Annuities

Definitions of Annuities

Fixed • Account credited with a fixed interest rate• Held in the insurance companies

general account• Need insurance license to sell

Variable• Deposits purchase “shares” called

accumulation units (similar to a mutual fund)

• Assets are held in a separate account

• Need insurance license and security license (Series 6 or 7) to sell

• Upon annuitization, the annuitant receives a fixed amount of annuity units

AnnuityA contract with an insurance company to accumulate money on a tax deferred basis

(No tax while in the annuity)

AnnuitizeGive up access to your accumulated dollars in exchange for a stream of payments.

Categories of Annuities

Immediate OR Deferred Annuitize now Do not annuitize now (maybe later) AND

Funding of Annuities

Immediate Deferred

YES Lump Sum YES

NO Fixed Installments YES

NO Periodic Payments (deposits) YES

JAN 15th$100

FEB 15th$100

MAR 15th$100

APR 15th$100

MAY 15th$100

JUN 15th$100

JUL 15th$100

AUG 15th$100

SEP 15th$100

OCT 15th$100

NOV 15th$100

DEC 15th$100

JAN 15th$50

FEB $ 0

MAR 30th$100

APR $ 0

MAY 25th$200

JUN $ 0

JUL $ 0

AUG 15th$100

SEP $ 0

OCT $ 0

NOV 20th$100

DEC 30th$200

Annuity Accumulation

Fixed VariableCost: Investment charges & mortality charges • Many different accounts

to choose from for specific allocations

• Accumulation Units “shares” can change daily

(like a mutual fund)

Cost: Usually no annual fee

• Interest Rate – • Current rate guarantee w/• Minimum rate guarantee• May also receive “bonus” rate

• Two Tiered Fixed Interest with a “mirror” Account (bigger interest rate) with a designated time frame (7-10 years) If annuitized, annuitant can use the bigger account to draw payments.• Equity Indexed Assigned a “Cap” Rate (ex: 7%) (Upside potential with no risk of losing principal)

Annuity DistributionUncle Sam Insurance Company

Taxes / Penalties Contract Charges / CDSC’s

• Beneficiary is taxed on any gain as ordinary income

• Gain comes first LIFO (Last In First Out)

• 10% - Penalty – If prior to age 59 ½ • Loans not recognized by IRS

• No 10% penalty if you annuitize over annuitants lifetime.

• Exclusion Ratio = Investment in contract Expected Return* *Expected Return = Annual Amount received x Life Expectancy

(IRS table 590)

• Generally no surrender charge

• Decreasing surrender charge or• Market Value surrender charge

– higher surrender charge if interest rates have increased -lower surrender charges if interest rate have decreased

• None

Death

Partial Withdraw

Annuitize

Annuitizing Options Life Payout Temporary Payout

Guaranteed payments for life of the Not based on annuitants life - but on either:annuitant – they cannot out live payments • If joint annuity – payments stop at • Specific Time (ex: 5,10,15,20 years, etc.) first death. or• If joint and survivor annuity - • Specific Amounts (ex: $X,XXX per: mo, yr, etc.) payments stop at last death. (for however long it takes for balance to be paid)

Options: A) Minimum TIME guarantees (Period Certain) can be added at a cost (causing lower payments) (the longer the minimum time guarantee - the lower the payment.) B) Minimum AMOUNT guarantees (Refund Annuity) Can be added at a cost (lower payment) - balance of initial premium amount is paid to beneficiaries (either in installments or lump sum) if annuitant dies before initial premium amount is paid out.