CHAPTER 7 ANNUITIES

D. SENIOR CONSUMERS

- 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 directed towards age 65 or older must prominently. disclose that an agent may contact applicant - Insurers or agents MAY not use fictitious names that are misleading w/ regards to the character of agent or purpose of advertisement - Misleading terminology / advertising materials is also prohibited - Must disclose that purchase of these products may have tax consequences, early withdrawal penalties or other costs & that senior may wish to consult legal or financial advice before transaction.

MARKET VALUE ADJUSTED ANNUITIES

- Also known as MODIFIED GUARANTEED Annuity MGA - a single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period between 3-10 years. Penalties for premature surrender depend upon current interest rate.

FIXED ANNUITY

- An annuity that offers fixed payments - guarantees a minimum rate of interest to be credited to the purchase payment or payments. - The insurance company guarantees the specified dollar amount for each payment & the length of the period of payments as determined by the settlement option chosen by the annuitant. Level Benefit Payment Amount - annuitant knows exact amount of each payment received from the annuity. A disadvantage is that the purchasing power that they afford may be eroded over time due to inflation.

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

RETIREMENT INCOME

Annuities are often used to fund QUALIFIED RETIREMENT PLANS, which means they meet the IRS guidelines to receive favorable tax treatment.

EDUCATION FUNDS

Annuities can provide funds for educational purposes on a tax-deferred basis.

LUMP SUM SETTLEMENTS

Annuities may serve as an ideal financial vehicle for someone who comes into a large lump sum of money, such as inheritance, lottery, award of damages from a lawsuit, proceeds from a sale of a business, or a lump-sum distribution from a qualified pension plan. In this case, a person may purchase a single premium immediate annuity, which will convert the lump sum into a series of periodic payments, providing a stream of income for the annuitant.

LIFE CONTINGENCY

Dependent upon whether or not the insured is alive

ADMINISTRATIVE PENALTIES:

Individuals who violate : $1,000 for first violation $5k-50K for 2nd or subsequent violations If commissioner determines licensee's actions may cause harm to seniors, producers license may be suspended. $10k for first violation $30k-300k for subsequent violations

LONG TERM CARE NEEDS

Under Pension Protection Act of 2006, annuitants are allowed to transfer money from an annuity to pay for long term care insurance premiums, tax free.

NATURAL PERSON

human being

IRS

(Internal Revenue Service) US Governmental agency responsible for collecting federal taxes, issuing regulations, and enforcing tax laws

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

QUALIFIED PLAN

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

TO ENSURE SUITABILITY, relevant info must be obtained:

Age Annual Income Financial Situation & Needs Financial Experience Financial Objectives Intended use of Annuity Financial Time Horizon Existing Assets Liquidity Needs Liquid Net Worth Risk Tolerance Tax Status Potential Reverse Mortgage Intention to apply for means tested government benefits (Medi-Cal, veteran's aid, attendance benefit)

TWO TYPES OF REFUND LIFEE ANNUITIES:

CASH REFUND - When annuitant dies, beneficiary receives lump sum refund minus benefit payments made to annuitant. Cash refund option does not guarantee to pay interest. INSTALLMENT REFUND - When annuitant dies beneficiary will continue to receive guaranteed installments until entire principal has been paid out. * Any unpaid annuity benefits following death. of annuitant are taxable when paid to beneficiary.

B. TYPES OF ANNUITIES

Fixed (General Account) Variable (Separate Account) Equity Indexed

3. ANNUITY INVESTMENT OPTIONS

Fixed annuities and variable annuities

GENERAL ACCOUNT ASSETS

Fixed annuity premiums are deposited into the life insurance company's general account. These investments are secure enough to allow the company to guarantee a specified rate of interest & assure the future income payments that the annuity will provide.

ANNUITY DISTRIBUTION CHOICES & FUNDING MECHANISMS:

Immediate & Deferred (Single Premium & Flexible Premium)

2. IMMEDIATE VS. DEFERRED ANNUITIES

Immediate Annuity - Purchased with a single lump sum payment & provides income. payments that start within one year from date of purchase. - Also known as Single Premium Immediate Annuity (SPIA) Deferred Annuity - Payments begin sometime after one year from date of purchase. Can be funded with lump sum or through periodic payments. - The longer deferred, the more flexibility for payment of premium it allows.

