Annuities

3. reviewing - annuitant

- annuity owner is the purchaser of the annuity - annuitant is the person who receives the payment from the annuity

9. review - deferred annuity

- deferred annuity is an annuity in which the income payments begin sometime after the first year - deferred annuities can be funded either with a single lump sum or through periodic payments

1. structure and design of annuities

- flexible options to purchasers to structure and design the product that best suits them including...

5. purpose and function - survivorship factor

- similar to the mortality factor in life insurance premium calculation - provides insurers with the means to guarantee annuity payments for life regardless of how long that life lasts

6. structure and design of annuities - funding method

- an annuity begins with a sum of money called the PRINCIPAL SUM - an annuity principal is created or funded by one of two ways... 1. IMMEDIATELY with a lump sum or single premium

2. review - purpose of an annuity

- annuities are not life ins but a way of accumulating money and liquidating an estate

10. structure and design of annuities - date annuity income payment begins

- immediately - can be deferred to the future

3. purpose and function - to calculate the payment amount of an annuity you need -

- the original sum of money (aka principal) - the length of the payout period - the interest rate of the annuity earns

7. review - annuity funding

- annuities can also be classified according to when income payments the annuity begin

2. annuity basics

- annuities can be funded by a single-sum amount or through a series of periodic payments - insurer credits the annuity fund with a certain rate of interest which is not currently taxable to the annuity

14. review - accumulation units

- as variable annuity premiums are invested and begin to grow this is known as the accumulation of units - annuity units is the payout phase of variable annuity

2. purpose and function - annuitant

- income recipient of an annuity

7. quiz - flexible premium deferred annuity

- is an annuity that requires premium payments that very from year to year

7. uses of an annuity - annuity investment and senior citizen

- joint purchasers of an annuity if one person is 65 or older it is considered senior consumer - an agent is required to make reasonable efforts to obtain information concerning the senior's financial status,, tax status, and risk tolerance, among other specified information relevant to determining suitability

2. income taxation of annuity benefits - 1035 contract exchanges

- section 1035 of internal revenue code provides for tax free exchanges of certain types of financial products including annuities - no gain will be recognized if an annuity contract is exchanged for another annuity contract - same applies if a life ins. or endowment policy is exchanged for an annuity contract - however, and annuity contract cannot be exchanged tax-free for a life insurance contract

34. structure and design of annuities - black box

- the index to which most EIA's are tied is the standard & poor's 500 composite stock price index

1. annuity basics

-an annuity is a cash contract with an ins co that includes a free-look period as well as non-forfeiture benefits .

2. structure and design of annuities

1. funding method - single lump-sum payment or periodic payments over time

4. purpose and function - the amount of an annuity payment is dependent upon three factors

1. starting principle 2. interest 3. income period

1. quiz - refund annuity

an annuitant dies during the distribution period. a refund annuity will return to a beneficiary the difference between the annuity value and income payments all ready made key words: RETURN TO BENEFICIARY

2. quiz - a disadvantage of own a fixed annuity is

during the periods of inflation, annuitants will experience a decrease in purchasing power of their payments

9. structure and design of annuities - periodic payments

example: periodic payments - a contract might specify that it will provide for guaranteed lifetime monthly payments of $5.06 per $1,000.00 at the annuitants age of 65. on a contract that has grown to $100,000 would pay $506.00 a month for life

7. structure and design of annuities - single premium

example: single premium - individuals nearing retirement whose financial priority is retirement income could surrender their whole life policies and use the cash value as a lump sum premium to fund an annuity

6. quiz - straight life

has the highest monthly payout upon annuitization

5. uses of an annuity - qualified annuity plans

upon retirement payments received by employees from the accumulated savings in tax-sheltered annuities are treated as ordinary income - total annual income likely to be less after retirement

2. uses of an annuity - individual uses

- can be sued for other purposes as well - example education fund

7. annuity basics

2. payout (aka annuity or liquidation) period - the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments at regular intervals - typically paid out monthly - quarterly, semiannually, or annually payments can be arranged

5. structure and design of annuities

4. payout period - a specified number of years, or for life, or a combination of both

