Annuities

Annual Maximum IRA Contribution

$5,000

Individual Annuity

A contract owned and purchased by an individual.

Joint Life

A payout arrangement where two or more annuitants receive payment until the first death among the annuitants, and then payments stop.

Separate Account

Premiums paid during the accumulation period are placed in this insurer's account that is usually invested in common stocks. This mean that the investment will vary according to the fluctuation in stock prices. These accounts provide professional management and diversification. Must be registered with the Securities and Exchange Commission as an investment company. This account will usually be registered as a unit investment trust (UIT). The account management will purchase and hold assets(common stock and other securities) for the benefit of plan participants. There is no guarantee of principal, interest, or investment.

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. Has all of the rights, such as naming the beneficiary and surrendering the annuity. May be a corporation, trust, or other legal entity.

Catch-Up Amount

$1,000 per year. Taxpayer who are age 50 or over will be intitled to make these contributions.

Indexed (or Equity Indexed) Annuities

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500. Generally the insurance companies reserve the initial returns for themselves but pay the excess to the annuitant. Are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.

Tax-Sheltered Annuity (TSA)/ Tax-deferred

Is a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems.

Fixed-period Installments

The annuitant selects the time period for the benefits, and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified amount of time only, whether or not the annuitant is living.

Annuities Certain

Short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated. These annuities are purchased as either a fixed-period installment or a fixed amount installment.

Single Premium Deferred Annuity

The annuity is purchased with a single payment, but the benefit is not paid until after one year or more has elapsed.

Accumulation Units

What variable premiums purchase in the fund, which is similar to buying shares in a Mutual Fund. Represent ownership interest in the separate account.

Group Annuity

Contract with an employer or other entity with a group of persons identified by reference to their relationship to the entity buying the contract.

Nonqualified Retirement Plan

One in which the contributions are not exempt from taxation. However, increase of the funds during the accumulation period are not taxed until they are actually received.

Annuitant

The person who received benefits or payments from the annuity, whose life expectancy is taking into consideration, and for whom the annuity is written. This person and the contract owner need not be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but this person must be a natural person.

Fixed-amount Installments

The annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. This option pays a specific amount until funds are exhausted, whether or not the annuitant is living. There are not life contingencies.

Flexible Premium Deferred

The annuity is purchased with multiple payments that can vary form year to year, and the benefit payments begin sometime after one year from the date of purchase.

Deferred Annuity

An annuity that either is purchased with a single, lump sum (single premium-deferred annuities) or is purchased through periodic payments (flexible premium-deferred annuities.) Most are back end loaded, this means that when funds are borrowed or surrendered from this annuity they come out on a last-in-first-out basis. The income payment begin sometime after one year from the date of purchase.

General Account

An investment portfolio used by the insurer for investing its premium income. It generally consists of safe, conservative, guaranteed investments, such as real estate and mortgages. Because deferred payment of a fix annuity are invested in this account, this allows the insurer to guarantee the interest rate.

Installment Refund

When the annuitant dies, the annuitant's beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.

Personal Uses of Annuities

Annuities are commonly used as retirement planning vehicles to assure that income will be provided to the annuitant. An annuity provides guaranteed income by the liquidation of the principal sum in accordance with its terms and provisions.

Underlying Investment

The payment that the annuitant invests into the variable annuity are invested in the insurer's separate account, not their general account. Since the separate account is not part of the insurance company's own investment portfolio, it is not subject to the restrictions that are applicable to the insurer's own general account. Consequently, the separate account can hold investments that stand to earn a higher return and hopefully provide the annuitant with a greater amount of income than could be provided by a fixed annuity. The separate account under many annuities provides the annuitant with a dozen or more investment options ranging from "money market funds" to "growth stock funds" to "precious metal funds".

Accumulation Period/ Pay-in Period

The period of time over which the annuitant makes payments (premiums) into the annuity. It is the period of time during which the payments earn interest on a tax-deferred basis.

Beneficiary

The person who receives benefits from the annuity. If the annuitant dies during the accumulation period, this person will receive the amount paid into the plan or the cash value, whichever is greater.

Annuity/ Annuitization/ Liquidation/ Pay-out Period

The time during which the sum that has been accumulated is converted into a stream of of income payments to the annuitant. May last for a lifetime of the annuitant or for a specified period, which could be longer or shorter.

Interest Rate

Under a variable annuity, the issuing insurance company does not guarantee a minimum interest rate; however, it guarantees a specified benefit to the beneficiary if the annuity owner dies before the insurer starts making payments. With both fixed and variable annuities the insurer guarantees both mortality and expenses.

Roth IRAs

Contributions can continue beyond age 70.5 and distributions do not have to begin at age 70.5. Accounts for these must be designated as these. Grow tax free as long as the account is open for at least 5 years. Contributions are not tax deductible. Should a taxpayer make an excess contribution, there is a 6% tax penalty. A traditional IRA can be converted if a person's adjusted gross income is less than 100k. Income will have to be paid on all deductible contributions and earning during the year it is rolled over, but the 10% early distribution penalty is waived. Distributions are not included in taxable income; however, qualified distributions cannot be made prior to the 5th year of the account's existence. Qualified distributions include those made after 59.5, those made to the estate of beneficiary at the owner's death, those made to a disabled owner, those made to a first time homebuyer, or if paying qualified higher education expenses for the owner, owner's spoues, children or grandchildren. With qualified distributions, there is no 10% penalty for early withdrawals. Nonqualified distributions are subject to the same tax consequences as traditional iras.