LIFE CONTINGENCY OPTIONS - Pure Life Vs. Life w/ Guaranteed Minimum

PURE LIFE - Also known as Life Only or Straight Life this payment ceases at annuitant's death. Provides HIGHEST Monthly benefits for annuitant. While annuity payments are guaranteed for the lifetime of annuitant, there is no guarantee that all proceeds will be paid out. LIFE W/ GUARANTEED MINIMUM - If annuitant dies before principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. Also called REFUND LIFE. Guaranteed that ENTIRE Principal will be paid out.

QUALIFIED VS. NON QUALIFIED

QUALIFED Retirement Plan - conforms to requirements of federal tax laws & for which the IRS recognized contributions to. the plans as tax deductible expenses to the employer. - When a plan is qualified, it receives favorable tax treatment NONQUALIFIED Retirement Plan - Contributions are not exempt from taxation. Increase of funds during accumulation period are not taxed until they are received.

SUITABILITY

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

LIQUIDATION OF AN ESTATE

converting a person's net worth into a cash flow

ANNUITY

is a contract that provides income for a specified period of years, or for life. Protects individuals against outliving their money. * Not life insurance but a vehicle for the accumulation of money & liquidation of an estate

VARIABLE ANNUITY

serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.

ANNUITIES CERTAIN (TYPES)

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

BENEFICIARY

the person who receives annuity assets (either amount paid to annuity or cash value whichever is greater) if annuitant dies during the accumulation period, or to whom thee balance of annuity benefits is paid out.

ANNUITIZATION DATE

the time when the annuity benefit payouts begin (trigger for benefits)

FIXED AMOUNT

with FIXED AMOUNT installments annuitant selects how much each payment will be & insurer determines how long benefits will be paid by analyzing the value of the account & future earnings. This option pays a specific amount til funds are exhausted whether annuitant is. living or not.

FIXED PERIOD

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

DEFERRED

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

TAX SHELTERED ANNUITY 403(b)

- A 403(b) plan or TSA is a qualified plan available to employees of certain NONPROFIT Organizations under Section 501(c)(3) of the Internal Revenue Code & to employees of public school systems - Contributions can be made by the employer or by the employee through salary reduction & are excluded from the employee's current income.

2. BUSINESS USES

- Annuities are more commonly used by businesses as the vehicle to fund employee retirement plans. Established by employer, or jointly with other employers as a union. - These plans, upon retirement of employee, will supplement Social Security retirement benefits. The employer benefits by higher employee retention.

LIFE W/ PERIOD (TERM) CERTAIN

- Another Life Contingency Payout Option - Annuity Payments are guaranteed for lifetime of annuitant & for SPECIFIED PERIOD of time for beneficiary. EX: 20 year period option provides annuitant with income while he is living. If annuitant dies shortly after payments begin, payments will be continued to beneficiary for the remainder of the period of 20 years.

INDIVIDUAL RETIREMENT ANNUITY

- Anyone with EARNED INCOME can have IRA. An individual can contribute 100% of 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 separate account not exceeding individual limit - Excess Contribution penalty for traditional IRA is 6% until withdrawn - Usually, an individuals contribution to IRA are tax deductible for the year of the contribution - IRA Assets grow TAX DEFERRED

EQUITY INDEXED ANNUITIES

- Are fixed annuities that invest on aggressive basis to aim for higher returns. Has a guaranteed minimum interest. Current interest is often tied to a familiar index. like the Standard & Poor's 500. - Insurance companies reserve the initial returns for themselves but pay excess to the annuitant. EX: Company may keep first 4%, but any accumulation in excess of the 4% is credited to annuitant's account. So if interest rate is 12%, company keeps 4% and client gets 8% - Less risky than variable or mutual fund but are expected to earn higher interest rate than a fixed annuity.

DISCLOSURES

- Every annuity delivered to a senior must have printed on front that after receipt of policy, the policy may be returned for cancellation CLEARLY stated within 30 days.