3. quiz - under the non-qualified annuity interest is taxed after the

exclusion ratio has been calculated

32. structure and design of annuities - equity indexes annuities

- EIA - higher credited rates of return than their traditional counterparts but guarantee the owner's principal - interest credited to the equity index annuity is tied to increases in a specific equity or stock index like S & P 500 resulting in long term inflation protection - underlying a minimum guaranteed rate (ordinarily 3 - 4%) which guarantees growth - an increase in the rate will be credited to the EIA and the return is the indexed value

26. structure and design of annuities

- a variable annuity may be preferred to a fixed annuity because since the benefit amount is fixed, annuitants may see the purchasing power of their income payments decline over the years due to inflation

4. review - accumulation period

- accumulation period aka pay-in period is the period of time over which the annuitant makes premium payments into an annuity - it is also the time that the premium payments earn interest on a tax deferred basis

30. structure and design of annuities - annuity unit

- at the time of initial payout the annuity unit calculation is made - from then on the number of annuity units remains the same for the annuitant - the value of one annuity unit can and does vary from month to month depending on investment results example: ---at 1000 accumulation units in an acct ----converted = 10 annuity units --- always credited with 10 annuity units and number does not change ---value of annuity units changes with underlying stocks retired each annuity unit valued at $40. 10 x $40 = $400 - next month stocks go up to an annuity value of $45 10 x $45 = $450 received the following month

29. structure and design of annuities - accumulation units

- contributions made by the annuitant (less a deduction for expenses) are converted to accumulation units and credited to the individual's account - value of each accumulation unit varies depending on the value of the underlying stock investment - example --- initially accumulation units valued at $10 --- holder of variable annuity makes a payment of $200 --- purchased 20 accumulation units --- 200/10 = 20 accumulation units --- 6 mths later accumulation units valued at $8 --- holder makes payment of $200 --- purchased 25 accumulation units ---200/8 = 25 accumulation units - as the value of the account rises and falls the value of each accumulation unit rises and falls

24. structure and design of annuities - investment configuration

- defined according to their investment configuration which affects the income benefits they pay - two classifications 1. fixed annuities - provide a fixed guaranteed accumulation or payout 2. variable annuities - attempt to offset inflation by providing a benefit linked to a variable underlying investment account ---equity indexed annuities - a form of fixed annuity are fairly new but have become quite popular

11. structure and design of annuities - immediate annuities

- immediate annuity make its first benefit payment to the annuitant at one payment interval from the date of purchase typically one month from date of purchase - an immediate annuity lacks an accumulation period immediate annuities can only be funded with a single payment - often called single-premium immediate annuities ( SPIA's) - intended for liquidation of a principal sum - an annuity cannot accept period funding payments by the annuitant and pay out income to the annauitant

25. structure and design of annuities - fixed annuities

- provide a guaranteed rate of return - during the accumulation period the insurer invests these payments in conservative long-term securities, typically bonds - allows the insurer to credit a steady interest rate to the annuity contract - interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract - has two interest rates 1. minimum guaranteed rate ---guaranteed by the insurer 2. and current rate --- which is credited to the annuity on a regular schedule, typically each year --- never lower than the minimum rate - accumulation of funds is in a fixed annuity is certain and the contract owner's principal is secure - investment rest born by insurer - when converted to payout mode fixed annuities provide a guaranteed fixed benefit amount to the annuitant dollars per $1,000.00 of accumulated value -rate payable on the annuity funds fixed and guaranteed at the point of annuitization

16. structure and design of annuities - cash refund option

- provides a guaranteed income to the annuitant for life - if dies before the annuity fund (principal) is depleted a lump-sum single cash payment of balance is made to the annuitant's beneficiary totally paying out the annuity

28. structure and design of annuities -

- special account for both annuity payments and annuity income 1. accumulation unit - pertains to the accumulation period 2. annuity unit - pertains to the income payout period

22. structure and design of annuities - other joint arrangements

1. joint and two-thirds survivor... - same as joint and full survivor arrangement except that the survivor's income is reduced to two-thirds of the original joint income 2. joint and one-half survivor. -this si the same as the joint and full survivor arrangement, except that the survivor's income is reduce to one-half of the original joint income

3. structure and design of annuities

2. date annuity benefit payments begins - immediately or deferred until a future date

8. structure and design of annuities - periodic payments

2. over time with a series of periodic premiums - today annuity owners can make flexible premium payments - certain minimum may be required to purchase annuity - after deposits can be made as often as desired the benefit is expressed in terms of accumulated value

