Annuity Fundamentals Linda L. Lanam Vice President, Annuities & Market Regulation May 2005

Copyright American Council of Life Insurers 2004 Why annuities?  Changing workplace retirement plans  Increasing longevity  Continuing low savings rate  Growing possibility of outliving assets

Copyright American Council of Life Insurers 2004 What is an annuity?  An annuity is a contract issued by a life insurance company.  An annuity can provide for savings and income in retirement.  An annuity can offer either deferred or immediate payout.  An annuity can offer fixed or variable earnings.

Copyright American Council of Life Insurers 2004 Deferred Annuities  A deferred annuity has two phases: accumulation and payout.  A deferred annuity provides tax-deferred savings in accumulation and insurance against outliving accumulated assets in payout.  In a deferred annuity, the policyholder may make single or multiple premium payments.  There are no federal premium limits but the premiums are paid with after-tax dollars.  Earnings on the premium(s) are credited until the contract is surrendered or annuitized.  The earnings are tax-deferred until withdrawal or annuitization.

Copyright American Council of Life Insurers 2004 Deferred Annuities Deferred annuity policyholders can obtain funds from their annuity by: –full surrender –partial surrender/withdrawal –term certain payout –lifetime payout (annuitization)

Copyright American Council of Life Insurers 2004 Deferred Annuities  Withdrawals from a deferred annuity before the policyholder is age 59 ½ are generally subject to a 10% penalty tax.  Surrenders are taxed on an “income out first” basis.  Surrender of a deferred annuity may be subject to a charge in the initial years of the contract. The surrender charge is a percentage of the account value of the contract.

Copyright American Council of Life Insurers 2004 Deferred Annuities  Payout from a deferred annuity may be either for a fixed term or for life (i.e., life contingent). A life contingent payout is also referred to as annuitization.  Life contingent annuity payouts provide a higher level of sustainable lifetime income than withdrawals from non- annuitized investments alone

Copyright American Council of Life Insurers 2004 Immediate Annuities  An immediate annuity has only one phase: payout.  Periodic payments from an immediate annuity must begin within one year after the initial premium payment.  Periodic payments can be monthly, quarterly or annual.

Copyright American Council of Life Insurers 2004 Fixed vs. Variable Annuities  A fixed annuity earns a fixed rate of return and provides a fixed periodic payout at annuitization.  A variable annuity earns a return based on the performance of an underlying account, usually of stocks and bonds, and payout can be either fixed or variable.

Copyright American Council of Life Insurers 2004 Death Benefits  Most annuities provide a death benefit if the policyholder dies prior to annuitization.  The beneficiary of the contract will usually receive a death benefit based on the premiums paid or the cash value.

Copyright American Council of Life Insurers 2004 Regulation of Annuities  Product Content  Advertising and disclosure materials  Sales Practices

Copyright American Council of Life Insurers 2004 Qualified Annuities  Qualified annuities are those issued in connection with workplace retirement plans, such as 403(b) or 457(b) plans.  Premiums paid into a qualified annuity are excluded from income.  An IRA can also be an annuity (Individual Retirement Annuity).  Funds accumulated in a 401(k) plan may be “rolled over” into an Individual Retirement Annuity.

Copyright American Council of Life Insurers 2004 Who owns individual annuities? Based on the Gallup Survey Of Owners Of Non-Qualified Annuity Contracts, November 2001

Copyright American Council of Life Insurers 2004 Who owns individual annuities? Based on the Gallup Survey Of Owners Of Non-Qualified Annuity Contracts, November 2001