type briefcases, start entering the bank, just flooding into the bank. I was so awestruck at them coming in — and so many of them coming into the bank, that I turned around and looked over there, and just kept watching them, and they just continued to come. I mean 80? I mean, our bank had, like, 100 employees.”

Out in the parking lot, he noticed a flash. It was a photographer for the local newspaper taking a photo for the front page of Saturday’s edition.

Keeping The Doors Open

At 6:08 p.m., Carey enters the bank he will own in just a few days. He finds the staff members are standing in their closed bank headquarters trying to digest the news. Some of them are crying. He remembers one of them saying, “My goodness, I just told one of our biggest customers yesterday, ‘Don’t worry, everything’s fine.’”

He says they seemed almost personally embarrassed that they now had to face those customers.

It’s now around 6:10. The Clark County people have a bunch of questions running through their heads — first among them: Do we get to keep our jobs? Carey can’t answer that. Umpqua will need only about a third of the Bank of Clark County staff. But it’s too soon to let individuals know whether they just lost a job.

The Bank of Clark County no longer exists. It’s not quite Umpqua Bank yet. The FDIC is in charge. The bank has to open its doors Tuesday morning — Monday is Martin Luther King Jr. Day.

The FDIC agents announce that, through the weekend, the staffers will be temporary employees of the FDIC. Stay and help us, the agents say.

“Most of us were planning on leaving at the end of the day,” says Ken Moody, the bank’s vice president of information systems. “My daughter had a seventh birthday that we were going to go to.”

Like An Autopsy

At 6:20 p.m., the FDIC agents spread out into offices, storage rooms, hallways, into any space available. They tape handmade signs to the doors, labeling rooms with functions like “audit,” “security” and “investigations.”

The agents begin going through files. They change the Web site and count all the cash by hand, a task that takes three hours. They check the safe deposit boxes, go through desk drawers and toss out bank letterhead.

From all the paperwork and computer hard drives, the FDIC has to reconstruct the bank’s entire balance sheet. It has to know what it’s selling to Umpqua.

The agents’ work includes checking every single account. Ones with a balance under $250,000 are fully insured by the FDIC. But some people have more than that, and there are business accounts and loans and it gets complicated. Some of the accounts are covered, some aren’t.

While the agents are sorting all this out, they can’t have customers going online and moving money around. They need to shut down the bank’s computers for a short while, maybe an hour. “Things started happening very quickly and with what seemed to be a lot of precision,” Moody says.

At 6:25 p.m., Moody sees three agents approaching. They hand him a thumb drive and ask him to plug it into a computer. The drive contains all the instructions about all the computer systems.

“It was like watching an autopsy being performed by a really skillful surgeon,” he says. “They just came in and sliced and diced and broke the bank up into a bunch of different pieces, threw them into different buckets — and did it with great efficiency.”

It was like an autopsy, he says, of all the work the bank employees had done together for a decade.

‘They Were Really Nice’

Many workers at the Bank of Clark County said one thing about the FDIC that you don’t often hear about a government agency — that it did a really good job. They describe the agents as kind, courteous and efficient. Everything was structured, even how and when to grieve.

“Many of the people who came in from the FDIC got to where they were because they were part of a bank that was failed,” says Lisa Stapleton, an assistant loan officer. “And they were like, ‘You know what? We’ve been where you are. And we understand and it’s going to be fine.’ So they were really nice. Having that empathy helped it kind of make it a little more pleasant.”

The Bank of Clark County had 100 employees and assets of $446 million — it was a really small bank. But the federal takeover kept 80 FDIC agents, about 50 Bank of Clark County staff, and 100 Umpqua employees, working round the clock for three days.

Most of the largest banks in trouble right now — Citibank, Bank of America — are about 6,000 times the size of the Bank of Clark County and much, much more complicated.

Considering the scale involved, it’s not surprising the U.S. Treasury secretary’s latest plan does everything it can to avoid using this process on those big banks. When you take over a little bank, it’s called receivership. When you do it to a big bank, people throw around the word nationalization.

But on the other hand, check these FDIC folks out. They know what they’re doing. And every week they get more experience. In the 10 weeks since the FDIC took over the Bank of Clark County, 18 more banks have failed. That brings us to a grand total of 20 since the start of this year — a number that will likely grow tomorrow.

FDIC Alert: Level One Bank Acquires Michigan Heritage Bank

Friday was a busy day for the FDIC.  On Friday, three other banks were taken over in addition to the one headlining this post.  The notices can be found on the following links:

• First Bank of Idaho – Ketchum, Idaho
• First Bank of Beverly Hills – Calabasas, CA
• American Southern Bank – Kennesaw, GA

Here is one of the most recent FDIC bank closures which was achieved by Level One acquiring Michigan Heritage Bank on Friday, April, 24. The article posted below is rom PRNewsWire via Comtex and appears on foxbusiness.com.