4. structure and design of annuities

3. investment configuration - a fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return

7. purpose and function - annuities vs life ins

- life ins is concerned with how soon one will die - life annuities are concerned with how long one will life

3. annuity basics

- most annuities guarantee a death benefit payable in the event the annuitant dies before payout begins limited to the amount paid into the contract plus interest credited - surrender charges - used to DISCOURAGE WITHDRAWLS AND EXCHANGES in an annuity

14. structure and design of annuities - annuity payout options

- number of annuity income options available: 1. straight life income 2. cash refund 3. installment refund 4. life with period certain 5. joint and survivor 6. period certain

4. annuity basics

- when annuity contract owner dies a payout to the beneficiary is triggered - a spouse as beneficiary may continue the contract with deferred taxation as contingent owner

30. structure and design of annuities - annuity units

- theory has been that the payout from a variable annuity over the period of years will keep pace with the cost of living and thus maintain the annuitant's purchase power at or above constant levels

11. review - straight life income option

- the straight life payout option aka pure life will pay a specific amount for the remainder of the annuitant's life - this option provides the highest monthly benefit for an individual annuity - although the annuity payments are guaranteed for the lifetime of the annuitant there is no guarantee that all the proceeds will be fully paid out because the payments stop after the annuitant's death

6. review - annuity funding

- there are two ways to fund an annuity: 1. a single payment or lump-sum 2. periodic payments, in which premiums are paid in installments over a period of tme

18. structure and design of annuities - life with period certain options

- aka life income with term-certain options - designed to pay the annuitant an income for life, but guarantees a definite minimum period of payment - example ; individual has a life and 10-year certain annuity, the individual is guaranteed payments for life or the individual's beneficiary will receive guaranteed payments for 10-years or life whichever is longer. - if receiving payments for 6 of the 10-years and dies then the balance of 4-years will be paid to the beneficiary

4. uses of an annuity - qualified annuity plans

- TSA tax-sheltered annuity - reserved for non-profit organizations and their employees -aka 403(b) plan or 502(c)(3)

15. review - annuity taxes

- a portion of each annuity benefit payment is taxable and a portion is not - the portion that is nontaxable is the anticipated return of the principal paid in aka the cost base - the portion that is taxable is the interest earned on the principal aka the tax base

3. uses of an annuity - qualified annuity plans

- a qualified annuity is an annuity purchased as part of a tax-qualified individual or employer-sponsored retirement plan, such as an individual retirement account (IRA)

9. uses of an annuity - qualified annuity plans

- agents are required t maintain procedures that are reasonably designed to detect or prevent violations of this law. - agents are also required to maintain records relating to such transactions for five years. the insurer may maintain these recored on behalf of the agent

8. uses of an annuity - qualified annuity plans

- an agent is not responsible for any transaction wherein a consumer refuses to provide relevant information required b the agent , fails to provide accurate or complete information, or decides to enter into a transaction that is not based on the agent's recommendation -by law the agent must make all reasonable efforts to obtain the consumer's age. - if the consumer refuses to provide relevant information requested b the agent, the agent must obtain a signed verification from the consumer that the consumer has refused to provide the requested information an may be limited projections regarding the suitability of the sale

1. review - purpose of an annuity

- an annuity provides income for a specific number of years or for life - an annuity protects a person against outliving their money

8. review - immediate annuity

- an immediate annuity is one that is purchased with a single lump sum payment and provides income payments that start within one year form the date of purchase

35. structure and design of annuities -

- annuity benefit payments are a combo of principal and interest - taxed in a manner consistent with other types of income - portion of the benefit payments that represents a return of principal (annuitant contributions) are not taxed - however interest earned on the declining principal is taxed as ordinary income - result is tax-free return of the annuitant's investment and taxing of the balance - exclusion ratio is used to determine the amt of annual annuity income exempt from federal income taxes --- formula: investment in the contract / expectant return - owner's investment aka cost basis is the amount of money pd into the annuity aka premium - the expected return is the annual guaranteed benefit the annuity receives x by the number of years f the annuitant's life expectancy = ratio ratio is applied to the benefit payment allowing the annuitant to exclude from income a like-percentage from the income

6. purpose and function - annuities versus life insurance

- annuity is a mirror image or exact opposites of a life insurance contract -- principle function of life insurance contract is to create an estate (estate being a sum of money) by the periodic payment of money (premium) into the contract -- principal function of an annuity is to liquidate an estate by the periodic payment of money out of the contract

