annuities

equity indexed annuity

Although Equity Indexed annuities are considered to be a type of fixed annuity with a guaranteed minimum rate of return, excess earnings above the minimum may or may not accrue, since performance is calculated using an indexing method that is usually linked to the S&P 500 index.

single premium immediate income annuity

PIAs are most commonly used for retirement expenses.

refund annuity

Refund Annuity: The Annuity settlement option with the least risk. If you die before receiving back everything you invested, your designated beneficiary or estate will continue to be paid by the insurance company, either on an installment basis or on a lump-sum cash basis until it has paid out everything you paid in. This is less risky, but the pay-out is lower.

fixed annuities

Since fixed annuities have a guaranteed rate of return, they do better when the cost of living is going down and worse when the cost of living is going up. In other words, fixed annuities have purchasing power risk and will suffer in an inflationary economy. Customers often buy variable annuities to hedge against inflation.

producerresponsibility

the producer must ensure that the annuity recommendations are"suitable," based upon a customer's financial status, tax status and investment objectives.

deffered annuities

they may be used to fund an IRA they provide tax deffered growth they provide a source of retirement income

joint and survivor annuity

Joint and Survivor Annuity option pays benefits, although reduced, to the death of the last survivor.

partial withdrawls

Partial withdrawals from a deferred annuity during the accumulation period are considered to be interest first and a return of principal second.

annuitant

The person whose life an annuity contract is based upon is known as the "annuitant." Although the contract owner is often also the annuitant, that is not always the case.

annuity pay out options

When the annuitant starts the pay-out period or annuity period, they must select an annuity pay-out option. Of course, they could always select lump sum cash at that point and pay tax on all interest earned up to that point. Annuity "settlement" options include: Straight Life or Pure Life Annuity Period Certain Annuity Refund Annuity: Joint and Survivor Annuity

Single Premium Immediate Life Income annuities,

they have no accumulation period there is no beneficiary they may not be surrendered for cash

life income annuity

A Life income annuity has no beneficiary, so payments will cease upon the death of the annuitant.

period certain annuity

A period certain annuity guarantees that payments will be made to the annuitant for a specified period of time, 15 years in this case. For example, if the annuitant died after 10 years, the beneficiary would receive payments for five years. However, although the beneficiary disappears when the period certain ends, if the annuitant continues to live, payments would continue on until their death.

variable annuity

customer's tax status is the most important factor to be used in determining their suitability for a variable annuity.

life annuity

On a life annuity, payments stop upon the death of the annuitant.

fixed annuities

FDIC covers bank deposits. SIPC covers securities brokerage firm insolvency. Although fixed annuities are not backed by either, they are backed by the insurer's general account assets. However, variable annuities offer no such backing, since they are invested in the insurer's separate account, which is very similar to a mutual fund.

market value adjusted annuities

Market Value Adjusted annuities are considered to be a type of variable annuity, so the customer must bear part of the investment risk.

variable annuities

Since variable annuities have no guaranteed rate of return, the investment risk is to the owner of the annuity, which is not always the annuitant. Just like in life insurance, an annuity can be purchased on someone else.

beneficiary

If the designated beneficiary on an annuity is the surviving spouse of the owner, then the distribution requirements are applied by treating the spouse as the contingent owner of the annuity contract, which means that they can treat the contract as their own and defer taxes until they elect to annuitize.

annuity characteristics

f a retired person has $200,000 in savings and they start withdrawing $60,000 a year to live on, they could potentially run out of money, depending on the return on their investment and length of their lifespan. A life annuitant can never outlive payments from an annuity. They will be paid as long as they live. Life insurance creates an immediate estate upon death of the insured. The main function of an annuity it to liquidate an estate over an individual's lifespan. Annuity death benefits are not tax free. The beneficiary would have to pay ordinary income tax on any interest they receive. Cash surrenders taken from an annuity prior to age 59 1/2 have a 10% IRS early withdrawal penalty that applies to the interest only. Life insurance cash surrenders can be taken at any age without penalty, but tax is still due on any amounts received in excess of premiums paid.

annuity tax considreations

Although proceeds payable from a Life insurance policy are tax free, that portion of an annuity death benefit that consists of the earnings will be taxable to the beneficiary as ordinary income.

single premium immediate annuity contract

Annuities can be paid for in a number of ways, which are very similar to life insurance. The annuitant could purchase an annuity with a flexible, fixed or single premium. The only annuity that would begin payments to the annuitant right away would be a single premium immediate annuity. A deferred annuity is any annuity where the annuitant does not enter the pay out period (annuitize) right away.

joint and survivor annuity

Joint and Survivor Annuity: This option has two or more annuitants, and benefits are payable as long as the last survivor lives. Usually selected by husband and wife, the benefits are reduced if the husband dies, but the wife continues to be paid until she dies (or vice versa)

life income annuity

Life income annuities have no beneficiary, so they only make payments to the annuitant until they die. Since they are the most risky, they offer higher monthly payments than some of the other annuity pay-out options, such as period certain or refund.

