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Split Decisions Expand Financial Flexibility

By Mark E. Caner, MBA, AEP, ChFC, CLU, CFP®
Business meeting presentation with audio visual

Years ago, the average grocery store might offer fewer than 10,000 items. Today, it may be as many as 60,000. Small wonder making a “quick stop” at the store remains an elusive errand. It’s not your imagination. Life has become more complicated.

The daunting array of selections extends beyond cereal varieties and yogurt flavors. Today’s financial services world likewise is ever more complex. Presented with so many personal financial considerations and choices, consumers find themselves challenged to determine a course of action that addresses their risk management needs. The result can be paralysis by analysis.

Given that so many possibilities exist, how can financial professionals seek to capture opportunities to make the most of them? Clients may well benefit from considering how to use an expanding range of options to their advantage. In fact, trying to satisfy multiple needs and goals with a single financial product may itself make planning unnecessarily complex. It may be needlessly limiting and ultimately counterproductive.

Seldom if ever is one strategy executed with one product the sole course of action available. Today a wide range of products awaits “on the shelf.” And you, as a financial professional, can help your clients adopt a systematic approach as they consider all that is offered in the financial products “store.” Splitting assets among multiple products – or even among several planned holding period durations within the same product – may enhance a client’s flexibility and certainty in addressing numerous financial needs amid life event risks they may encounter in the future.

The Inside Split

One way to split annuity assets in order to pursue a variety of financial objectives is to use what can be called an “inside split.” An inside split allocates assets among multiple terms of years within a single annuity product. For example, this can be accomplished by funding different holding period durations providing various multi-year interest rate guarantees. Shorter terms can help address renewal flexibility, while longer terms could provide the potential for asset growth.  “Laddering” of this type can enable the owner to spread assets across a range of rate period durations, allowing a single financial product to serve as a multi-faceted financial vehicle.

The Outside Split

Another way to address multiple goals is via an “outside split,” employing different annuity products that include complementary characteristics. One example is splitting annuity premium amounts between an immediate annuity – to help address present income needs – and a deferred annuity to help pursue longer-term asset growth objectives. Doing so means coordinating two separate annuity products to serve two distinct needs, working together under one overriding strategy. This idea can be taken a step further by incorporating the “inside split” concept described above within the deferred annuity component.

The Big Split

The concept of asset splitting may be particularly valuable for larger amounts of annuity premiums. If someone plans a larger annuity purchase, buying multiple, smaller annuities may be advantageous versus buying a single annuity.

For instance, instead of placing $1 million in one annuity, this amount could be broken into four $250,000 contracts. There is no extra cost for doing so. And it adds flexibility come annuitization time. The different contracts can be paid out on different schedules.  Or, one could be rolled to another suitable opportunity that may present itself in the future.

Another reason for splitting annuity premiums to purchase several contracts with different characteristics comes in times of prevailing low interest rates. If you have a client wanting to purchase immediate income now but also anticipating an improved rate environment in the coming years, they may want to spread purchases of several single premium annuity contracts over multiple years. Then, if rates increase in the future, assets will remain available for additional purchases that capture those future rates.

Splitting a purchase into multiple contracts may yield tax advantages as well. For example, say a client buys a nonqualified annuity with a $100,000 premium. After that annuity has grown to $200,000, a major cash need arises and $100,000 is withdrawn. How much is taxed? All $100,000 of it, because a regular distribution is taxed as gain out first.

But what if the client splits the purchase into two annuities, bought 12 months apart? And they fund each with a $50,000 premium and see both eventually grow to $100,000. Assume again that a cash need for $100,000 then arises. By surrendering one contract completely, the client receives $50,000 in basis and $50,000 in gain. The benefit: Only the $50,000 gain is taxed. The $50,000 basis is returned tax-free.

This big money split could work well for a life insurance need, too. Instead of placing the large premium in a single policy, a life insurance purchase can also be broken up into a number of separate contracts. This multiple policy strategy could allow more flexibility when multiple beneficiaries are involved. The purchaser could choose to fund them in proportions conforming to different face amounts to be passed on to multiple separate beneficiaries.

Telling Clients to Split

The store of financial risk management opportunities continues to expand. As always, clients and their financial professionals should work closely to weigh how various alternatives and combinations thereof may serve many needs. As they develop and pursue a course of action to address numerous growth, protection, and asset distribution needs, a “split decision” may help take advantage of different terms, features and strategies — and perhaps help make financial decision-making easier and more effective.

Mark E. Caner

Mark E. Caner, MBA, AEP, ChFC, CLU, CFP®

Mark is responsible for leading four sales channels. In addition, he has responsibility for relationship management, marketing, product development, and sales support.

Information provided is general and educational in nature. It is not intended to be, and should not be construed as legal or tax advice. W&S Financial Group Distributors, Inc. (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. Consult an attorney or tax advisor regarding your specific legal or tax situation.

Be sure clients discuss any split annuity purchase technique with their tax or legal advisor before taking any action of this type. The age of the annuity purchaser, whether two annuities are issued by the same insurance company within a 12-month period and other factors may affect individual income tax results of a split annuity purchase arrangement.

An annuity is a long-term financial vehicle designed for retirement. An insurance company accepts premiums and provides future income or a lump-sum amount to the contract owner by contractual agreement. Payment of benefits under the annuity contract is the obligation of, and is guaranteed by the issuing company. Guarantees are based on the claims-paying ability of the issuing company. Products are backed by the full financial strength of the issuer.

Interest earnings grow tax deferred until received. Distributions from non-qualified annuities and IRAs are subject to ordinary income tax. Distributions from a Roth IRA are tax free after age 59½ if the plan has been established for at least five years. Withdrawals prior to age 59½ may incur a 10% IRS penalty tax in both Traditional IRA and Roth IRA plans and in non-qualified annuities.

Securities offered through Touchstone Securities, Inc. Cincinnati, OH, a registered broker-dealer and member FINRA/SIPC.

No bank guarantee. Not a deposit. May lose value. Not FDIC/NCUA insured. Not insured by any federal government agency.