10. review - annuity payout options

- annuity payout options specify how annuity funds are to be paid out. they are very similar to the settlement options used in life insurance an determine how the policy proceeds are distributed to the beneficiaries

5. review - annuity period

- annuity period aka annuitization period aka liquidation period is the time during which the money that has accumulated during the accumulation period s converted into income payments to the annuitant - NOTE: if an annuitant dies during the accumulation period the beneficiary will receive the cash value or total premiums paid whichever is greater

13. review -

- another way to classify annuities is according to their investment configuration - the two classifications are: 1. fixed annuities - which provide a fixed guaranteed payout - payments that do not vary from one payment to another and guaranteed minimum rate of interest 2. variable annuities - a variable annuity serves as a hedge against inflation and is variable because there is not a guarantee of payout - payments can very from one payment to another and there is not a set rate of interest - a variable annuity is considered a security and is regulated by the securities and exchange commission (SEC) - an agent selling variable annuities must also have a securities license in addition to their life ins license

12. structure and design of annuities - deferred annuities

- deferred annuities accumulate interest earnings on a tax deferred basis and provide income payments at some specified future date ( normally within 12 months after date of purchase) - funded with periodic payments over time and are called flexible premium deferred annuities (FPDA's) - accumulation value of deferred is - equal to the sum of premium paid - plus interest earned - minus expenses and withdrawals - benefit payments are initiated after the contract becomes annuitized

1. income taxation of annuity benefits

- deferred annuities accumulate interest earnings on a tax-deferred basis - no taxes imposed on the annuity during the accumulation phase - taxes are imposed when the contract begins to pay its benefits - to deter using deferred annuities as short term investments the IRS imposes penalty as well as taxes on early withdrawals and loans from annuities - partial withdrawals are treated first as earnings income and are thus taxable as ordinary income - only after all earnings have been taxed are withdrawals considered a return of principal - 10% penalty imposed on withdrawals from deferred annuity before 59 1/2 and after 59 1/2 still taxable as ordinary income - nonforfeiture value of an annuity prior to annuitization is all premiums pd plus interest minus an withdrawals and surrender charges - if the annuitant dies before the annuity start date the beneficiary receives the premiums pd plus interest carried

17. structure and design of annuities - installment refund option

- guarantees that the total annuity fund will be paid to the annuitant or the annuitant's beneficiary - payment is in installments - installment refund option guarantees payment to the annuitant for life - if the annuitant dies before the principal fund is depleted the same annuity payments will continue to the beneficiary until the fund is pd out

21. structure and design of annuities - black box

- the joint and full survivor option provides for payment of the annuity to two people - if either person dies the same income payments continue to the survivor for life. - when the surviving annuitant dies, no further payments are made to anyone

13. structure and design of annuities - deferred annuities

- if liquidated in the early years of an annuity most insurers charge the contract owner a back-end load - these surrender charges cover the cost associated with selling and issuing contracts as well as cost associated with the insurer's need to liquidate under investments of a possible inappropriate time - when annuity dies or becomes disabled many deferred annuities waive t the surrender charge - surrender charges are limited duration applying only during the first 5 to 8 years of the contract - years where charges apply most annuities provide for an annual FREE WITHDRAWAL allowing for a certain percentage ie 10% of annuity account with no surrender charge applied - bailout provisions - allows owner to surrender annuity without surrender charges if interest rates fall below a stated level within a specified time period

27 structure and design of annuities - variable annuities

- investment risk is shifted from the insurer tot he contract owner -if investments supporting the contract perform well (bull market) the owner will probably realize investment growth that exceeds what is possible in a fixed annuity - however lack of investment guarantees means that the variable annuity owner can see the value of the annuity decrease in a depressed market (bear market) or in an economic recession - because variable annuities re based on non-guaranteed equity investments (ie common stocks) a sales rep must be registered with Financial Industry Regulatory Authority (FINRA) as well as hold a state ins license - variable annuities fluctuate in response to movements in the market - so too will the amount of annuity income fluctuate eve after the contract has annuitized

5. quiz - life annuity certain

- is the type of annuity guarantees in which a stated number of income payments, whether or not the annuitant is still alive to receive them