market value adjusted annuity

Market Value Adjusted annuities are a type of variable annuity, so a life insurance producer must also have a FINRA securities license in order to sell them. Clients who purchase Market Value Adjusted annuities bear some of the risk in that if they withdraw their invested funds early, their account is subject to a market value adjustment, which could result in negative performance. Equity Indexed annuities are not considered to be securities, since both the principal and the rate of return are guaranteed in the contract.

immediate annuities

On immediate annuities, payments will begin to the annuitant immediately upon purchase, but payments will stop upon their death. Remember. An immediate annuity is annuitized right away, so it has no accumulation period. Once an annuity has been annuitized, it can no longer be surrendered for cash.

straight life annuity

Straight Life or Pure Life Annuity: The most risky option, it also has the highest pay-out. Based on your expected life span and sex, the insurance company will pay you an amount monthly that would "annuitize" your invested capital over a period of time. If you die, payments stop immediately and the insurance company keeps what is left of your funds. If you live, the insurance company will continue to pay you until you die, even if you collect more than you invested.

equity indexed annuity

An EIA is a fixed annuity where both the principal and the interest are guaranteed. However, excess interest earnings above the guaranteed rate may accrue since performance is calculated using an indexing method that is usually linked to the Standard and Poor's 500 index.

fixed annuity

Fixed Annuities are much safer, since the insurance company invests the funds of the annuitant in its "general account" in much the same way it invests its other funds. A Fixed Annuity has a guaranteed, fixed minimum rate of return, guaranteed by the insurance company and backed by the State Insurance Guaranty Fund, so the annuitant cannot lose their invested capital. The fixed minimum rate of return may be quite low, such as 4%, but companies often pay more than the minimum. A life insurance license is all that is needed to sell Fixed Annuities.

annuity withdrawal penalties

Most annuities are subject to surrender charges, which are levied by the insurer during the early years of the contract, as well as premature distribution penalties, which are levied by the IRS upon cash surrender prior to age 59 1/2. Surrender charges usually apply on a declining basis and will gradually disappear over a period of time. Their purpose is to discourage customers from investing in annuities on a short-term basis.

refund annuities

Refund annuities have very little risk, since if the annuitant dies before they receive the value of their account back, the beneficiary will receive the balance, either in cash or in installments. However, if the annuitant continues to live, monthly payments will be made until their death.

immediate annuities

It is "immediate" annuities that provide an immediate source of education funds.An immediate annuity is purchased with a lump sum and is annuitized right away, meaning that the client will start to receive monthly payments immediately. Remember, an immediate annuity has no accumulation or pay-in period. It is a deferred annuity that would be used to save money for a child's college expenses.

partial surrenders

Partial surrenders on annuities are treated as interest first and a return of principal last. In this case, the customer has earned $11,000 in interest, which means of the $17,000 withdrawn, $11,000 will be taxable as ordinary income and $6,000 will be treated as a tax free return of principal. There could also be a 10% IRS penalty on the interest portion of the withdrawal if the customer was under age 59 1/2.

immediate annuties

It is immediate annuities that are used to fund lottery pay-outs and structured settlements.

annuity policy

When an annuity policy is in the pay-out period, it will pay the annuitant back all the money the annuitant paid in, plus interest, over their lifetime. The principal amount is guaranteed and will be paid out as long as the annuitant lives. The amount paid is based upon the annuitant's expected life span, sex, and the annuity pay-out option selected. Annuity benefit payments to the annuitant are usually paid out monthly. Insurance companies offer annuities to the beneficiaries of insureds who have died, enabling these beneficiaries to reinvest the policy proceeds with a high degree of safety and the guarantee of lifetime income.

403 b tax sheltered annuity

TSAs are generally available only to employees of public educational institutions, tax exempt non-profits and church organizations. TSAs are funded with voluntary before-tax contributions, usually on a payroll deduction basis.

non qualified deferred annuity accumulation period

The earnings during the accumulation period of a deferred annuity purchased by an individual are tax deferred until the contract is surrendered for cash or annuitized, at which time the earnings above the annuitant's cost basis are taxable as ordinary income. However, the earnings during the accumulation period of a deferred annuity owned by a corporation are taxable to the corporation as they accrue.

deferred annuity

A Deferred Annuity may be either Variable or Fixed. It is simply an Annuity that is bought over a period of time, say by investing $100 a month from age 35 to age 65. This is called the Accumulation period, or Pay-In period. If the annuitant should die during the Pay-In period, all invested capital up to that point, plus interest, would go directly to their beneficiary or estate. Remember, this is not a life insurance Death benefit, it is a return of the annuitant's invested funds. The interest earned during the Pay-In period accumulates on a tax-deferred basis; the annuitant is not taxed on their earnings until they start the Pay-Out (Annuity) period, and then only on the interest earned, since the initial contributions were made with after-tax dollars.

