We’ve all had that feeling after a relatively large purchase decision that maybe we should never have bought the product in the first place, right? Maybe we feel that it was pushed upon us, or that it’s overly complicated, or that we just don’t really understand how it works. Well, the purchase of financial “products” are no different.
But, just because we regret buying it, doesn’t mean we should always rush out and sell it. Here’s why:
# 1 We might have to pay surrender fees
These are fees charged if we surrender, sell, or cancel our product within a certain number of years after the purchase date. That means we might not even get back the product’s current account value, but rather some lower dollar amount. In that case, it might make more sense to wait until the surrender period is over before we make any moves. Our firm has even seen products that had an indefinite surrender period, and the only way to get a client’s full account value was to have the product distributed over a multi-year period.
If there are no surrender fees, then we’ll want to understand if…
#2 We might incur significant taxes
If we are surrendering cash value life insurance policies or annuities that are worth more than what we’ve put in, then we’ll probably owe taxes on that gain. The IRS usually classifies this kind of gain as ordinary income, which will be taxed at our highest marginal bracket. Even if we’re selling a product that will be taxed at more favorable capital gains rates, we’ll still want to carefully evaluate the tax consequences.
If there are no adverse tax consequences, then we will have cleared our second hurdle. We still, however, need to research if…
#3 We might have a product with advantageous “secondary benefits”
Depending on when we obtained our product, there may be some generous contract provisions that we don’t want to give up. For example, some variable annuity contracts issued between 2006 – 2008 contained guaranteed income provisions that may have worked out in our favor.
Depending on the purchase date and provisions of the product, it may make more sense to simply keep the product or consider other allowable options, such as annuitization (which converts our product into an annual income stream).
The easiest thing to do when we have second thoughts about a financial product that we’ve purchased is simply to unload it. But “easiest” isn’t always “best.” Even if we regret our initial purchase, we still want to get as much out of the product that we can, by not leaving any benefits on the table and by avoiding excessive taxes and fees.