# Chapter 11 - Annuities

Date payments begin:

1) Immediate- Immediate annuities are always funded with a single payment 2) deferred

A senior consumer is any person age...

65 or older

What's fixed annuitites invested into?

Bonds. Mortgages. Fixed rates of return.

When you annuitize it, how do you stop it?

Die

lump sum

Lump sum just means I throw money in and I go away

What kind of risk do variable annuities have?

Market risk

There are two periods with an annuity what are they?

The accumulation period and the annuity period

annuity unit

The number of annuity units denotes the share of the funds an annuitant will receive from a variable annuity account after the accumulation period ends and benefits begin. A formula is used to convert accumulation units to annuity units. If each one of them costs $100, next month how many did you buy? 10. So after those two months you would have 110 accumulation units. You are buying more units when the price is low, fewer units when the price is high.

Who regulates a fixed annuity?

The state

Do your payout options make a difference?

Yes

Now, let's say I have 15,000 accumulation units. Each one of them is worth $10. How much is my variable annuity worth?

$150,000

What happens to

...

There are 5 ways to receive your money as a stream of income and each one will affect how much your monthly check will be:

1) Straight Life 2) Life Income - cash refund 3) Life Income - installment refund 4) Life Income - 10 year period certain 5) Joint & Survivor

Payment Options:

1) Straight life annuity 2) Life with cash-refund 3) Life with installment refund 4) Life with period certain 5) Joint & Survivor

There are two types of variable annuity units:

1) accumulation units 2) annuity units

Underlying investment:

1) fixed annuities 2) variable annuities

What are the different types of joint annuity

1) joint and full survivor annuity 2) joint and two-thirds survivor annuity 3) joint and one-half survivor annuity

Funding method:

1) single payment or 2) periodic payments- Periodic payments can be fixed, or they can be flexible.

So, for an annuity to pay a stream of income, you need to know three things:

1) starting principal 2) interest rate 3) payout period

There's three types of charitable organizations:

1) teachers, 2) preachers, 3) nonprofit organizations.

How much is going to be taxed out of a 403(b) plan when they take it out?

100 percent of it is going to be taxed. f you didn't pay taxes going in, you're going to pay taxes when it comes out.

What's the exclusion ratio on a variable annuity?

100 percent.

annuity

A contract that provides a stipulated sum payable at certain regular intervals during the lifetime of one or more persons, or payable for a specified period only. One important element, absent from this simple definition of an annuity, one distinguishing factor that separates life companies from all other financial institutions-anybody can set up an annuity and pay income for life. Only life insurance companies can do so and guarantee it for the life of an annuitant.

You cannot sell anything that says "variable" until you get a what?

A federal license. You need a Securities license.

equity indexed annuity

A fixed deferred annuity that offers the traditional guaranteed minimum interest rate and an excess interest feature that is based on the performance of an external equities market index. Equity indexed annuities are invested into the S&P 500. The S&P 500 is invested into the stock market with an average on the return of 500 stocks. Not as risky as the variable.

Remember, before talking about any variable products you need to give the prospect what?

A prospectus

fixed annuity

A type of annuity that provides a guaranteed fixed benefit amount, payable for the life of the annuitant.

What does "accumulate" mean?

Accumulate, it's growing, earning interest.

straight life income

An annuity income option that pays a guaranteed income for the annuitiant's lifetime, after which the payments stop.

tax-sheltered annuity

An annuity plan reserved for nonprofit organizations and their employees. Funds contributed to the annuity are excluded from current taxable income and are only taxed later, when benefits begin to be paid. Also called tax- deferred annuity and 403(b) plan.

Purpose & Function

Annuities are designed to pay out a steady stream of income for a lifetime, no matter how long that life lasts.

joint and survivor annuity

Covers two or more lives and continues in force so long as any one of them survives. This option pays until both annuitants die, and there are different types.

