Introduction to Annuities

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Help you determine if an annuity investment is something you want to explore.

Answer your questions about annuities and how they might fit into your portfolio.

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An annuity is a contractual investment through an insurance company offering the investor a range of assurances.

What is an annuity?

How money is credited (fixed rate, equity indexed or variable)

Method of investment (single or multiple payments)

When distributions commence (deferred or immediate)

Three ways to define an annuity

Tax deferred growth.

Distributions of growth/interest taxed as ordinary income.

Distributions of non-qualified (after-tax) principal are not taxed.

Annuitization (a steady stream of income) is an option.

Each contract has an owner, annuitant and beneficiary.

Characteristics of all annuities

Owner decides who will be annuitant and beneficiary.

Upon death, proceeds pass free of probate.

All commercial annuities are issued by insurance companies.

Annuities are sold by banks, brokerage firms, independent agents and insurance companies.

Any guarantees are backed by the insurance company.

Annuity characteristics continued

Duration Interest Rate

Minimum Investment

Company Company Rating

4 year multi-year rate guarantee

2.25% $10,000 Guggenheim Life & Annuity Co.

B++

5 year multi-year rate guarantee

2.75% $10,000 Americo A-

6 year multi-year rate guarantee

3.00% $10,000 Equitrust Life insurance Co.

B++

April 2014 examples

Fixed rate

Equity indexed

Variable

Three investment methods

Safety of principal and a fixed rate of return

Typical contract duration: 3 to 7 years

Limited liquidity. Although some contracts offer up to a 10% withdrawal without penalty

Insurer will charge a penalty for early withdrawals exceeding predefined limits

Fixed rate characteristics

Safety of principal (unless you withdraw early).

Various interest crediting options offered.

Interest earnings benchmarked against an underlying index such as the S&P 500.

Example on next slide: Invest $100,000 on Jan 1, 2006 in an EIA. This EIA has a 5% cap and a 100% participation rate benchmarked to the S&P 500. The contract has a “ratchet” feature.

Equity indexed (EIA) characteristics

Year S&P 500 Return W/O Dividends

Credit to EIA Contract

Contract Value

2006 13.6% 5.0% $105,000

2007 3.5% 3.5% $108,675

2008 -38.5% 0.0% $108,675

2009 23.4% 5.0% $114,108

2010 12.8% 5.0% $119,814

EIA characteristics continued

Typical contract duration: 5 to 15 years

Limited liquidity. Consider an EIA if you have at least a five year time horizon.

EIA characteristics continued

Your principal is not guaranteed. (Some variable contracts offer riders designed to guarantee principal. These riders have a cost and also a benefit).

Insurance company offers various sub-accounts, similar to mutual funds, from which the investor can choose.

Typical contract duration: 3 to 10 years.

Variable annuity characteristics

Fixed, equity indexed and variable annuities can all be deferred. You are deferring Annuitization. Most deferred annuities do not have to be annuitized.

What is a deferred annuity?

Single Premium Immediate Annuities (SPIAs) are investments that convert a one-time premium into an immediate income stream.

A deferred annuity can be annuitized at the end of its term, during the term of the contract, or not at all.

What is annuitization?

The assumptions on this page are based on the contract not forcing annuitization. You can take your money (principal + interest) as a lump sum and pay taxes

on the interest at your ordinary income tax rate.

Some deferred annuities allow you to remain in the contract after it matures, however, you will likely not be credited with your old guaranteed interest rate.

You can roll the contract over with the same insurer for a new deferred annuity, likely with different terms.

You can roll the contract over to a new deferred annuity with a different

insurer.

“Roll-overs,” referred to as a 1035 exchange allow the money to remain tax deferred.

What happens when my annuity contract matures?

You can annuitize the money with the same or a different insurance company and start receiving an income stream.

It is always a good idea to shop around for

the best single premium immediate annuity (SPIA) rates on the market. Your existing company may not offer the best rate. This is also the time to carefully study the company ratings. You are about to make an extended or lifetime investment.

What happens when my annuity contract matures - continued

Annuitization generates a fixed, steady stream of income for a period you specify, or the rest or your life.

The steady income stream does not increase with inflation. (There are exceptions to this rule, but you have to pay for inflation protection).

When you annuitize you are trading the control of your money for a fixed stream of income from the insurance company.

Once you annuitize you cannot reverse the process.

Considerations before annuitizing

Yes, all annuity contracts have penalties for early surrender.

Some annuity contracts allow a 10% free withdrawal annually. Be sure to study the contract to learn if it is 10% of your original principal or 10% of principal plus growth.

IRS penalty: Since the contract is growing tax deferred, if you are younger than age 59.5 and you make a withdrawal from the contract, you will pay a 10% IRS penalty on the growth portion of the money withdrawn, not the principal withdrawn.

Do deferred annuities have surrender and withdrawal penalties?

When the contract matures and you take your money as a lump sum, you pay your ordinary income tax rate on the growth.

If you choose to make a withdrawal during the

contract term. You pay your ordinary income tax rate on the interest/growth withdrawn.

If you choose to annuitize, you pay your

ordinary income tax rate on the interest each time you receive an annuity check.

When do you pay taxes on an annuity?

What happens when the Husband/owner dies:

Wife can:1. Take a lump sum.2. Defer distribution for up to five years.3. Annuitize within one year. 4. Continue contract becoming the owner and annuitant and

must name a new beneficiary.

Income Taxes:If the contract continues, taxes remain deferred. If not continued, the growth portion of the contract proceeds are taxed to the wife based on her ordinary income tax rate.

Estate planningHusband = Owner

Husband = AnnuitantWife = Beneficiary

The IRS requires owners of traditional IRAs, 401k and 403b plans to start withdrawing money from those investments by age 70.5.

Non-qualified money (money that has already been taxed) in annuity contracts is not subject to IRS required minimum distributions.

Required Minimum Distributions (RMDs)

Since annuities are insurance company products, only licensed life insurance producers (agents) can sell them.

In order to sell variable annuities, the life

insurance producer must also have a series 6 or 7 license. Variable annuities are regulated by the SEC and therefore require additional training and licensing to sell.

Who can sell annuities?

Investors who cannot afford to lose principal.

Those who currently have investments in CDs, T-bills, savings accounts or money market accounts willing to trade some liquidity for higher returns.

An investor who wants to shelter their non-qualified (after-tax) money on a tax deferred basis from RMDs.

Those interested in a pension-like income stream for a period of time or the rest of their lives.

Who is a good candidate for an annuity?

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