1. Understanding Annuities

2. With the number of defined benefit pension plans decreasing, and changes to Social Security, individuals are finding that more of the retirement savings responsibility has fallen on them.
As a result, individuals are looking at a variety of alternatives for their retirement savings.
Annuities are becoming more and more popular as one of those alternatives.

3. Agenda What is an Annuity Types of Annuities Deferred Annuities
Immediate Annuities
Qualified vs Non-Qualified
Parties to an Annuity
Death and Distribution
Taxation of Annuities
Why Annuities

4. What is an Annuity
By definition: An annuity is a series of equal payments at regular intervals
It is a contract issued by an insurance company. For a purchase payment or series of payments, the company can at some point in time provide a series a payments for a period of time as agreed upon in the contract.
Today, annuities have evolved from a simple series of payments into a robust market of growth and income vehicles

5. Types of Annuities Deferred Immediate Fixed Fixed Index Variable
Deferred Income

6. Types of Annuities 2 Phases to An Annuity Contract Accumulation Phase
Deferred Annuity
Income Phase
Income (Immediate) Annuity

7. Types of annuities Annuities can be Deferred or Immediate
A Deferred Annuity is one in which payments begin more than 1 year after issue
An Immediate Annuity is one in which payments begin within 1 year of issue

8. Types of annuities
A Deferred Annuity may be purchased with a single premium payment or with a series or flexible payments.
By definition, Immediate Annuities are purchased with a single premium payment.

9. Deferred Annuities
Fixed
Variable
Fixed Index

10. Fixed Annuities
Interest Crediting
Liquidity
Riders
Charges

11. Fixed Annuities interest crediting
Provides a Minimum Guaranteed Rate
Provides a Specified Rate for a Set Period of Time
After Specified Period a Renewal Rate is Declared at the Guaranteed Minimum Rate or Greater
The Insurance Company bears the Risk for the Performance of the Account

12. Fixed annuity liquidity options
Full Surrender
Partial Withdrawal
Systematic Withdrawal
Provides a specified amount at regular intervals until the account value is exhausted
Withdrawals not subject to surrender charges
May offer a percentage that can be withdrawn without incurring any surrender charges
Annuitization

13. Fixed Annuity Riders Bonus Living Benefit Rider
Guaranteed Withdrawal Benefit*
*Rider charges may apply

14. Fixed Annuities: Charges
Surrender Charges –
In the early years of the contract
Generally a percentage of premiums paid
In general declines each year
May be contract based or premium based
withdrawals made in excess of any free withdrawal amount.
Generally not applied to annuitization, or systematic withdrawal*
Market Value Adjustment –
In addition to the surrender charge
May increase or decrease the surrender charge amount
Increase if prevailing interest rates are higher than when contract issued
Decrease if prevailing interest rates are lower than when contract issued
Contract Fee – A flat dollar amount that may be charged annually
Premium Tax- A tax some states charge on annuities. Insurance company may charge contract at issue, annuitization or at death of the contract owner, or surrender
*Provided the systematic withdrawal is within the free withdrawal amount

15. Who Purchases Fixed Annuities
CD Type Saver
Conservative – Risk Averse
Wants to know exactly what they will earn

16. Variable Annuities
A Hybrid between an Insurance Product and an Investment Product
Investment Options
Features and Benefits
Optional Riders

17. Variable annuities Features Investment Options Investment Strategies
Death Benefit
Optional Riders
Share Classes
Liquidity Options
Fees and Expenses

18. Variable Annuities features
Performance Based on Underlying Investment Options
May Have a Fixed Account
Tax Free Switches between Investment Options
Investment Strategies
Death Benefits
Optional Features
Share Classes
Charges and Fees

19. VA Investment Options
Offers a Wide Variety of Investment Options known as Subaccounts
May be similar to a mutual fund offering
But you are not investing directly in that fund
May include managed portfolios, exchange-traded funds, index or index linked portfolios among other strategies
The investor bears all the risk for the underlying performance
May also offer a fixed account
Exchanges between subaccounts and or the fixed account are tax free