Qualified Retirement Plan

One that conforms to the requirements of federal tax laws and for which the Internal Revenue Service recognizes contributions to the plan as tax-deductible expenses to the employer. It receives favorable tax treatment. Employer contributions are tax-deductible expense at the time they are made, and the employee is not taxed on the employer's contribution until the benefits are actually received. Also, the increase during the accumulation period is not subject to taxation until benefits are actually received. They cannot discriminate in coverage, contributions or benefits in favor of highly compensated employees, shareholders, or company officers.

Variable Annuity

The annuitant may receive varying rates of return on the funds that par paid into the annuity. Thus, the value of the investment account in the annuity may be subject to variation. It is because of this feature that these were developed primarily as a way to provide a hedge against inflation. Premiums are invested into securities, hopefully maintaining a constant purchasing power, as a protection against inflation. As a result, the investment risk is borne by the account holder. Premiums paid during the accumulation period are placed in the insurer's separate account that is usually invested in common stocks. The investment will vary according to the fluctuation in stock prices. Three main characteristics: Interest Rate, Underlying Investment and License Requirements

Early Withdrawals from an IRA

Subject to income taxation and a 10% penalty, unless any of the following conditions is met: Participant is age 59.5; participant is totally disabled; the money is used to make the down payment on a home (not to exceed $10,000, and usually for first time homebuyers); withdrawals are for post-secondary education expenses; withdrawals are for catastrophic medical expenses, or upon death. In those cases, the 10% penalty is waived, but the money is still subject to income taxation.

Immediate Annuity

One that is purchased with a single, lump sum and provides income payment that start within one year from the date of purchase, but can begin as soon as one month. The time period before a payment is made is equal to a payment interval from the date of purchase.

Joint and Survivor

Arrangement is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive. Although it is possible for the surviving recipient or recipients to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies. This option is commonly selected by a couple in retirement. A period certain option may also be included. There is no guarantee that all the proceeds will be paid out if both beneficiaries die shortly after the installments begin. An annuitant whose life expectancy is longer will have smaller income installments.

Contributions

Made by the employer or by the employee through salary reduction. In both cases, the contributions are excluded from the employee's current income. As with the 401k, employee contribution limits to the 403b are currently $16,500, to be adjusted for inflation thereafter. The same "catch-up: provisions also apply.

Fixed Annuity

Provides: Guaranteed minimum rate of interest to be credited to the purchase payment or payments; Income (annuity) payments that do not vary from one payment to the next; The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant. They provide the annuitant with the advantage of knowing the exact amount of each payment received from the annuity during the annuity period. A disadvantage is that the purchasing power that they afford may be eroded over time due to inflation.

Pure/Straight Life benefit payment options

The payment ceases at death. This option provides the highest monthly benefits for an individual annuitant. The annuity payments are guaranteed for the lifeitme of the annuitant. There is not guarantee that all the proceeds will be fully paid out.

Annuity Units

Upon annuitization, this is what the accumulation units are converted to. The income is then paid to the annuitant based on the value of these units. The number received remains level, but the unit values will fluctuate until actually paid out to the annuitant.

Cash Refund

When the annuitant dies, the annuitant's beneficiary receives a refund of the principal, or the original amount paid into the annuity minus benefit payments already made to the annuitant. This guarantees the return of the amount to purchase the annuity but it does not guarantee to pay any interest. Is a lump-sum payment.

Business Uses of Annuities

While annuities may be used as investment vehicles, they are more commonly used as the vehicle to fund employee retirement plans that are established by the employer or jointly with other employers or a union. The plan may be set up for the employees of a particular business, or it may be a multiemployer plan, serving the workers from a number of related or unrelated firms. These plans, upon the retirement of the employee, will supplement Social Security retirement benefits. The employer benefits from the existence of the plan by higher employee retention.

Annuity

A contract that provides income for a specified period of years, or for life. It protects a person against outliving his or her money. Are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate. Are marketed by life insurance companies. Insurance agents with the life line of authority are authorized to sell these. Do not pay a face amount upon the death of one, in face they are just the opposite. In most cases, the payment phase stops upon the death of the annuitant. Do not use a mortality table, but this table reflects a longer life expectancy than the table used in life insurance. A deferred one does grow tax-deferred.

Market Value/ Market Value Adjusted/ Modified Guaranteed Annuity

A single-premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years. Penalties for a premature surrender depend upon current interest rates at the time of surrender. Is usually a percentage of the difference between the contracted rate of interest in the annuity and the current rate at surrender. The insurance company requires the annuitant to share in the market risk of changing interest rates, if the annuity is surrendered early.

Individual Retirement Annuities (IRAs)

Anyone with earned income who has not attained age 70.5 can have this. An individual can contribute 100% of earned income up to a specified amount (currently 5,000). A married couple can contribute a specified amount that is double the individual amount, even if only one had earned income, but each maintain a separate account not exceeding the individual limit. The excess contribution penalty for traditional IRAs is 6%, until withdraw. Usually, an individual's contributions are tax deductible for the year of the contribution. Any eligible person not participating in a qualified retirement plan can take a full deduction from taxable income up to the max limit. Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level. Contributions must be made in cash in order to be tax deductible. The money invested in the account can be used to buy stocks, bonds, mutual funds or annuities. The money used for contributions cannot be used to purchase life insurance policies or collectibles such as art, antiques or stamps.

License Requirements

Under federal law, a variable annuity is considered to be a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. Because variable annuities are considered to be securities, a person must hold a securities license in addition to a life agent's license in order to sell variable annuities. Agents or companies that sell variable annuities must also be properly registered wit the FINRA- financial industry regulatory authority

Refund Life

Under the life with Guaranteed minimum settlement option, if the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. The beneficiary will continue to take the money in installments or in a single cash refund. It guarantees the principal amount will be paid.