Annuity 4 hour CE Course. We will start in a few minutes. State and Federal Regulations, Requirements and Producer Training Requirements

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1 Annuity 4 hour CE Course Presented by Richard A. Mangiameli, LUTCF, FSS Director of Annuities Division McGill, Rediger & Simmons LLC. Thank you for your time Give me a call with any questions or Extension #218 We will start in a few minutes COURSE OUTLINE 1. State and Federal Regulations and Requirements 2. Types of Annuities and Classifications 3. Identification of the Parties to an Annuity 4. How fixed, indexed and variable annuities affect consumers 5. Income Taxation on annuities (Qualified & Non-Qualified) 6. Primary Uses of Annuities 7. Sales Practices 8. Suitability Standards & Checklist 9. Replacement & disclosure requirements 10. Glenn Neasham CA. Case Study 1 2 Why are we here today? NAIC 2010 Model Regulation: Suitability in Annuity Transactions Reciprocity w/other States Certain carriers REQUIRE CE Certification Annuity Suitability Training (4 hr CE) No product specific sales or marketing information FINRA authority with Broker-dealers NE Legislative Bill 887 signed by Governor April 11, Section 28 (2) (a) (ii) Why are we here today? American seniors, with over $15 trillion, are targets for abusive practices Indexed Annuities / Variable Annuities Too Complex Agent Trust Me advantage over seniors Hitting their fear, anger or greed buttons Big commissions Dishonest, deceive, coerce, frighten the elderly walk into home and rip them off Questionable Practices vs. Best Practices Poor Agent Supervision Better Knowledge, Better Business, Better Future 3 4 STATE REGULATIONS State and Federal Regulations, Requirements and Producer Training Requirements Standards for Sales of Annuities 1. LB887 Section 28 (2) (a) (ii) ( Producer Training!) 2. Duties of Insurers and Producers! 3. Suitability Information (includes 14 points) 4. NAIC Sec 6H safe harbor 5. Know the product; know your client 5 6

2 Who s Who in Annuities? NAIC IRS FINRA OIC Elder law Elder care Insurers PRODUCER Elder Abuse Units Brokerdealers ERISA Parties to Contract Annuities Why Buy? Demographics Longevity Volatility Pensions Guarantees Guaranteed Income for Life Reduce Social Security Taxes 7 8 Why All This Interest? 80% of Americans: Not Prepared for Retirement Need for stable, long term income Paltry CD rates (taxable) vs. Inflation Seeking higher returns with safe investment haven Supplemental income Long term care planning Income to surviving spouse PLANNING What Matters to Consider? Risk Tolerance Emergency reserve College Planning Loss of Income Wealth increase Retirement Planning Loss of Life Health Care & LTCi Taxes Income for Life Wealth Transfer & Distribution 9 10 PLANNING Risk: How much is enough? Three-Legged Planning Stool: Increasing Savings/Assets Adjusting Risk Levels Resetting Goals Objectives: Accumulate Assets Guard Family Security Guaranteed money is available for retirement Guaranteed Income for Life Wealth Distribution PLANNING Traditional nature of retirement under attack: Retirees more closely connected to society Personal savings playing a greater role New set of web-based competitors questioning your value Important that you the RR or Agent Invest in Self Designations: CLU; CFP; ChFC; LUTCF: FSS 11 12

3 PLANNING Client Considerations: Behavioral Change Psychological Change Life Change Job Change Lost of Assets Responding to the highest challenge we face! Planning T.E.A.M. it is important to work with other professionals during planning Financial Planner/Register Representative Insurance Agent Employee Benefits Company P&C Agent Brokerage Firms CPA Attorney for Wills & Trusts Elder Care Expert Types of Annuities Variable Fixed Single Premium Immediate Annuity SPIA Objective of Annuities Objective 1. Tax Deferral 2. Income Stream that cannot be outlived 3. Guaranteed Growth (fixed or variable) Classification 1. Non-Qualified 2. Qualified 3. Roth Classification of Annuities By maturity date / Surrender Periods By how premiums are invested / VA or Fixed By how product is funded / DCA; Rollover; 1035 Transfer; By federal tax classification / Qualified or Non-Qualified 17 18

4 Identification of parties Annuitant Owner Individual or Trust Beneficiary Names Date of Birth Social Security Relationship Insured Company rating How Fixed, Variable and Indexed Contract Provisions Affect Consumers Types of Annuitization / Life; Jt. Life; Period Certain; Installment; Cash Refund Basic Product Features Provisions Common to All Annuities Contract Provisions Important to Consumers Basic Product Features Annuitization Fixed Variable Variable using mutual funds - tied to the market. Fees & Admin Charges Riders Volatility Fixed interest rates locked in and guaranteed tied to the long term treasury Riders No Fees Indexed interest rates are CAPPED.. Insured buys options Indexes such as: S&P 500, NASDAQ, Russell 2000, 10yr Treasury, S&P 400, Euro Stoxx 50, Hang Sang, & Gold Riders No Losses & locks in any gains fixed guaranteed. No Fees Provisions Common to Annuities Titled Premiums Single or Flexible Surrender Periods Guarantees Annuitization methods and options Death Benefits Liquidity Contract Provisions Important to Consumers Guarantees Holding Periods Surrender charge periods Free withdrawal allowance Crisis waivers Contract Fees and Expenses Rules for Early Withdrawal Tax Free Transfers & 1035 s Death during surrender period 23 24