Life income, with installment refund

Every option, other than a straight life income, has a survivorship option. But with an installment refund, how is she going to get the money? In installments. It might pay me $725 a month. But if I die, after receiving $725 a month, for a total of $30,000, then she would continue getting $725 a month until the balance of the remaining $70,000, was paid out. If she died before it was paid out, it would go to somebody else.

what IS a 1035 exchange

Exchange and transferring like kind to like kind, without getting taxed. 1) you can go from life to life 2) from annuity to annuity 3) from life to annuity BUT YOU CANNOT GO FROM ANNUITY TO LIFE

When it is a joint annuity and both spouses die, if there's a balance-say you purchased $100,000. If you only received $50,000, nobody gets the payoff?

Gone. Kids get none. The only annuities that can have balances left to beneficiaries are installment or cash refund. That's why you don't put all your money in an annuity.

Annuitize means

I am taking a steady stream of income from the annuity. There are no other periods. Period!

Taxation

I have $150,000 in the annuity. I'm going to annuitize my annuity. I'm 65 years old. The mortality tables say I am going to live to age 85, just an example. Going to pay me out about 5 percent.I am going to receive about $10,000 a year. A part of the $10,000 represents principal, and a part represents interest. The part that represents principal is received tax-free. The part that represents interest is taxed as ordinary income, not capital gains.

How did that money get into this annuity?

I invested money in that annuity. I just started putting money in. Any amount, unlimited amounts. You understand? After-tax dollars, dollars that had already been taxed. That money is invested, and it earns interest and it grows, and I don't pay taxes on that money while it grows. This is called the "accumulation period". The taxes are deferred.

How are immediate annuities funded?

Immediate annuities are always funded with a lump sum. Because you can't be putting money in after you've annuitized.

fixed annuities

In a fixed annuity, the principal is guaranteed. The interest that it is earning is guaranteed. The payout is guaranteed. Everything with a fixed annuity is guaranteed. That $10,000, or the amount you get per month, never changes. Do we agree with that?

What kind of risk did a fixed annuity have?

Inflation risk

life income with a 10-year period certain

It pays the annuitant for life or 10 years, whichever lasts the longest. If I'm still living beyond that 10-year period, if I am doing a little dance, got my hat on, got a smoke going, everything is cool. Am I still getting paid? Yes. If I died in year 2, it would pay for how long? Eight years.

life income, with a cash refund

It's going to pay a lower amount per month, maybe $7 per 1,000. The benefit factor is less. $7 multiplied by what, 100, (because we have $100,000 in the annuity) would be how much? $700. But if I die after receiving $20,000, my wife would receive $80,000 in cash. This has a survivorship option, but it is going to pay less money per month while I am alive.

What's the difference between a 20-year period certain and a life with a 20-year period certain?

Life with a 20-year period certain, if I live longer than 20 years, they're going to pay me. A 20-year period certain guarantees to pay only for 20 years, not for life.

There are two ways to get your money out of the annuity what are they?

Make a withdrawal. Reach in and get you some. Or you can annuitize it. Annuitize means you open up the spigot and it starts paying you a steady stream of income.

what's the exclusion ratio on a fixed annuity?

Money put in, divided by the expected return.

What happens if you have straight life pay out and you die after the first month, would your wife get the rest?

NO! She gets nothing. If I die after one payout, if I die after receiving one check, she gets nothing. There's absolutely no survivorship option with a straight life payout.

Do I pay taxes on it while it's growing?

No, that's why they call it a "tax-deferred" annuity.

Can annuities lapse?

No, there's no insurance, it's just a bucket of money. The money is invested and it earns interest.

accumulation unit

Premiums an annuitant pays into a variable annuity are credited as accumulation units. At the end of the accumulation period, accumulation units are converted to annuity units. You're saying, "Of my $1,000 deposit, I want 50% to go into the aggressive growth account (this little bucket), and 50% of it to go into the money market account (that little bucket)." If each unit costs $10, how many did you buy? 100.

immediate annuity

Provides for payment of annuity benefit at one payment interval from date of purchase. Can only be purchased with a single payment.

deferred annuity

Provides for postponement of the commencement of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased either on single-premium or flexible premium basis.

variable annuity

Similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks.