life annuity

A Life Annuity will pay the annuitant as long as they live. The funds are paid out to the living policyholder, not the beneficiary. Life income annuities do not have a beneficiary, except during the Pay-In period. Remember, during the Pay-Out period of a Life income annuity, the company pays you as long as you live, but if you die, the company keeps the money.

variable annuity

A Variable Annuity is the most risky type of annuity. The insurance company invests the annuitant's funds in a "separate account" that is usually invested in equities (stocks). This type of annuity MAY appreciate with market and economic conditions and it MAY NOT. This type of annuity is not backed by the State Guaranty Fund and it is considered very risky, meaning the client could lose their invested capital due to poor performance of the stock market. Salespersons selling Variable Annuities need to have a life insurance license plus a Financial Industry Regulatory Authority (FINRA) license. In addition, the State Department of Insurance requires a Variable Annuities endorsement on your life insurance license.

fixed annuity

Fixed annuities guarantee not only the amount of payments but also the interest rate paid on the invested capital. Each fixed annuity contract specifies an interest rate, for example 5%. If the portfolio earns only 4%, the company is still obligated to pay the 5% rate. To minimize risk, an insurance company uses its general account to fund fixed annuity contracts. The portfolio of the general account is invested in medium term fixed income producing debt securities such as bonds and real estate mortgages. The insurer may also guarantee a higher earnings rate, which may vary from year to year (the current rate). For example, the interest rate stated in the contract, say 5%, is the guaranteed base rate. The account will never earn less than 5% for the life of the contract. However, a current interest rate, such as 7 1/2%, may be guaranteed for one year. The account is credited for interest at 7 1/2% for the one year period; thereafter, a new rate may be effective, but will never be less than the guaranteed 5%.

joint life annuity

When the Joint Life Annuity payout option is selected the insurer will send a check to the husband and wife once a month until the first person dies. Regardless of who dies first (the husband or wife), monthly payments will be discontinued at that point. If they had selected the Joint and Survivor payout option the insurer would send them monthly payments until the last surviving spouse died. Since the Joint Life payout option will pay only until the first person dies, they would receive a higher monthly payment than if they selected the Joint and Survivor payout option, since the insurer will be paying the money out over a shorter period of time. Age 59 1/2 has no relevance to Annuity payout options.

annuities

Remember, annuities are the opposite of life insurance. When an annuitant buys a life annuity, they are betting that they will outlive the insurer's annuity tables and the insurer is betting that they won't. Based upon the law of large numbers, the insurer will take the money of their life annuitants who die too soon and pay it to those who live too long.

immediate annuity

An Immediate Annuity means that the annuitant purchases either a Fixed or Variable Annuity with a lump-sum amount, say $100,000. This would be considered the "premium" paid for the annuity. The annuitant wants the insurance company to start paying them back immediately, starting with monthly payments based on their expected life span, sex, and annuity option selected. Remember, most annuity pay-out options pay the annuitant for life. You cannot outlive the income from a life annuity. As you can see, insurance companies began to offer annuities as a way to keep the money when a life insurance client died. By offering the surviving beneficiary the option to purchase an annuity with a lifetime income, the company was in a position to reinvest the policy proceeds they would have otherwise had to pay out as a lump-sum cash Death benefit.

cash surrender

Cash surrender is only available on an Annuity during the accumulation or pay-in period. Once the annuitant annuitizes and selects a payout option they can no longer take cash surrender. An annuitant can annuitize the contract at any age without a 10% penalty (even under 59 1/2). However, if the annuitant instead of annuitizing decides to take cash surrender under 59 1/2 they will have to pay a 10% IRS early withdrawal penalty on any interest they withdraw. The 10% penalty DOES NOT apply to the annuitant's cost basis, only to interest withdrawn prior to age 59 1/2. Partial surrenders of annuities are taxed as withdrawal of interest first and return of cost basis second (LIFO), similar to Modified Endowment Contracts (MECs).

period certain annuity

Period Certain Annuity: With this option, either you or your designated beneficiary or estate is guaranteed to receive funds from the insurance company for a period of time designated by the annuitant, say 10 years. If you die after five years, the payments for the remaining five years go to your beneficiary or estate, so there is less risk, although the amount paid monthly is less. If you die in the eleventh year, the insurance company keeps your remaining funds. However, if you live to be 105, they will continue to pay you. The Period Certain can be 5, 10, 15, or 20 years.

annuities

All annuities are life insurance products and must be written by life insurance companies. Although many bankers and stock brokers sell annuities, they do so through a life insurance company, who pays them a commission for selling their products.

deffered annuities

Cash surrender in the early years will result in a surrender charge They have a beneficiary during the accumulation period they are purchased with periodic payments over a period of time