Annuitues

✅ What is the main use of annuities?

To pay for retirement

Long-Term Care Needs

Under the Pension Protection Act of 2006, annuitants are allowed to transfer money from an annuity to pay for long-term care insurance premiums, tax free. In the past, distributions from nonqualified annuities were taxed; however, now, distributions can be used to pay for long-term care premiums and, in many cases, eliminate the taxes on the annuity gains. As a result, many insurers now offer a hybrid annuity with a long-term care feature. These policies provide for income, long-term care, or both.

✅ Natural person

a human being

✅ Joint and Survivor

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(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipients will receive a reduced payment after the first recipient dies. Most commonly, this option is written as "joint and ½ survivor" or "joint and 2/3 survivor," in which the surviving beneficiary receives ½ or 2/3 of what was received when both beneficiaries were alive. This option is commonly selected by a couple in retirement. As with the life income option, there is no guarantee that all the proceeds will be paid out if both beneficiaries die shortly after the installments begin.

✅ Joint Life

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

✅ Suitability

a requirement to determine if an insurance product or an investment is appropriate for a particular customer

✅ Qualified plan

a retirement plan that meets the IRS guidelines for receiving favorable tax treatment

✅ Indexed (or equity indexed) annuities

are fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity 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. For example, the company may keep the first 4% earned for itself, but any accumulation in excess of 4% is credited to the annuitant's account. So if the interest earned is 12%, the company keeps 4% and credits the client's account with 8%. Equity indexed annuities are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.

Annuity Nonforfeiture law

stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges). However, a 10% penalty will be applied for early withdrawals (prior to age 59 ½).

(✅ life with refund?) 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, wether or not the annuitant is living. If the insured dies, rest will be transferred to the beneficiary.

✅ Deferred

withheld or postponed until a specified time or event in the future

What are the 2 types of refund life annuities?

* Cash refund — when the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant. Cash refund option does not guarantee to pay any interest. * Installment refund — when the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.

✅ What do suitability requirements NOT apply to?

* Direct response solicitations where there are no recommendations based on information collected from the consumer; * Employee pension or welfare benefit plans covered by the Employee Retirement Income Security Act (ERISA); * A plan described by Section 401(a), 401(k) — profit-sharing plans, 403(b) — tax-sheltered annuities, 408(k), or 408(p) of the Internal Revenue Code (IRC); * Government or church plans; * Employer-sponsored nonqualified deferred compensation plans; * Settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; and * Prepaid funeral contracts.

3 main characteristics of a variable annuities

* Underlying Investment: the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account. * Interest Rate: issuing insurance company does not guarantee a minimum interest rate. * License Requirements: a variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA. Variable premiums purchase accumulation units in the fund, which is similar to buying shares in a Mutual Fund. Accumulation units represent ownership interest in the separate account. Upon annuitization, the accumulation units are converted to annuity units. The income is then paid to the annuitant based on the value of the annuity units. The number of annuity units received remains level, but the unit values will fluctuate until actually paid out to the annuitant.

✅ Refund Life Annuity

- guaranteed lifetime income. If annuitant dies, balance is "refunded" to beneficiary. Installment option gives beneficiary payments until purchase amount is paid out. Cash refund gives refund of balance of original annuity purchase amount minus payments made to annuitant.

✅ Fixed Annuities

--> General Account Features: * Guaranteed minimum rate of interest to be credited to the purchase payment(s); * Income (annuity) payments that do not vary from one payment to the next; and * 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. With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called level benefit payment amount. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

✅ Variable Annuities

--> Separate account Serves a hedge against inflation, and is variable from the standpoint that annuitant may receive different rates of return on the funds that are paid into the annuity.

✅ What are the 2 distinct periods of an annuity?

Accumulation period & annuitization period

✅ What are the required suitability information to be obtained prior to making recommendations to a consumer?

Age; Annual income; Financial situation and needs (including financial resources used to fund an annuity); Financial experience; Financial objectives; Intended use of an annuity; Financial time horizon; Existing assets (including investment and life insurance holdings); Liquidity needs; Liquid net worth; Risk tolerance; Tax status; Potential reverse mortgage; and Intention to apply for means-tested government benefits (e.g., Medi-Cal, veteran's aid and attendance benefit).

✅ Immediate vs. Deferred Annuities?

An immediate annuity is one that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase. Typically, an immediate annuity will make the first payment as early as 1 month from the purchase date. Most commonly, this type of annuity is known as a Single Premium Immediate Annuity (SPIA). A deferred annuity is an annuity in which the income payment begin sometimes after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (Single Premium Deferred Annuities —- SPDAs) or through periodic payments (Flexible Premium Deferred Annuities — FPDAs). The longer the premium is deferred, the more flexibility for payment of premium it allows. Know This! An immediate annuity is purchased with a single premium. Know This! Income payments from a deferred annuity begin sometime after 1 year from the date of purchase.

