Michigan- Annuities

What are some Factors Producers must Evaluate to Ensure Suitability?

-Age; -Annual income; -Tax status; -Financial needs and timeline; -Investment objectives; -Liquidity needs and liquid net worth; -Existing assets; -Intended use of annuity; -Financial experience; -Risk tolerance.

Fixed Annuities

-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; -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.

Annuity Income Amount is Based Upon What?

-The amount of premium paid or cash value accumulated; -The frequency of the payment; -The interest rate; -The annuitant's age and gender.

2 Premium Payment Options to Classify Annuities based on how they can be funded (paid for)

-a single payment (lump sum) -Periodic payments in which the premiums are paid in installments over a period of time. Periodic payment annuities 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.

Nonforfeiture

A deferred annuity has 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 1⁄2).

Example- Annuitant

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).

Immediate Vs. Deferred Annuities

Annuities can also be classified according to when the income payments from the annuity begin.

Annuity Products

Annuities may be classified as fixed or variable based on how the premium payments are invested.

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.

Mortality Tables

Annuities use mortality tables, but these tables reflect a longer life expectancy than the mortality tables used for life insurance. Morality Tables indicate the number of individuals within a specified group (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age.

Annuity Benefit Payment Options

Annuity payment options specify how annuity funds are to be paid out. They are very similar to the settlement options used in life insurance that determine how the policy proceeds are distributed to the beneficiaries.

Example- Surrender Charges

Assume that the annuity owner paid $700 in premium, which accumulated a total of $35 of interest, and a surrender charge is $70. If the annuity is surrendered prematurely, what will the annuity value be at surrender? The answer is $665. ($700 Premium + $35 Interest) - $70 Surrender Charge = $665 Value of the Annuity

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.

Interest Rate Guarantees (Minimum vs. Current)

In fixed annuities, the insurer bears the investment risk. Future interest rates actually paid by an insurer are based upon the performance of the insurance company. However, the rate may not drop below a policy's guaranteed minimum (typically 3%). Should interest rates drop below this guaranteed rate, the insurer is obligated to pay the guaranteed rate amount. During the accumulation phase, the insurer will invest the principal, or accumulation, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher. The minimum rate is the lowest rate that the principal can contractually earn.

Retirement Income

Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans, which means they meet the IRS guidelines to receive favorable tax treatment. 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).

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.

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.

What is the Principal Use of an Annuity?

The principal use of an annuity is to provide income for retirement; however, an annuity may be used for any accumulation of cash or simply to liquidate an estate. Because of the various uses of annuities, agents should always assess how well a recommended product will meet the applicant's needs and resources - the suitability of a product. It is a producer's responsibility to make sure that annuity transactions address consumers' needs and financial objectives.

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.

Surrender Charges

The purpose of the surrender charge is to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity. A surrender charge is levied against the cash value, and is generally a percentage that reduces over time. 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. At surrender, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge.

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.

Example- Market Value Adjusted Annuities (MVA)

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.

Annuity

is a contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving his or her money. Annuities are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate. Annuities are marketed by life insurance companies. Licensed life insurance agents are authorized to sell some types of annuities. Annuities do not pay a face amount upon the death of the annuitant. In fact, they do just the opposite. In most cases, the payments stop upon the death of the annuitant.

Market Value Adjusted Annuities (MVA)

is 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. In a MVA, penalties for a premature surrender depend upon current interest rates at the time of surrender.

Deferred Annuity

is an annuity in which the income payments begin sometime 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). Periodic payments can vary from year to year. The longer the annuity is deferred, the more flexibility for payment of premiums it allows.

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).

Accumulation Period or Pay-in Period

is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

Annuity 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).

Example- Indexed Annuities

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.

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 benefit will be paid to the annuitant's estate. 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.