5 BREAK McGill, Rediger & Simmons LLC for all your insurance needs. Annuity Suitability Case Study Agent Glenn Neasham Case Study 1. Producer has over 23 year s industry experience with substantial client base. 2. Existing Client, with over 10 year s experience, owns this annuity himself and makes referral. 3. Previous year, Client s annuity earned 10%. 4. Referral is female, 83, good health her partner is Producer s existing client. 5. Gathered financial information (home is free and clear). 6. Discussed tax deferral, guarantees, returns, risk tolerance and financial goals. 7. Referral s goal to eliminate taxation of Social Security income. 8. Discussed most popular, number-one selling annuity in U.S. 9. Annuity has best crediting strategy compared to over 350 other fixed annuities. 10. Allows participation in stock market gains with no downside risk Case Study 11. Has fixed account earns 3-3.5%. 12. Over last 3 years average returns were 8%. 13. Other clients who have this annuity all satisfied. 14. Referral has $239,000 CD maturing at local bank. 15. Placed $175,000 in annuity; over $100,000 left in CD s and cash. 16. Referral did not make son the beneficiary hates him.. estrange from Child 17. Made the partner the beneficiary (the agent s original client who made the referral). Annuity Taxation of Qualified and Non-qualified Premiums Surrenders and Withdrawals Income Taxation Annuitization (exclusion ratio) Estate Taxation 18. Producer contacted son about this; he said; she s free to do whatever she wanted 19. Insurer rated A+ by AM Best. 20. Insurer processed the application and issued the contract Annuity Taxation Annuities are especially attractive to retirees.but many retirees will die before tapping their deferred annuity. What are the tax consequences to the annuity beneficiary and should other options be arranged? A Deferred Annuity offers a distinct tax-benefit. Earning grow tax-deferred Tax-deferred earnings will eventually be taxed upon withdrawal Contributions to the annuity will not be taxed upon withdrawal Non-qualified annuities which are funded with after tax contributions. Annuitant s taxation Partial withdrawal is made, the IRS presumes that earnings come out first Under regular monthly payments a portion of each payment is not taxed Treated as a return of your nontaxable contributions. Exclusion ratio calculated by the insurance company designates that untaxed portion. Taxation after death of annuitant Beneficiary taxation After tax contributions made by the deceased remain untaxed when received by the beneficiary. tax-deferred earnings within the annuity will be taxed as ordinary income to the beneficiary. Begun receiving lifetime payments, no benefits would be left for the annuity beneficiary. contract called for a fixed term guaranteed payments, the beneficiary would received those remaining payments taxed at the deceased s exclusion ratio. Owner died before beginning annuitization, provision may be made for either a lump sum distribution or a series of payments. Series of guaranteed payments, Would not be required to pay taxes on any of the payments until the deceased owner s contribution were fully received. Any payments beyond that would be fully taxed as ordinary income. An annuity beneficiary, can lose a lot of that taxable portion of the annuity. A annuity owner decides not to annuitize, he may use his annuity s value to switch to another option better suited to his beneficiary