INTEREST RATE GUARANTEES (MINIMUM VS. CURRENT)

- Insurer bears the investment risk. - Future interest rates paid by insurer are based on the performance of the company's general account. The rate may drop below a policy's GUARANTEED MINIMUM (typically 3%) - During accumulation phase, the insurer will invest the principal & give the annuitant a guaranteed rate based on a minimum rate as specified in the annuity or the current interest rate, whichever is higher

4. ANNUITY BENEFIT PAYMENT OPTIONS

- Life Only, Life w/ Period Certain, Period Certain, Life w/ refund, Joint Life, Joint & Survivorship Annuities - They specify how annuity funds are paid out.

NONFORFEITURE

- Not losing cash values, when policy lapses for non-payment. Three options to choose from: cash surrender, reduced paid up, extended term. - 100% premium paid, less withdrawals & surrender charges. However, a 10% penalty will bee applied for early withdrawals prior to age 59 1/2.

3. SUITABILITY

- Principal use of Annuity is to provide income for retirement. However an annuity may be used for any accumulation of cash or simply liquidate an estate. Because of the various uses of annuities, agents should always assess how well a recommended product will meet applicant's needs. & resources - the SUITABILITY of a product.

SINGLE VS. MULTIPLE LIFE

- SINGLE cover ONE LIFE - MULTIPLE covers 2 or more lives. Most common are Joint Life, Joint & Survivor JOINT - Payout arrangement where 2 or more annuitants receive payment til first death, then payments stop JOINT & SURVIVOR - guarantees income for two that neither can outlive. Surviving recipient receives reduced payment after first recipient dies.

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. - Must be a natural person

OWNER

- The purchaser of the annuity contract, but not necessarily the one who receives the benefits. - May be a corporation, trust or legal entity

ACCUMULATION PERIOD

- also known as the pay-in period, is the period of time over which the owner makes payments into an annuity. - it's the period of time during which the payments earn interest on a tax deferred basis.

SURRENDER CHARGES

- to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity. - Levied against cash value & is generally a percentage that reduces over time. Ex: 7% first year, 6% second year, 5% and so forth. At surrender, the owner gets the premium, plus interest (the value of annuity) minus the surrender charge. - Ex: ($700 Premium + $35 interest) - $70 Surrender charge = $665 Value of Annuity

VARIABLE ANNUITY CHARACTERISTICS:

1) Underlying Investment - the payments that annuitant makes into the variable annuity are invested in the insurers separate account not their general account. 2)Interest Rates - issuing insurance company does not guarantee a minimum interest rate. 3) License Requirements - a variable annuity is considered a security and is regulated by the securities exchange commission in addition to state insurance regulations. * Variable premiums purchase ACCUMULATION UNITS in the fund, which is similar to buying shares in a Mutual Fund. Upon annuitization, the accumulation units are converted to ANNUITY UNITS.

SUITABILITY Requirements DO NOT APPLY to the ff transactions:

1. Direct response solicitations where there are no recommendations based on information collected from the consumer 2. Employee pension or welfare benefit plans covered by Employee Retirement Income Security Act 3. Profit sharing plans, tax sheltered annuities 4. Government or Church plans 5. Employer sponsored nonqualified deferred compensation plans 6. Settlements of liabilities associated w/ personal injury litigation 7. Prepaid Funeral Contracts

ANNUITY INCOME is based on:

1. The amount or premium paid or cash value accumulated 2. The frequency of the payment 3. The interest rate 4. The annuitant's age & gender * Shorter life expectancy = higher benefit Longer life expectancy = lower benefit

1. PREMIUM PAYMENT OPTIONS

Single Premium — A lump sum payment is made into an annuity. Periodic Premium — Premiums are paid in installments over a period of time. Flexible Premium — Amount & frequency of each installment varies.

GUARANTEED MINIMUM WITHDRAWAL BENEFIT

The annuitant can withdraw maximum percentage of his investment annually until initial investment has been recovered. Protects annuitant from investment losses. * Qualified annuities can be INDIVIDUAL (IRA) and group (Tax Sheltered Annuity TSA, or profit sharing plans)