20. VA Investment strategies
Dollar Cost Averaging
Portfolio Rebalancing
Interest Sweep

21. VA Dollar Cost Averaging
Involves Periodic Investments into the Annuity Over Time
Investment Amount remains the same
Underlying Share Price Fluctuates
Average Price Per Share will be lower than if you tried to “time” the market
But more when the price is low, buy less when price is high

22. VA Portfolio Rebalancing
At specified points in time, the contract will automatically rebalance to a set asset allocation. In rebalancing, the contract will automatically sell in those subaccounts that are “high” and purchase in the subaccounts that are “low”

23. Va interest sweep
If the contract offers a fixed account, monthly any interest earned in the fixed account will be swept from the fixed account and invested in one or some of the investment accounts, dollar cost averaging into the account(s)

24. VA Death Benefits
Basic – Will return the greater of the contract value or premiums invested in the event of death
Enhanced – will lock in some gains of the contract at specified times to pay in the event of death, or will guarantee a specific growth rate on premiums to be paid only in the event of death

25. VA optional features / riders
Guaranteed Withdrawal Benefit (GWB)
Guaranteed Minimum Accumulation Benefit (GMAB)
Guaranteed Minimum Income Benefit (GMIB)
Long Term Care Rider
Terminal Illness Rider
May be selected for an additional cost

26. VA GWB May be a lifetime withdrawal benefit
Guarantee a return of purchase payments over a specified number of years or over the life time of the owner or lifetimes of the owner and spouse through a series of withdrawals
Withdrawals in excess of the guarantee may impact the guarantee
May limit investment options

27. VA GMAB
Guarantees the return of purchase payments or a higher stepped up value at the end of a specified waiting period regardless of investment performance
If contract value is below the amount, the contract value will be increased
At the end of the specified period, rider may be renewed, if not renewed contract value becomes subject to market risk
Contract may limit investment options

28. VA GMiB
Guarantees a lifetime income stream when the contract is annuitized after a specified waiting period
Income amount is the greater of a specified compounded rate, or a contract value at a specified point in time – current amount, highest anniversary value etc.
Must be annuitized
Regular annuitization may produce a higher income stream
May limit investment options

29. VA Long Term Care Rider
A Long Term Care rider will accelerate the death benefit to pay for long-term care. Benefits can be used for home health care, assisted living, a nursing home, adult day care or other qualifying services.

30. VA Terminal Illness Rider
Also called an Accelerated Death Benefit Rider
Provides access to the owner to access all or a portion of the death benefit for varipous expenses in the even the owner is diagnosed with a terminal illness
May define the life expectancy timeframe

31. VA Share Classes
Many variable annuities will offer varying fee and surrender charges known as share classes. Agent compensation arrangement may also vary based on share class.
B – Generally lower cost and in general offer a longer surrender charge period (generally 7+ years)
L – A shorter surrender charge with higher fees. (Generally 3 – 4 years)
C – Generally fully liquid. Highest contract fees
Bonus – If a bonus on premium deposits (May limit to first 12 months), surrender charge will be long (8-9+ years), and high charges which in effect recoup the bonus over time

32. Va liquidity options Full Surrender Partial Withdrawal
Systematic Withdrawal
Provides a specified amount at regular intervals until the account value is exhausted
Free Withdrawal
May offer a percentage that can be withdrawn without incurring any surrender charges
Annuitization
May be fixed or variable

33. va Charges
Mortality and Expense Risk Charge- Compensates the insurance company for the insurance risks and other costs it assumes under the annuity contract. This charge is deducted from the value of the subaccounts.
Administrative and Distribution Fees – Covers the costs associated with the servicing and distributing the annuity

34. Va charges
Contract Maintenance Fee –An annual flat fee charged for record keeping and administrative purposes
Underlying Subaccount Fees and Expenses – A fee charged to the subaccounts. Includes the management fees that are paid to the investment adviser responsible for making investment decisions affecting the subaccouts

35. VA Charges
Contingent Deferred Sales Charge – An early termination charge when the annuity is surrender during the early years of the contract. Generally a percentage of the amount withdrawn and declines over time
Optional Rider Charges – Some of the optional riders if selected may have separate charges associated with them.