Variable annutities

Similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks. A variable annuity is invested into the stock market. They are designed to off-set inflation. A Variable annuity is a bucket and inside this bucket you have funds (mutual funds or little buckets) - growth accounts, aggressive growth accounts, bond accounts, maybe a money market account. The owner gets to choose which fund to invest in and each bucket has investment risk different from the others. You can be as safe as you want, money markets, or as risky as you want, aggressive growth.

What's the problem with fixed annuities?

The amount you get per month never changes, and thus it doesn't account for inflation. So they came out with something called a variable annuity.

What's the annuity period mean?

The annuity period is when you are taking a steady stream of money out of the annuity.

What does the isnurance company guarantee in a fixed annuity?

The insurance company guarantees the principal, the interest rate, and the payout. The amount of the monthly check will not go up or down, even if the interest rate decreases or increases.

So who regulates it? Always say the what first?

The state and the feds (Securities & Exchange Commission)

Which plan has a survivorship option?

The whole idea is that everything other than the straight life income option has a survivorship option, and the full benefit will be paid out.

Which two licenses do you need to get in order to sell anything with "variable"?

There are two types of securities licenses, F.I.N.R.A., Financial Industry Regulatory Authority, licenses, and you will need one or the other. A Series 6, securities license, two-hour exam. Or a Series 7, a six hour exam. The Series 7 includes everything the 6 does, plus you can sell stocks and things like this. Anyway, you can't sell those variable products without the Series 6 or 7.

If I annuitize at age 48, what's the penalty?

There is no penalty. Because I annuitized. I did not withdraw. If you annuitize - at any age; at 10, at 20 - there's no penalty. There will be taxes, but no penalty.

If you make a withdrawal before age 59-1/2 what happens?

There's a 10 percent penalty

Is there insurance with annuity?

There's no insurance with an annuity. The only time an annuity would have insurance, if you want to call it insurance, is during the accumulation period. If I die, I leave it to my wife. She can have it. It's the same as leaving her my savings account, isn't it? So you can say my savings account is a death benefit if I die before ever annuitizing it.

So the thing is, there is risk once it goes to the money management?

There's risk because it's invested in the stock market.

How are fixed annuities invested?

They are invested in bonds and mortgages

How do we find out how much of this is taxable?

We use an exclusion ratio. You take the amount invested, and you divide it by the expected return. How much was invested? $150,000. How much am I expected to get back? $10,000 a year by how many years? 20 years. So $200,000 is the expected return. So if I invested $150,000, I am expected to get back $200,000. How much is excluded from taxes? 75%

403(b) plan

What does the "B" stand for? That stands for before-tax annuity. All annuities up to this point were after tax? Yes.

501-C 3

What's that "3" stand for? Means there's three of them. What's the "C" stand for? Charitable organizations

Does the amount of money in the bucket make a difference in how much I am going to get?

Yes

Does the interest rate make a difference in how much I am going to get?

Yes

Can teachers, preachers, and nonprofit organizations have a before-tax annuity?

Yes it's called a tax-sheltered annuity. That means the money going in is before tax. These folks do not have the opportunity for a 401k, so they have access to these plans.

What's the difference between annuitizing and withdrawing?

Yes, you can effectively annuitize it yourself just by taking a $1,000 a month out. If you continued doing that then eventually It would all be gone. But when you annuitize, you can't outlive it. The company takes the risk. So instead of withdrawing $1,000 a month until the annuity, let's say $12,000, was gone, you could annuitize and get $1,000 a month for the rest of your life.

Does age make a difference in how much I am going to get?

Yes. Age makes a difference because if you have a guy my age, 48, I have fewer years to live than a guy, say, 30 years old. So if everything else is equal, then my check will be higher per month.

Does sex make a difference in how much I am going to get?