6 Income Taxation 1035 / Direct Transfer Exchanges exchange your old annuity or life insurance policy for a new one for any number of reasons. Section 1035 of the I.R.S tax code allows you to do so without incurring any taxable gains. The gains from your old policy can be transferred to a new insurance policy on a tax free basis. You can continue to defer taxes in your new policy for a desired number of years or for your lifetime What is a 1035 Exchange? I.R.S. tax code that allows for the transfer of a non-qualified annuity or life insurance policy to a new policy of equal or greater value. Capital gains and/or income taxes resulting from the growth of the old policy will be avoided and deferred when the transfer is completed properly. Examples of a 1035 exchange: Life Insurance to Life Insurance * Life Insurance Cash Value to an Annuity Tax Deferred Annuity to Annuity Transfer One annuity value to another is the most common example of a Transfer. Old Fixed annuity is yielding below average interest Aggressive and unpredictable variable annuity Transfer qualifies if you are transferring from a non-qualified annuity Non-qualified accounts are simply those you have already paid taxes on the invested principal, but not the gains. A Transfer / Rollover of qualified funds like an IRA, 401k, 403b, TSA, Roth IRA, and any Pension plans. Avoid income taxes on the accumulated gains Transfer your old annuity for a new one. Protocols to this procedure that must be met in order to avoid a taxable event. Both of the insurance companies involved will have paperwork that must be filled out correctly. Cash Value Life Insurance 1035 Exchange 1035 Exchange of the accumulated cash value in your old life insurance You are allowed to withdrawal all (or some of) the cash value in your variable, universal or whole Life Insurance policy and deposit the funds on a tax free basis into a new life insurance policy. Term life insurance is not one of them. Term life insurance has no cash value for the insured. Additionally Cannot avoid income taxes by purchasing a term policy using the cash value from an existing whole, variable, universal, or indexed life contract. Consider this exchange; if you wanted to establish a new single premium paid up life insurance policy. Life insurance needs have changed and you no longer wish to pay ongoing premiums. In other cases, you might simply want to establish a new policy that is more in line with your present needs and continue to pay premiums into the new account Life Insurance to Annuity 1035 Transfer A 1035 cash value from your life policy and transfer it tax free to an annuity This is the least common of the three allowable strategies. Conversely, you may not transfer any gains from an annuity account to a life insurance policy without creating a taxable event. Keep in minds any gains in that annuity will have a taxable event. Life insurance policies offer several tax advantage over annuities. At passing, all proceeds from a life policy can be withdrawn tax free by your beneficiaries including the gains. And life insurance can also avoid federal estate taxes and state inheritance taxes when setup properly. Transfer the accumulated cash value to a single premium paid up policy rather than into an annuity account. If you desire safety and predictability, a single premium whole or indexed life insurance contract can be a good alternative. Both indexed and whole life will earn fixed interest and increase in value year over year based on the declared rate. Estate Taxation The full value of your traditional and Roth IRAs and annuities as of the date of your death will be included in your federal estate tax base. Tax Guides will show you the federal estate tax exposure and the changes in place for 2009, 2010, and The combined estate tax and income taxes on your IRAs and annuities can go as high as 80 percent of the value of your IRA. Federal estate tax rate is 45 percent, and the income tax rate your beneficiaries pay is 35 percent, then 80 percent of the value of your IRA will be paid in taxes. IRAs and annuities avoid probate - are payable directly to a named beneficiary, they are not subject to federal estate taxes. Unfortunately, this isn't true. They will be included in your taxable estate Over the exemption amount for that year, will be taxable

7 Taxes: Facing the Facts 1. U.S. GOV Spending Massively Expanded 2. More and More Paying No Income Tax At All 3. Heavy Tax & Regulatory Burdens on Business 4. U.S. National Debt Growing Steadily Since Economic Growth in Decline for 50 Years Primary Uses of Annuities What are they?? Primary Uses of Annuities Provide a permanent income Tax-deferred wealth accumulation Safe investment haven Primary Uses of Annuities Market-based investment returns With principal guarantee Without principal guarantee Supplemental income Long-term care & Life Insurance funding Income to surviving spouse Appropriate Sales Practices, Replacement and Disclosure Requirements Insurer Suitability Requirements Insurer Responsibilities in the Event of a Suitability Violation Producer Suitability Requirements Suitability Requirements Ensure issuance only when transaction is suitable Establish supervision system Establish standards for validating producer training 41 42

8 Suitability Requirements Establish procedures to deter transactions that are not suitable Provide product specific training Reporting Monitor FINRA information Compliance mitigation Responsibilities of Insurer in the Event of a Suitability Violation Take reasonably corrective action for any consumer harmed by the violation Ensure producer and general or independent agency takes corrective action Penalties may be modified or waived if corrective action is taken promptly after discovery of violation Producer 14 Suitability Requirements: Obtain Required Suitability Information 1. Name 2. Age / Date of Birth 3. Annual / Monthly Income 4. Annual / Monthly Expenses 5. Financial Experience 6. Financial objectives Producer 14 Suitability Requirements: Obtain Required Suitability Information 7. Financial Time Horizon 9. Financial situation and needs: a. Resources used for funding of this annuity. 10. Liquidity needs 11. Liquid Assets / Non liquid assets 12.Liquid net worth not including home 13.Risk tolerance 14.Tax Status 7. Intended use of annuity Producer Suitability Requirements: Obtain Additional Suitability Information Must have reasonable grounds to believe: a. Consumer has been reasonably informed b. Consumer would benefit c. Annuity is suitable for consumer suitability d. Exchange is suitable Producer Suitability Requirements: Obtain Additional Suitability Information Must obtain consumer s suitability information Issue only suitable annuities Issuance must be reasonable (per Sec 2 above) Must record certain consumer action Additional procedures and standards Insurer responsible for supervision/compliance Producer shall not dissuade consumer 47 48

9 Summary Apply the Suitability Checklist Who s Who in Annuities? Know your clients real need Keep it Simple Broader, Comprehensive Planning T.E.A.M. be connected Get the family involved with decision Connections That Count Build Trust and Credibility Was the Transaction Suitable Protect & Grow Your Business NAIC IRS FINRA OIC Elder law Eldercare Insurers PRODUCER Elder Abuse Units Brokerdealers ERISA Parties to Contract Annuity 4 hour CE Course Presented by Richard A. Mangiameli, LUTCF, FSS Director of Annuities Division McGill, Rediger & Simmons LLC. Thank you for your time Give me a call with any questions or Extension #218 51