Annuities 101. What is an annuity. Type of Annuities. How to get started

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1 Annuities 101 What is an annuity Type of Annuities How to get started

2 What is an Annuity? An annuity is a long-term (often 5 years or more), interest-paying contract offered through an insurance company. An annuity can be deferred as a means of accumulating income while deferring taxes, or it can be immediate and pay you an income now and as long as you live. The Opposite of Life Insurance Annuities are sometimes described as the opposite of life insurance. Annuities protect you from living too long, while life insurance protects you from dying too soon. With an annuity, the financial risk of living too long is transferred to the insurance company. A Lifetime Income With the average retirement period lengthening, annuities are increasing in importance. Only annuities can pay you an income you can t outlive, even after all the money you put into the annuity has been exhausted. Therefore, annuities can help you manage your cash flow, and provide a safe and competitive means to accumulate funds.

The Opposite of Life Insurance Annuities are sometimes described as the opposite of life insurance. Annuities protect you from living too long, while life insurance protects you from dying too soon.

3 What are the different types of Annuities? This guide explains major differences in different kinds of annuities to help you understand how each might meet your needs. But look at the specific terms of an individual contract you re considering and the disclosure document you receive. If your annuity is being used to fund or provide benefits under a pension plan, the benefits you get will depend on the terms of the plan. Single Premium or Multiple Premium You pay the insurance company only one payment for a single premium annuity. You make a series of payments for a multiple premium annuity. There are two kinds of multiple premium annuities. One kind is a flexible premium contract. Within set limits, you pay as much premium as you want, whenever you want. In the other kind, a scheduled premium annuity, the contract spells out your payments and how often you ll make them. Immediate or Deferred With an immediate annuity, income payments start no later than one year after you pay the premium. You usually pay for an immediate annuity with one payment. The income payments from a deferred annuity often start many years later. Deferred annuities have an accumulation period, which is the time between when you start paying premiums and when income payments start.

If your annuity is being used to fund or provide benefits under a pension plan, the benefits you get will depend on the terms of the plan.

4 What are the different types of Annuities? Fixed During the accumulation period of a fixed deferred annuity, your money (less any applicable charges) earns interest at rates set by the insurance company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change. Variable During the accumulation period of a variable annuity, the insurance company puts your premiums (less any applicable charges) into a separate account. You decide how the company will invest those premiums depending on how much risk you want to take. You may put your premium into a stock, bond or other account, with no guarantees, or into a fixed account, with a minimum guaranteed interest. During the payout period of a variable annuity, the amount of each income payment to you may be fixed (set at the beginning) or variable (changing with the value of the investments in the separate account).

contract. The company guarantees that it will pay no less than a minimum rate of interest.

5 Taxes & Annuities Taxation of Annuity Income Income received from a nonqualified annuity under a structured annuitization option is taxed in accordance with the exclusion ratio. The exclusion ratio treats each annuity payment as part principal and part interest, thereby excluding a portion of each payment from tax and taxing a portion. The exclusion ratio is the investment in the contract (i.e., total premiums paid) divided by the expected return (i.e., total amounts to be received). If the expected return is not based on a life expectancy as would be the case with a fixed term of years option, for example it is calculated simply by adding the total amounts to be received. If the expected return is based on a life (or joint life) expectancy, certain IRS-prescribed tables and multipliers are used to determine the total expected return. Taxation to the Beneficiary at the Annuitant s Death (Post-Annuitization) In cases where an annuitant owns a term certain or refund annuity and dies after payments begin but before receiving the full amount guaranteed, the balance is paid to a designated beneficiary. In these cases, the amounts paid to the beneficiary whether as a single payment or in installments are received tax free until the sum of all payments that were excluded from tax exceed total premiums invested. After that, any amounts the beneficiary receives are fully taxable.

The exclusion ratio is the investment in the contract (i.e., total premiums paid) divided by the expected return (i.e., total amounts to be received).