Yes. Let's say I have a twin; she's a girl. Everything else is equal. Who is going to get the highest monthly amount? The man. Because I have a life expectancy that is shorter than hers since women live longer. She has a life expectancy that's longer than mine. So she will be paid the same amount of money over a longer period of time; therefore, her monthly check will be smaller. But theoretically she will receive the same, theoretically.

For annuities do you need to know inflation?

You do not need to know inflation.

Annuity Basics

You take a sum of money - $12,000, the principal. You pay it over an expected period of time -- 12 months, the life expectancy, derived from the mortality table (I am just making up a number). Pay it out over a 12-month period, at an interest rate. Let say 0%. How much are you going to get? A $1000 a month until you die, no matter how long you live. That's an annuity. You are buying income. The more money you have in the "bucket" the more monthly income it will pay you.

If the consumer refuses to provide relevant information requested by the agent, the agent must obtain what?

a signed verification from the consumer that the consumer has refused to provide the requested information

Agents are required to maintain procedures that are reasonably designed to what?

detect or prevent violations of this law.

An agent is required to make reasonable efforts to obtain information concerning the senior's:

financial status, tax status,and investment objectives, among other specified information relevant to determining suitability

Agents are also required to maintain records relating to such transactions for how long?

five years

How are fixed annuities expressed and how are variable annuities expressed?

fixed annuities are expressed in terms of dollars. Variable annuities are expressed in terms of units.

With an equity indexed annuity:

it gives you the chance of growth somewhat similar to a variable annuity by investing in the stock market but with all the guarantees of a fixed annuity. The primary purpose of equity indexed annuities is accumulation.They are not annuitized. In addition, it may have something called ratcheting, which means if it goes up, say from $10,000 to $12,000, we lock in all your gains. Even if the market took a dump right after that, we're going to use your $12,000 as a basis for all future gains. With an equity index annuity, it guarantees a minimum interest rate. So usually they're sold in 7-year time frames. So companies guarantee a 4-and-a-half percent interest rate, let's say. And they give you at the end of that 7 years the greater of the 4-and-a-half percent or the average of the S&P 500. So it gives you all of the guarantees of a fixed annuity and somewhat market-based gains of a variable annuity.

Two ways to get money in what are they?

lump sum or periodic payments

Periodic payments

means I put money in on a monthly, quarterly, semi-annual, basis.

The more risk you are willing to take...

the higher the original monthly amount will be while both annuitants are still living.

What is the idea behind variable annuity?

the idea behind a variable annuity is it keeps pace with inflation. Over the long haul, the stock market has always outperformed other investments.

what you receive when you annuitize under a variable annuity?

the insurance company has to convert this $800 to annuity units. I will just make up a number of units. Let's say the insurance company has converted this into 100 annuity units. You are now going to get 100 annuity units per month for the rest of your life. When you annuitize your variable annuity, you lose all control over the investments. You now have a money manager who's managing that money-your money, my money, and the guy-down-the-street's money, all of this money is combined into the company's separate account. He's managing the separate account.

Does the insurance company place a charge for withdrawing money?

the insurance company will also impose a surrender charge if money is withdrawn with-in the first five to eight years. This covers the costs of issuing the contract as well as the insurance company having to liquidate underlying investments. But, they usually allow "free withdrawals" of up to 10% during this period.

A joint and full survivor

will pay $1,000 a month a month while both are living, then $1000 to survivor.

A joint and one-half annuity

will pay, let's say, $1,400 a month while both are living, then $700 to survivor.

Are withdrawals taxed?

withdrawals are taxed according to the LIFO method, Last In, First Out. The IRS says the last money in will be interest. So it will be the first out. So, let's say you have invested $10,000 and the annuity is valued at $15,000. You have a $5000 gain. If you take a withdrawal of $7000, of this amount, $5000 will be taxed at ordinary income rates. Only after all the earnings have been withdrawn and taxed can one take the principal tax free.

A joint and two-thirds survivor annuity

would pay $1,200 a month a month while both are living, then $800 to survivor.