20. - Joint and full survivor option

- joint and full survivor option provides for payment of the annuity to two people - if either person dies the same income payments continue to the survivor for life - when the surviving annuitant dies, no further payments are made to anyone -- full survivor option pays the same benefit amount to the survivor -- a two-thirds survivor option pays two-thirds of the original joint benefit. --a one-half survivor option pays one-half of the original joint benefit

4. quiz - life income

- life income is a settlement option which pays a stated amount to an annuitant but no residual value to a beneficiary

12. review - life with period certain

- life with period certain is another annuity payout that is contingent on the annuitant dying - under this option the annuity payments are guaranteed for the entire lifetime of the annuitant and for a specified period of time to the beneficiary

1. purpose and function - annuity

- main reason for purchasing an annuity is to provide future economic security - not a life insurance contract - a lump sum of money earning interest paid out in equal installments over a period of time until the original fund is exhausted

33. structure and design of annuities - market value adjusted annuities

- market driven MVA - annuity's interest is guaranteed fixed if the contract Is held for the period specified in the policy - market interest feature applies only if contract is surrendered before the contract period expires - otherwise the annuity functions the same way a fixed annuity does - if surrendered early a surrender charge and a market -value adjustment will apply - if interest rates decrease during the contract period the market-value adjustment will be positive and may add to the surrender value of the contract - if interest rates increased over the period the market-value adjustment will be negative which would increase the contract's surrender charge - the effect of the market value adjustment is to shift some of the investment risk to the owner

23. structure and design of annuities - period certain option

- not based on life contingency - guarantees benefit payments for a minimum number of years, such as 10, 15, 20 regardless of when the annuitant dies - at the end of the specified term, payments cease

19. structure and design of annuities - temporary annuity certain

- payments are guaranteed to be made for a specified number of years - if dies before receiving full payments annuitant's beneficiary will receive payments for the remaining number of years

1. uses of an annuity - individual uses

- principle use of an annuity is to provide income for retirement - structured guaranteed life income provided by annuities for retirement purposes is the primary reason annuities are so popular. - annuities are designed to liquidate principal but in a structured systematic way that guarantees it will last a lifetime - excellent in retirement because they are: 1. conservative in nature 2. reliable 3. flexible enough to meet nearly all needs - as an accumulation vehicles they offer: 1. safety of principal 2. tax deferral 3. diversification 4. competitive yield (enhanced by tax deferral) 5. liquidity - as distribution vehicles they offer: 1. a variety of payout options 2. options which can be structured to conform to certain payment amts 3. and payment periods 4. cover one life or two 5. arrange so that a beneficiary will receive a benefit if the annuitant dies before receiving the full annuity principal

15. structure and design of annuities - straight life income option

- straight life annuity aka life annuity - pays guaranteed income for the annuitant's lifetime - when annuitant dies no further payments made to anyone and balance is forfeited to the insurer - protects against exhaustion of savings due to longevity - typically pays the largest monthly benefits to a single annuitant because it is based n life expectancy - however creates risk that the annuitant may die early and forfeit much of the value of the annuity to the ins co

6. uses of an annuity - structured settlements

- structured settlements - used to distribute funds from the settlements of lawsuits or the winnings of lotteries and other contest. - court settlements of lawsuits often require the payment of large sums of money throughout the rest of the life of the injured party - state lottery awards are suited for this type of account because the payout is usually over 10 or 20 years - trends indicate that significant growth can be expected from both these markets for annuities

8. annuity basics - black box

- the accumulation period s the time during which funds are being paid into the annuity. - the payout of annuity period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments on a regular basis

6. annuity basics

- two time periods involved... 1. accumulation period - funds being paid into an annuity - payments by contract holder - interest by insurer - accumulation period can continue after the purchase payments cease - if an annuitant dies during the accumulation period their beneficiary will receive the total premium paid in - p/o is the only one who can surrender an annuity during the accumulation period

31. structure and design of annuities - annuity units

- variable annuity's have various payout options to choose 1. life annuity 2. life annuity with period certain 3. unit refund annuity (similar to a cash refund annuity) 4. joint and survivor annuity

5. annuity basics

- with an annuity contract application the owner names his own beneficiary and also the ANNUITANT's beneficiary - to simplify matters the owner and the annuitant can be each other's beneficiary. - no one can be his or her own beneficiary