How can annuities be classified?

Annuities can be classified according to how premiums are paid into the annuity, how premiums are invested, and when and how benefits are paid out. Know This! Classification of annuities: * Premium payment method: single premium vs. periodic * When income payments begin: immediate vs. deferred * How premiums are invested: fixed vs. variable * Disposing of proceeds: pure life, annuity certain, or life refund annuity

✅ Individual Retirement Annuity

Anyone with earned income can have an IRA (Individual Retirement Annuity or Account). An individual can contribute 100% of earned income up to a specified amount. A married couple could contribute a specified amount that is double the individual amount, even if only one person had earned income, but each must maintain a separate account not exceeding the individual limit. The excess contribution penalty for traditional IRAs is 6%, until withdrawn. Earned income means salary, wages, and commissions, but would not include income from investments, unemployment benefits, or income from trust funds. Usually, an individual's contributions to a traditional IRA 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 maximum limit. If you are a participant in another qualified retirement plan, there are income limitation tests to determine how much, if any, of one's IRA contribution is tax deductible. Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level. Regardless of the deductible status of the IRA contribution, IRA assets grow tax deferred.

✅ Identity the rules regarding the sale to a senior age 65 and older (CIC 785-789.10)

As required by the California Insurance Code, all insurers, agents and brokers who solicit insurance to insureds age 65 or older, owe those insureds a duty of honesty, good faith and fair dealing. Any advertisement designed to produce leads based on a response from a potential insured that is directed towards persons 65 years of age or older must prominently disclose that an agent may contact the applicant. Insurers or agents may not use real or fictitious names that are deceptive or misleading with regard to the status, character, or representative capacity of the insurer or agent, or to the true purpose of the advertisement. The use of misleading terminology or advertising materials is also prohibited. If a life agent offers to sell to a senior consumer any annuity product, the agent must advise the senior in writing that the sale or liquidation of any stock, bond, individual retirement account, certificate of deposit, mutual fund, annuity, or other asset to fund the purchase of this product may have tax consequences, early withdrawal penalties, or other costs or penalties as a result of the sale or liquidation, and that the senior or his/her agent may wish to consult independent legal or financial advice before the transaction. Individuals who violate these regulations are subject to the following administrative penalties: $1,000 for the first violation; and $5,000 - $50,000 for second or subsequent violations. If the Commissioner determines that the licensee's actions may cause significant harm to seniors, the Commissioner may suspend the producer's license. Insurers who violate these rules are liable for an administrative penalty of $10,000 for the first violation, and $30,000 - $300,000 for each subsequent violation.

Annuity Surrender Charge

At surrender, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge. (A common surrender charge might be 7% the first year, 6% the second year, and 5%, 4%, 3%, 2%, 1%, and 0% respectively thereafter. Therefore, if the annuity is surrendered in the 8th year or after there would be no further surrender charge).

✅ Business Uses

Can be used as investment vehicles, but more commonly used to fund employee retirement plans that are established by the employer or jointly with other employers or a union. These plans upon the employees retirement, will supplement Social Security retirement benefits. The employer benefits from the existence of the plan by higher employee retention.

General Account Assets

Fixed annuity premiums are deposited into the life insurance company's general account. The general account is comprised mostly of conservative investments like bonds. These investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide. Know This! In fixed annuities, the premiums are deposited in the company's general account.

✅ What are the 2 types of annuities based on when the annuity payment begin?

Immediate & deferred annuities

✅ IRS

Internal Revenue Service: a U.S. Government agency responsible for collecting taxes, and enforcement of the Internal Revenue Code (tax code)

✅ Tax-shelter Annuity - 403(b) / (TSA)

Know This! 403(b) plans are nonprofits and public-school systems. 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. Contributions can be made by the employer or by the employee through salary reduction and are excluded from the employees current income. As with any other qualified plan, 403(b) limits employee contributions to a maximum amount that changes annually, adjusted for inflation. The same catch-up provisions also apply.

✅ The parties of an annuity?

Know This! Because annuities are based on the life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy. ____________________________________________________________________________________ Owner - The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust, or other legal entity. Annuitant - The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person. Beneficiary - The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

✅ Accumulation Period vs. Annuity Period

Know This! During the accumulation period, funds are paid INTO the annuity. During the annuity period, funds are paid OUT to the annuitant. The accumulation period, also known as the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. Also, it is the period of time during which the payments earn interest on a tax-deferred basis. The annuity period, also known as the annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter. The annuitization date is the time when the annuity benefit payouts begin (trigger for benefits).

Guaranteed Minimum Withdrawal Benefit

Retirement annuities may offer a Guaranteed Minimum Withdrawal Benefit (GMWB) option to the annuitant. With this option, the annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered. This option protects the annuitant against investment losses. Qualified retirement annuities can be individual (such as individual retirement accounts — IRAs), and group (such as tax-sheltered annuity — TSA, or profit-sharing pension plans).