36. Who Purchases variable annuities
Willing to take More Risk in Exchange for the Opportunity for More Return

37. Fixed Index Annuities Features Crediting Strategies Riders
Liquidity Options
Bonuses
Fees and Expenses

38. Fixed Index Annuities
FIAs are a combination of many of the desired features or both Fixed and Variable Annuities:
Potential Growth Based on the Performance of an Index
Protection from Market Losses
Guarantee of Principal
May be subject to surrender charges
Locked in Interest Earnings at Various Points in Time
Provide a Hedge Against Inflation
Interest is typically capped or subject to a margin

39. Fixed index annuities Crediting Strategies FIA Riders
Liquidity Options
Bonuses
Fees and Expenses

40. How FIAs Work Definitions: Market Index Indexing Method Index Term
Participation Rate
Cap Rate
Spread Rate (Margin Rate)
Floor
Uncapped Strategy

41. Definition: Market Index
An index that measures the price changes of a large, overall market, such as the S&P 500.

42. Definition: Indexing Method
The calculation applied to the change in the index to determine the interest crediting rate applied to the annuity. . If the Index has no increase or suffers a loss, the interest crediting will be zero. Dividends are excluded.
Examples:
A Point to Point
Monthly Sum
Monthly or Daily Averaging
Annual Reset (Ratchet)
High Water Mark

43. Definition: Index Term
The period over which index change is measured and the index-linked interest is calculated and credited to the annuity.

44. Definition: Participation Rate
The participation rate determines how much of the increase in the index will be credited to the annuity. It is expressed as a percentage – for example 60%. If the increase in the index is 10%, 6% will be credited

45. Definition: Cap Rate
The Cap Rate is the maximum amount of interest the annuity can earn.
Example:
Change in Index = 10%
Participation Rate = 60%
Cap Rate = 5%
Amount credited to the annuity = 5%

46. Definition: Spread Rate
The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. This fee may also be called an administrative fee and can be used separately or in conjunction to a cap or participation rate.
Example:
Change in Index = 10%
Spread = 2%
Amount Credited to the Annuity: 8%

47. Definition: Floor
A contract may provide a floor. This is the minimum guaranteed interest rate that will be credited to the annuity. The floor is based on the claims paying ability of the issuing insurance company.

48. Definition: Uncapped Strategy
This is a new type of strategy where there is no cap on the change in index rate paid. Often to participate in this type of strategy, the insurance company will require a specified amount to be invested in a fixed account.

49. FIA Interest Crediting Strategies
Point to Point
Monthly Sum
Monthly or Daily Averaging
Annual Reset (Ratchet)
High Water Mark

50. Point to Point
The change in the index is calculated from two points in time. Any change is impacted by any participation, cap or spread rate. The change is then credited to the annuity at the end of the crediting period and sets a new value for the annuity.
Can be an Annual Point to Point or a Term End Point.
A Term End Point is the same as an Annual Point to Point with the interest change credited after the end of a certain term typically 3 – 10 years.

51. Example: Point to Point

52. Monthly Sum
The change in the index is calculated each month and both positive (impacted by participation rate, cap rate or spread rate) and negative changes (not reduced by cap rate) are added up at the end of the term. If the sum is positive, it will be credited to the annuity at the end of the term. If the change is negative, no interest is credited, but the annuity value is not reduced.

53. Example: Monthly Sum

54. Monthly or Daily Averaging
The value of the index is recorded on a daily or monthly basis, and the index-linked interest is calculated as the difference between the average of the daily or monthly values over the course of the term and the index value at the start of the term, subject to participation rate, cap rate and or spread rate.

55. Example: Monthly or Daily Averaging

56. High Water Mark
The index value is recorded at various times over the course of the term (usually on annual anniversaries). Interest is then based on the difference between the highest index value and the index value at the start of the term. Interest is credited at the end of the term.

57. Example High Watermark

58. FIA Riders Death Benefit Long Term Care
Guaranteed Lifetime Withdrawal Benefit

59. Riders: Death Benefit Basic – Pays full account value at death
Enhanced
Annual Increase – Guarantees death benefit grows by a specified percentage each year regardless of performance
May combine an income stream with Annual Increase

60. Riders: Long Term Care
Provides the flexibility of having access to a portion of the annuity’s principal to pay for long term care expenses without any applicable surrender charges.