6 Taxes & Annuities Taxation to the Beneficiary at the Annuitant s Death (Pre-Annuitization) In cases where the owner is the same as the annuitant, what happens at the annuitant s death is governed by the rules applicable at the owner s death. In cases where the annuitant is different from the owner and the annuitant dies first, federal tax law does not require that taxes be paid unless the contract terminates, which many do. However, recent clarification on this issue by Congress and the IRS has given insurers confidence to design contracts that survive the death of a nonowner annuitant by naming a new annuitant. Often this is the owner or contingent annuitant. One important exception to this occurs when the owner is a non-natural person, such as a trust. In these situations, the death of the annuitant results in exactly the same tax treatment as the death of an owner. Taxation to the Beneficiary at the Owner s Death For contracts in deferral, federal tax law requires that any gain in the contract be recognized and consequent taxes paid whenever the owner dies. This is also true in the event of multiple owners when any owner dies. Therefore, most annuity contracts provide for payment of the death benefit to the beneficiary at the time of the owner s death. This means that the beneficiary will be responsible for income taxes on the contract s gain.

In cases where the annuitant is different from the owner and the annuitant dies first, federal tax law does not require that taxes be paid unless the contract terminates, which many do.

7 Taxes & Annuities Taxation of Annuity Withdrawals and Distributions There are a number of ways for contract owners to access the values in their annuities other than through annuitization. These options include systematic withdrawals, loans and full or partial surrenders, all of which can be utilized before an annuity s maturity date. However, current tax laws are such that any of these distribution options may create a taxable event For annuities purchased before August 14, 1982, the general rule regarding cash withdrawals, amounts received as loans or amounts received on surrenders is that they are tax free until they equal the contract owner s basis or investment in the contract. After that, they are fully taxable as income. These annuities are given firstin, first-out (FIFO) treatment. Annuities purchased on or after August 14, 1982, the general rule regarding these same kinds of distributions is that they will be treated first as fully taxable interest payments and only second as a recovery of non-taxable basis. These annuities are given last-in, first-out (LIFO) treatment.

However, current tax laws are such that any of these distribution options may create a taxable event For annuities purchased before August 14, 1982, the general rule regarding cash withdrawals,

8 Taxes & Annuities Penalties for Early Distributions or Withdrawals To promote the use of annuities as retirement plans and to discourage their use as short-term tax-sheltered investments, a 10% penalty is imposed on premature distributions, or those taken before the contract owner s age 591/2. Therefore, an individual who, at age 54, withdraws a sum of $5,000 from his or her annuity will have to pay a current tax plus a $500 penalty as well, to the extent the withdrawal is attributed to interest earnings. No penalty is imposed for distributions taken:after age 591/2; In the event of disability; In the event of death; or As part of a series of substantially equal payments taken over life expectancy.

Therefore, an individual who, at age 54, withdraws a sum of $5,000 from his or her annuity will have to pay a current tax plus a $500 penalty as well, to the extent the

9 Annuities & CD s Assume an individual has $100,000 to invest and is considering an annuity or a CD. He or she is a 40% (combined state and federal) taxpayer. The following shows how tax deferral gives the annuity a significant advantage over the CD.* CD Annuity Before-tax yield: 6.50% 6.50% After-tax yield: 3.90% 6.50% 1 year $103,900 $106,500 5 years $121,081 $137, years $146,607 $187, years $177,514 $257, years $214,937 $352,365 *Both investments assume the same rate of return over 20 years and annual compounding. After 20 years, the annuity value after taxes is $251,419.

* CD Annuity Before-tax yield: 6.50% 6.50% After-tax yield: 3.90% 6.

10 How to quote and View Annuity Details 1) go to 2) Login using your agent ID 3) Click on the Quotes Tab

11 How to quote and View Annuity Details 4) Click on the AnnuityQuotes Tab

12 How to quote and View Annuity Details Annuity Quote Engine 5) Enter your criteria to start viewing available annuities.

13 Bill Levinson-Vice President 5551 N. University Drive Ste 201 Coral Springs, FL Ph. (954) Fax.(954) Toll Free (800)

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Annuity Principles and Concepts Session Five Lesson Two. Annuity (Benefit) Payment Options

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