Determining the Cash Value of and Income from Annuities
There is some confusion among managers of affordable rental housing regarding how to determine the value of and income from annuities. Part of the confusion is the result of a lack of understanding about how annuities differ from investment accounts in terms of how they are handled for Section 8 and tax credit purposes. This article with describe what an annuity is and how is should be treated for housing purposes for properties governed by the requirements of HUD Handbook 4350.3, Chg. 4.
What is an Annuity?
An annuity is a contract sold by an insurance company designed to provide payments, usually (but not always) to a retired person, at specified intervals. Many annuities are “life” annuities, meaning that they continue to pay out as long as the owner is alive.
Generally, a person who holds an annuity from which he or she is not yet receiving payments will also be earning income. In most instances, a fixed annuity will be earning interest at a specified fixed rate similar to interest earned by a Certificate of Deposit (CD). A variable annuity will gain or lose income based on market fluctuations, similar to a mutual fund.
Most annuities will charge surrender or withdrawal fees if the owner closes the account and withdraws the balance. In the case of an early withdrawal, there will also usually be tax penalties.
Depending on the type of annuity and the status of the annuity, different questions need to be asked of the verification source, which will normally be the applicant’s insurance broker.
Income After the Holder Begins Receiving Payments
When verifying an annuity, owners should ask the verification source whether the holder of the annuity has the right to withdraw the balance of the annuity. If there is no right of withdrawal, the annuity is not treated as an asset, but should be documented in the file.
In most cases, when the holder has begun receiving annuity payments, the holder can no longer convert it to a lump sum of cash. In this situation, the holder will receive regular payments from the annuity that will be treated as regular (not asset) income, and no calculation of income from assets will be made.
Calculations When an Annuity is Considered an Asset
When an applicant or tenant has the option of withdrawing the balance in an annuity, the annuity will be treated like any other asset. Management must determine the cash value of the annuity in addition to determining the actual income earned.
Management needs to verify the following information with the insurance agent:
- The right of the holder to withdraw the balance (even if penalties are involved);
- The basis on which the annuity may be expected to grow during the coming year;
- The surrender or early withdrawal penalty fee; and
- The tax rate and the tax penalty that would apply if the family withdrew the annuity.
The cash value will be the full value of the annuity, less the surrender (or withdrawal) penalty, and less any taxes and tax penalties that would be due.
The actual income is the balance in the annuity times the percentage (either fixed or variable) at which the annuity is expected to grow over the coming year. Even though the money will be reinvested into the annuity, it is still considered actual income).
The imputed income from the asset is calculated only after the cash value of all family assets has been determined. Imputed income from assets is calculated on the total cash value of all family assets.
Management should keep in mind that unlike designated retirements accounts (IRAs, 401ks, Keoghs, etc.), even though regular payments are being made from an annuity, if the holder still has access to the balance in the account, the annuity is treated as an asset. In such cases, the payments are counted as regular income, the cash value of the annuity is an asset, and income earned on the annuity is asset income.