61. Riders: Guaranteed Lifetime Withdrawal Benefit
Provides an annual withdrawal throughout the owner’s lifetime, without the need to annuitize the contract
Payments continue even if account value decreases or is zero

62. FIA liquidity options Full Surrender Partial Withdrawal
Systematic Withdrawal
Provides a specified amount at regular intervals until the account value is exhausted
Free Withdrawal
May offer a percentage that can be withdrawn without incurring any surrender charges
Annuitization

63. Liquidity: Annuitization
Annuitization: A systematic liquidation of principal and interest.
Life Only
Life and Period Certain
Life and Refund
Joint Life Options
Period Certain

64. Bonuses
Premium
Guaranteed Lifetime Withdrawal Benefit
Annuitization

65. Fees and Expenses Surrender Charges Market Value Adjustment
Optional Benefit Charges
Margin, Spread or Administrative Fee
Maintenance Fee

66. Fees: Margin, Spread, Administrative
The Spread or Margin rate is an amount of interest that is subtracted from the change in Index. The key difference between a Spread and other types of fees is that a Spread is not charged to a policy if there is not enough crediting performance in the contract to cover the cost of the spread. A Spread may also be called an “Administrative Fee” and can be used separately or in conjunction to a cap or participation rate.

67. Immediate Annuities Fixed – Pays a Fixed Dollar Amount
Variable – Pays a fixed number of units. Actual dollar amount received varies by value of a unit

68. Annuitization Options
Fixed Period
Life Only
Life and Period Certain
Life and Refund Feature
Joint Life

69. Annuitization: Period Certain
Will pay the entire amount of the contract over a set period of time regardless of whether or not the annuitant lives to the end of the term. If the annuitant dies prior to the end of the term, the balance of payments will be made to a designated beneficiary.

70. Annuitization: Life Only
Payments are made as long as the annuitant is alive. At death payments cease. No guarantees. Pays the highest income amount.

71. Annuitization: Life and Period Certain
Payments will be made for a specified time or for the annuitant’s lifetime, whichever is longer. If the annuitant dies prior to the specified time person, payments will continue to a designated beneficiary until the specified period is over.

72. Annuitization: Life and Refund
Payments will be made for the life of the annuitant. If the annuitant dies before the original premium has been paid out, the balance will be paid to a designated beneficiary. Can be lump sum or installments depending on the contract options.

73. Annuitization: Joint Life
Payments will be calculated and made over 2 lives. The amount paid to the survivor may be 100% , 67% or 50%. May also add a guarantee such as period certain or refund if contract offers.

74. Deferred Income Annuities
Annuitizes at a Future Point in Time
Provides a future annuitization amount today for an income in the future.
Future payout amount is guaranteed
Similar to what a defined benefit plan does
Risk is on the Insurance Company to provide the future amount

75. Tax status of Annuities
Qualified
Non-Qualified

76. Types of Annuities: Qualified
Receiving Special Tax Treatment Under Code Sections:
401
403
408
457
In general purchased with pre-tax money

77. Types of Annuities: Non-Qualified
NOT receiving Special Tax Treatment Under Code Sections 401,403,408,457
Purchased with After Tax Dollars

78. Parties to an annuity
Insurance Company
Owner
Annuitant
Beneficiary

79. Parties: Insurance Company
Issues the Contract
Responsible for any contractual guarantees
Allocated premium as instructed or prescribed
Provides all contract information

80. Parties: Owner The “Boss” of the Contract
Makes all the Decisions Regarding the Annuity
Names the Annuitant and Beneficiary

81. Parties: Annuitant
The Annuitant is the Life Upon Which Benefits are Calculated
May or May not be the Owner

82. Parties: Beneficiary
Receives any Proceeds in the Event of the Owner’s (and some times, Annuitant’s)Death
In general can be changed at any time

83. Death and Distribution
Before Annuitization
After Annuitization

84. D&D Before Annuitization
Spouse Beneficiary
Can step in as the new owner
Non-Spouse Beneficiary
Entire value of the contract must be distributed within 5 years of death
Within 1 year of death may begin a lifetime income stream

