7 - Annuities

Equity Indexed Annuities

A type of fixed annuity that offers the potential for a higher return than a standard fixed annuity. They are sometimes tied to the Standard and Poor's 500 or the Composite Stock Price Index

Single-life annuities

Characterized by having only one annuitant.

What is an example of Life with Period Certain Payout Option?

if an annuitant has a 20 year period certain and dies after 10 years, the beneficiary will receive payments for another 10 years

Variable Annuity

Does not provide a guaranteed rate of return, because of the investment risk. The cash value is based on the results of these investment funds. A statement must be provided to the owner of the annuity at a minimum of once per year. Variable annuities can be classified as either immediate or deferred. Insurers that deal with variable annuities are subject to dual regulation by the SEC and the state's Office of Insurance Regulation.

Accumulation Units

In a variable annuity, the value of the accumulation units varies depending on the value of the stock investment that is a part of a variable annuity.

Tax-sheltered annuities

Limited exclusively for employees of religious, charity, or educational groups. • Also called 403(b) plans • Accumulation payments often come from voluntary salary reductions • The annuitant may have an individual account contract

Period Certain Payout Option

Pays guaranteed income payments for a certain period of time, such as 10 or 20 years, whether or not the annuitant is living.

Joint and Full Survivor Payout Option

Pays out the annuity to two or more people until the last annuitant dies. If one of them dies, the other will continue to receive the same income payments

Fixed Annuity

Provide a guaranteed rate of return. Fixed annuities credit interest at a rate no lower than the contract guaranteed rate.

Immediate Annuities

Purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. It's purpose is to provide for liquidation of a principle sum. J • Commonly used to structure the payment of liability insurance settlements, lottery winnings, and other large sums • This type of annuity is usually called a Single Premium Immediate Annuity (SPIA)

What do annuities help protect against?

annuities protect against the risk of living too long.

1035 Exchange

applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy

Annuities

are ways of providing a stream of income for a guaranteed period of time. • Simply stated, an annuity is started with a large sum of money that will be paid out in installments over a period of time or until the money is all gone. • The monthly amount of benefit an annuitant receives is based on factors such as: principle amount, rate of interest the annuity earns, and length of payout period.

Life with Period Certain Payout Option (life income with term certain)

is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. It provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies.

Partial Withdrawal

is taken from an annuity before age 59 ½ the withdrawal is considered 100% interest, and is therefore taxable as ordinary income. A 10% tax penalty is applied if a distribution is received before the annuitant reaches age 59 ½. After this age, withdrawals do not incur the 10% penalty tax, but are taxable as ordinary income

Straight Life Income Payout Option

pays the annuitant a guaranteed income for the annuitant's lifetime. When the annuitant dies, no further payments are made to anyone. This offers protection against exhaustion of savings due to longevity.

Deferred Annuities

will start providing income payments after the first year. Deferred annuities are usually purchased with either a single lump sum payment known as a Single Premium Deferred Annuity (SPDA) or from monthly payments known as Flexible Premium Deferred Annuity (FPDA). A Fixed Deferred Annuity, for example, pays out a fixed amount for life starting at a future date. Interest credited to the cash values of annuities are deferred until distribution.

Beneficiary

The beneficiary is the person who receives survivor benefits upon the annuitant's death.

Annuitant

The income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to the annuitant.

The exclusion ratio

The exclusion ratio is a simple way to determine what portion of each annuity benefit payment is taxable: Exclusion ratio = Investment in the contract / Expected return

Accumulation Period

The pay‐in period, where the contract owner makes the purchase payments. The accumulation period of an annuity normally may continue after the purchase payments cease.

Installment Refund Payout Option

Pays a guaranteed income to the annuitant for life. If the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments

Annuity Period

This is also called the liquidation period, annuitization period, or payout period. This is the time when the money that has accrued during the accumulation period is paid-out in the form of payments to the annuitant.

Joint and one-half survivor

Survivor will have payments reduced to one-half of the original payment.

Joint and two-thirds survivor

Survivor will have payments reduced to two-thirds of the original payment.

Cash Refund Payout Option

Pays a guaranteed income to the annuitant for life. If the annuitant dies before all the money is gone, a lump-sum cash payment of the remaining funds are paid out to the annuitant's beneficiary.

Funding Method

• Single Payment - Lump Sum • Periodic Payments - Installments paid over a period of time

What are some other characteristics of Deferred Annuities?

• When a deferred annuity is cancelled during the early contract years, the insurer normally will assess a back-end load known as a surrender charge • The "bailout" feature, sometimes found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below a stated level • Before a deferred annuity contract can be terminated for its surrender value, the insurer must first obtain authorization from the owner • The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals

Income Tax Treatment of Annuity Benefits

Annuity benefit payments consist of principal and interest. The portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owner's "cost basis". The portion of the annuity benefits that is interest earned on the principal is taxable as ordinary income. Interest income must be reported for federal income tax purposes upon receiving distributions or income benefits from the contract.

Annuity Units

At the time the variable annuity is to be paid out to the annuitant, the accumulations are converted into annuity units. These payouts can vary from month to month depending on the investment results. The number of units doesn't change, but the value does. The amount of each variable annuity benefit paid to an annuitant varies according to the market value of the securities backing it.

Contract owner

The individual who purchases the annuity pays the premiums and has rights of ownership. • An owner may be the annuitant, the beneficiary, or neither

Senior Residents Age 65 or Older

When making recommendations to a senior consumer regarding the purchase or exchange of an annuity, an agent must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. This recommendation should be based on the facts disclosed by the senior consumer. It should include an evaluation of his investments and other insurance products along with his financial situation and needs.