How to Use Annuities to Fund Life Insurance
Annuities are not often used to fund life insurance policies because they are retirement contracts which offer tax deferral and retirement-income options. However, Ii you don't have other options to fund your life insurance and have money in an annuity that won't be needed for future goals, there are methods to use your annuity to pay insurance premiums. Because annuities offer tax-deferral, there are specific IRS rules that must be followed to avoid 10 percent IRS penalties for early withdrawal.
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Instructions
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Ask your annuity provider for a list of withdrawal options from your annuity. If you're under 59 1/2, you'll pay a 10 percent penalty to withdraw dollars above the amount you invested, unless you annuitize the annuity. If you don't have gains on your annuity or are older than 59 1/2, the annuity company may allow you to take penalty-free withdrawals as you choose.
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Explore annuitization of your annuity if you're under 59 1/2 to fund your life insurance policy. Annuitization means that you'll give up your rights to the funds inside the contract in exchange for a guaranteed stream of income you can't outlive. This method of funding your insurance policy may be attractive, because you'll be able to count on a steady flow of premium payments into your insurance policy to keep the insurance active. Annuitization also eliminates the IRS 10 percent penalty for early withdrawal.
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Ask your life insurance provider if the funding option you chose will be enough to keep your policy active as long as you need it. Because many insurance policies allow flexible premium amounts, they often project for clients how long your policy will last with your chosen premium amount. They may direct you toward one funding option from your annuity that is most attractive for your life insurance.
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Contact your annuity provider and ask for for forms to send your annuity withdrawals directly to your life insurance contract. You will need information from your insurance company, such as their name, address and your policy number. Because you're sending payment directly to a third party, you will need a signature guarantee stamp, available at a bank where you have funds. Paying your premiums directly from the annuity to the insurance policy keeps payments flowing to the contract in a timely manner.
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Complete forms to withhold any income taxes that are due. In many cases, income tax withholding is an option on the annuity withdrawal form. Annuity companies routinely withhold taxes due for their contract holders when making withdrawals. This will allow you to take payments from your annuity without worrying about paying taxes out-of-pocket at tax time.
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