FARMINGTON HILLS, Mich., April 24, 2009 /PRNewswire via COMTEX/ —-Level One Bank of Farmington Hills is pleased to announce the acquisition of all deposit accounts and select consumer loans of Michigan Heritage Bank, also of Farmington Hills, from the FDIC as Receiver following its closure on April 24, 2009. Level One Bank was selected by the FDIC, after a competitive bidding process, to assume these deposits and purchase these selected assets.

All Michigan Heritage Bank offices will open for business as branches of Level One Bank beginning Monday morning, April 27, 2009. Michigan Heritage Bank depositors will automatically become customers of Level One Bank and will have uninterrupted access to their funds, all of which will continue to be insured by the FDIC to the FDIC’s limits with no loss of any depositor money.

Level One Bank is a locally owned, full-service commercial and consumer bank which strives to exceed customer expectations at every point of contact. Level One Bank continues to take banking to a higher level with the most qualified and enthusiastic bankers in the market and the technology and infrastructure to make banking easier and more convenient.

“As a bank committed to the success of our local community – both its residents and businesses – we are thrilled to welcome the Michigan Heritage Bank customers into the Level One family. We pride ourselves on making a difference for each of our customers by providing a superior level of attention, treating each family like a business, and each business like family. We truly believe the transition will be a smooth, enjoyable experience for all our new customers. And we believe by keeping these deposits local, we’ll continue to positively support our communities and state,” said Patrick J. Fehring, President and CEO of Level One Bank.

Level One Bank’s Consumer Division offers personal savings and checking accounts including free checking and competitive interest-bearing accounts such as Money Markets, IRAs, and CDs. The bank also provides a complete array of consumer loan products including first mortgages, home equity, personal lines, auto, recreational vehicles and credit card services. The Commercial Division provides a complete menu of products including lines of credit, term loans, commercial mortgages, SBA loans and a full suite of Treasury Management Services.

   Level One Bank locations will be:
   30201 Orchard Lake Road, Farmington Hills
   28300 Orchard Lake Road, Suite 200, Farmington Hills
   21211 Haggerty Road, Novi
   28345 Beck Road, Suite 102, Wixom

The official fdic.gov press release can be found here: PR09058.

Is Your Annuity Safe?

He is an article that you assist you in determining whether you are comfortable with your current arrangement. Either way, if you want to ensure that you have the optimal income solution that enables guaranteed principal protection, income for life where you never run out of money, and your original starting balance is recovered, give us a call. Read on…

Is your annuity safe?

By Walter Updegrave, Money Magazine senior editor

October 10, 2008 5:18 pm

Question: I have $100,000 in an annuity with AIG that my mom and I depend on for income to live. Should I cash it out even though I would suffer a loss, or do you think I should hold onto it? It’s so hard to know what to do. —Kitty Schwartz, Plano, Texas

Answer: Most people buy an annuity at least in part because they see it as a refuge, an investment they can count even if the financial markets are spiraling downward. But that faith has been tested in recent weeks.

The government needed to step in to cover the debts of AIG, the nation’s largest insurer, and the health of many other major insurers has been called into question.

So it’s no surprise that I have been inundated with questions from people worried about the security of money they have in annuities.

I would love to be able to give a simple reassurance.

But annuities are often complicated products. I’ll try to lay out the most important issues surrounding that choice as best I can.

To do that, however, you first must understand the safety mechanisms that are in place for annuities so you can better gauge the risk you actually face (which for many people will be a lot less than they fear). And you must also understand the possible consequences of withdrawing your money from an annuity.

3 lines of defense

Basically, there are three lines of defense that protect the money you have in an annuity.

The first is oversight. Insurance companies are regulated at the state level, and the main job of each state’s insurance commissioner is to assure that the companies headquartered in that state have enough reserves, or capital, to meet their obligations to annuity owners and other policy holders.

The second line of defense becomes a factor when insurers run into trouble despite the oversight. Specifically, the state insurance commissioner steps in, do anything from arranging for a takeover of the ailing insurer to transferring annuities and other policies to a healthy insurer.

The third line of defense is the network of state guaranty funds, a factor if a failed insurer doesn’t have enough in assets to cover obligations annuity holders. Most states cover up to $300,000 for life insurance death benefits, $100,000 in cash surrender values for life insurance and $100,000 in withdrawal and cash value for annuities, although some states have higher limits.

This coverage is per person per insurance company. So if the state limit for annuities is $100,000 and you have a $100,000 annuity with one insurer and another $100,000 with a different insurer, you would receive $100,000 of coverage for each annuity.

A quick note about variable annuities. Most people who own variable annuities have their money invested in one or more “subaccounts,” or mutual fund-like stock or bond funds. The money in these subaccounts is segregated from the insurer’s assets and cannot be tapped by the insurer or its creditors. So while the market value of your variable annuity may decline, the money you’ve invested in a variable annuity would be safe should the insurer fail. (If you have invested in the variable annuity’s “fixed” account, that money is part of the insurer’s assets and would be covered by the guaranty fund.)