85. D&D After Annuitization
Once the contract has been annuitized, the annuitization option will dictate what if any death benefit is payable

86. Annuities: Taxation The Power of Tax Deferral
Basic Rules: Deferred Annuities
TEFRA
Immediate Annuities
Qualified
Non-Qualified

87. Tax Deferral
Annuities are not taxed until they are removed from the contract*
Therefore the deposit earns interest, the interest grows interest and the money that would have gone to taxed earns interest
It will grow faster than in a taxable vehicle
Once money is withdrawn, ordinary income taxes are accessed on any money that was not previously taxed
In addition to taxes, a 10% premature distribution penalty tax may apply to the taxable portion of the distribution
* The annuity will become immediately taxable if it is assigned as collateral, owned by a non-natural person (exceptions apply) or another prohibited transaction applies – See IRC Sec. 72)

88. Qualified vs Non-Qualified
A qualified annuity is generally taxed with pre-tax money. Therefore all withdrawals would generally taxable. Any after tax deposits would not be taxed.
In the case of a Roth IRA, if the rules are followed, withdrawals may come out tax free
In addition to Ordinary Income Taxes a 10% federal tax penalty may apply

89. Qualified 10% Penalty 72(t)
In addition to Ordinary Income Taxes, a 10% penalty may apply unless:
Owner attains age 59 ½
Owner dies
Owner becomes disabled
Payment is part of a Series of Substantially Equal Periodic Payments
Owner is age 55 and separated from service (Qualified employer plan)
Qualifying Medical Expenses
Payments to an alternate payee under a QDRO
Health Insurance Premiums if Unemployed
Higher Education Expenses
First Time Home Purchase

90. Qualified vs non-qualified
Non-Qualified Annuities are purchased with after tax money.
The amount of the withdrawal that represents after tax money is not taxed
In addition to Ordinary Income Taxes, a 10% federal tax penalty may apply

91. Non-Qualified 10% penalty
In addition to Ordinary Income Taxes, a 10% penalty may apply unless:
Owner attains age 59 ½
Owner dies
Owner becomes disabled
Payment is part of a Series of Substantially Equal Periodic Payments
Immediate Annuity

92. TEFRA August 13, 1982 Created LIFO – Last In, First Out
Interest comes out first
Once all interest is out, Investment comes out

93. Immediate Annuity Taxation
A systematic liquidation of principal and interest
Part of each payment is principal, part is interest
Qualified – Generally all taxable
Non-Qualified – Determine Exclusion Ratio
That portion that represents after tax investment in contract and is not taxable
Formula: Investment in the Contract
Expected Return

94. Why Annuities
Benefits
Who Purchases Annuities

95. Annuity benefits Tax Deferred Growth
An Income Stream Guaranteed for Life*
Various Living and Death Benefit Features
* If a life contingent option is chosen. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.

96. Who Buys Annuities Information provided by:
2013 Survey of Owners of Individual Annuity Contracts
Conducted by:
The Gallup Organization
Matthew Greenwald & Associates
For:
The Committee of Annuity Insurers

97. Buyer Demographics Average age at purchase: 51 Average current age: 70
86% purchased prior to age 65
Average current age: 70
51% Female
65% Retired

98. Buyer Occupations Support Staff: 12% Blue Collar / Service Worker: 14%
Foremen or Manager: 15%
Business Owner or Company Officer: 15%
Professional (Physician, Attorney, Teacher): 34%

99. Why Purchase
90% Safety
86% Tax Deferral
87% Guarantees

100. Annuity Uses 84% Retirement Income
87% Financial Cushion for Living Too Long
79% Avoid Being a Burden to Children
73% Financial Protection for Investments
73% Emergency Fund in the Event of Catastrophic Illness or Nursing Home Care Need

101. 4 Steps for Presentation Success
Use Comparison Selling
Use terms that your client will understand and give them a frame of reference
Explain the Advantages
Understand your client’s needs and demonstrate how the annuity can be a solution
Handle Objections Before You Get Them
Full transparency, help your client understand your product
Close the sale!