✅ Pure Life (continent option)

Know This! Pure life annuity provides the highest monthly benefit, but there is no guarantee that the entire principal will be paid out. ________________________________________________ aka life-only or straight life, this payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs). This option provides the highest monthly benefits for an individual annuitant. Under this option, while the annuity payments are guaranteed for the lifetime of the annuitant, there is no guarantee that all the proceeds will be fully paid out.

What is the annuity income amount is based upon?

Know This! Shorter life expectancy = higher benefit; longer life expectancy = lower benefit. * The amount of premium paid or cash value accumulated; * The frequency of the payment; * The interest rate; and * The annuitant's age and gender. An annuitant whose life expectancy is longer will have smaller income installments. For example, all other factors being equal, a 65-year-old male will have higher annuity income payments than a 45-year-old male (because he is younger), or than a 65-year-old female (because women statistically have a longer life expectancy). If an annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either the cash value or the total premiums paid, whichever is greater. If a beneficiary is not named, the death benefit will be paid to the annuitant's estate.

What is the main use of annuities?

Know This! The main use of annuities is to provide retirement income.

(✅ period certain?) Fixed Period

Know this!: The fixed-period option pays for a specific time only, whether or not the annuitant is living. 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.

✅ Qualified vs. Nonqualififed annuities

Qualified retirement plan is one that conforms to the requirements of federal tax laws and for which the IRS recognizes contributions to the plan as tax-deductible expenses to the employer. When a plan is qualified, it receives favorable tax treatment. Employer contributions are tax deductible expenses at the time they are made, and the employee is not taxed on the employers contribution until the benefits are actually received. Also, the increase during the accumulation period is not subject to taxation until benefits are actually received. Another requirement for qualified plans is that they cannot discriminate in coverage, contributions or benefits in favor of highly compensated employees, shareholders or company officers. Nonqualified retirement plan is 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.

Single Life vs. Multiple Life

Single life annuities cover one life, and annuity payments are made with reference to one life only. Contributions can be made with a single premium or on a periodic premium basis with subsequent values accumulating until the contract is annuitized. Multiple life annuities cover 2 or more lives. The most common multiple life annuities are joint life, and joint and survivor.

Identify and define the Premium Payment Options

Single premium: one-lump sum payment Periodic payments: installments over a period of time. Can be either level premium, in which the annuitant/owner pays a fixed installment, or flexible premium, in which the amount and frequency of each installment varies.

✅ What type of disclosers are required if the applicant requests an immediate investment of funds in a variable annuity (CIC 10127.10)

The period of time for the return must be at least 30 days. During the 30-day period, the premium for a variable annuity may be invested only in fixed-income investments and money-market funds unless the owner specifically directs that the premium is invested in the mutual funds within the annuity. If the annuitant waives the right to the fixed-income requirement by directing that the funds be immediately invested, and then cancels the annuity anyway, the annuitant is entitled to the account value on the date the annuity is returned to the insurer. This is not the full value that the free look originally guaranteed. The account value must be refunded by the insurer within 30 days from the date that the insurer is notified that the owner has cancelled the policy. (Sorry future self)

✅ Who is an annuitant?

The person on whose life expectancy the annuity is written and who receives benefits from the annuity

Market Value Adjusted Annuities (MVA)

aka modified guaranteed annuity (MGA): a single-premium differed annuity that allows the owner to look in a guaranteed interest rate over a specific maturity period, anywhere between 2 to 10 years. In a MVA, penalties for a premature surrender depend upon current interest rates at the time of surrender. EX: assume that a client purchased a 10-year 6% fixed annuity tied to the Bond Fund Index Interest Rate (Moody's). If the client withdraws his/her money in 5 years and the current interest rate at that point is 6%, there is no adjustment. If the current interest rate at the time of surrender is 8%, a penalty will be assessed. If the interest rate at surrender is 4%, the insurance company may pay a bonus. The market value adjustment 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.

(✅ period certain?) Annuities Certain (Types)

short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.

✅ Liquidation of an estate

converting a person's net worth into a cash flow

✅Life contigency

dependent upon whether or not the insured is alive

Life with Guaranteed Minimum

if the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. This option is also called refund life. It guarantees that the entire principal amount will be paid out.

✅ Annuity

is a contract that provides income for a specified period of years, or for life. It protects a person against outliving his or her money. Not a life insurance but a liquidation of an estate.

✅ Life with period (term) certain

is another life contingency payout option. Under this option, the annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary. For example, a life income with a 20-year period certain option would provide the annuitant with an income while he is living (for the entire life). If, however, the annuitant dies shortly after payments begin, the payments will be continued to a beneficiary for the remainder of the period (for a total of 20 years).

✅ Identify different types of annuity payment options

life only, life with period certain, period certain, life with refund, joint life and joint-and-survivorship annuities.