So if your annuity’s value is within your state guaranty fund’s coverage limit, you don’t need to bail out to protect yourself from a loss. That’s not to say you might not want to get out at some point in the future for peace of mind or if you decide annuities aren’t for you. But you don’t have to exit in a rush, which might trigger taxes and penalties. Your money is secure.

What if the value of your annuity exceeds these limits? In that case, you’ve got a few factors to consider.

Consider your insurer’s financial strength

Assessing the financial strength of your insurer is difficult if you’re not an insurance analyst. But you can get a feel for it by checking how highly your insurer is rated by ratings companies like A.M. Best, Standard & Poor’s and Moody’s. (It’s important that you have the exact name of your insurer, as there may be multiple subsidiaries with similar-sounding names, each of which is rated separately. The name of the insurer that issued your annuity should be on your contract.)

Granted, these ratings are hardly foolproof. Rating agencies can get it wrong. And rapidly deteriorating markets can make what was a sound company weeks ago vulnerable today.

It’s hard to draw a dividing line between what rating represents an acceptable level of safety and what rating doesn’t. But I think it’s reasonable that someone relying on an annuity for security would want to see a rating of A or better. (The rating scales vary somewhat between companies, but A is usually the third highest rating, after AAA and AA.).

Weigh the taxes and penalties

You’ve also got to consider withdrawal penalties. Most annuities carry surrender charges that typically start at 7% or so and decline gradually each year until they disappear after seven years. In some cases, however, surrender charges can run as high as 20% and last 20 years. If you pull money out early, you could take a sizeable hit.

There is a bit of a loophole here, though. Most insurers allow you to withdraw a small amount – usually 10% of your balance – free of surrender charges each year.

Taxes are another consideration. If you withdraw money from an annuity, you’ll owe tax at ordinary income tax rates on any gains (and on your original investment if your annuity is held within an IRA account funded with tax-deductible or pre-tax dollars.) If you’re under age 59 ½, you’ll pay an additional 10% early withdrawal tax.

There is a way around the tax hit. Instead of just pulling your money out of the annuity, you can do what’s called a 1035 exchange into another annuity. In fact, you can do a 1035 exchange and split your money among two or more insurers with good ratings to diversify your exposure. You’ll still be in an annuity, of course. So if your goal is to exit the annuity altogether, this tactic wouldn’t help. A 1035 exchange also doesn’t exempt you from any surrender charges that may apply. And, indeed, by moving to a new annuity, you would likely start the clock again on a new set of surrender fees, which could make a future exit more costly than getting out today.

Bottom line: If your annuity’s value is over your state’s guaranty fund limit, you’ve essentially got to weigh the cost of getting out vs. the risk of staying in.

If you have an annuity with a highly rated insurer and the surrender charges are still quite high, you might prefer to just hold on at least for now, especially if your annuity’s value isn’t that far above the guaranty fund’s limit. You can always pull money out later on or move it to another insurer via a 1035 exchange after the surrender charge has fallen.

You could even reduce your exposure above the guaranty limit gradually by taking advantage of the annual surrender-free withdrawal provision.

If, on the other hand, the insurer has a low rating or you’re really worried about a loss and the surrender penalty isn’t too severe, you might want to switch via a 1035 exchange to an annuity with a highly-rated insurer, especially if the annuity’s value is well above the guaranty coverage.

If the insurer’s rating is low and the surrender penalty is still high, you could also consider doing a partial 1035 exchange – that is, move enough of your current annuity to an annuity with one or more highly rated insurers so that each annuity falls within or at least not too far above your state’s guaranty fund limits. You would still have to pay a surrender charge, but at least it would be on only a portion of your annuity’s value.

All this comes down to a personal judgment. But I think that ultimately, if you’re going to own annuities, you want to have your money spread among two or more insurers and, to the extent possible, below the guaranty fund limit for your state. You don’t have to get to this position overnight. But the weaker your current insurer is and the higher above the guaranty limits you are, then it seems to me the sooner you want to do this.

Are annuities for you?

One final note: I think this is a good time for people who own an annuity – or are considering buying one – to ask themselves whether they really ought to be in an annuity at all. I’ve long recommended a particular type of annuity – an immediate annuity – as a way to convert a portion of your savings to a lifetime income once you’ve retired.

But immediate annuities represent a very small portion of annuity sales. Most of the annuities that are sold fall into two categories: fixed deferred annuities, which are sold to older investors, most of whom I think would likely be better off in bank CDs and bonds; and variable annuities, which are touted as mutual funds that can shelter their gains from taxes and often sold (usually inappropriately in my opinion) as investments for IRAs and 401(k) rollover money to people who are still years away from retirement.

If nothing else, I hope the attention that insurers and annuities are getting will lead investors to re-assess (ideally with the help of a financial adviser who doesn’t depend primarily on annuity sales for his or her livelihood) whether they really belong in annuities.

As I said at the beginning of this column, annuities can be complicated. But there’s one aspect of them that’s become painfully obvious: Getting into them is a lot easier than getting out.