The ABC’s of Annuity Investing

Table of Contents

 

I. Retirement’s Surprise

6

 

Finding Retirement Income

6

 

Everyone is Living Longer These Days

7

 

Retirement Risks

8

 

Baby-Boom Generation Reaches Retirement

10

 

Putting Off Retirement

11

 

Gender Issues in Retirement

12

 

Interest, Dividends and Rental Income / Supplementing SS with Lifetime Annuities

16

 

Retirement is Expensive

18

 

How Much Money is Needed to Fund Retirement?

20

 

Limiting Credit Card Use in Retirement

21

 

Social Security’s Development

22

 

Changing the Age of Retirement / Financial Defense

25

 

Taxation Affects Retirement

26

 

Tax Efficiency / After Longevity, Health is a Major Retirement Concern

27

 

The Disappearing Three-legged Stool

28

 

Diversification

29

 

Rule of 100

30

 

Managing the Retirement Money

31

 

Supplementing Other Retirement Income

33

 

Annuity Purchase Advantages / Annuity Purchase is not Right for Everyone

34

 

Practical Application

35

II. Annuity Types

37

 

The Test of Time

37

 

The Annuity’s Investment Role

38

 

Structured Settlements / Annuity Extras; Principal Protection

39

 

Annuity Cost of Living Protection / Premium Methods

40

 

Annuity Choices / Joint and Survivorship / Guaranteed and Life-Time-Certain

41

 

Level Annuities / Capital-Back Guaranteed Annuities / Escalating Annuities

42

 

Inflation-linked Annuities / Enhanced Annuities / The Roth and Education IRA

43

 

Tax-Deferred Accumulation / Flexibility

44

 

Annuity History

45

 

Annuity Basics

48

 

Choosing Between Fixed & Variable Annuities / Between a Lifetime Annuity &Term Annuity

49

 

Determining Investment Type

50

 

Annuity Participants / “Measuring Life”

51

 

Annuity Terminology

52

 

Annuity Contracts are “Driven”

56

 

Meeting Investment Goals

57

 

     How to Sue an Annuity for Losses by Kay Miranda

59

 

Annuity Investment Advantages

60

 

Safety of Principal

61

 

Reserve Pools / Tax-Deferred Growth

64

 

Tax-Deferred Defined

65

 

Tax-Deferred Status

66

 

Tax-Deferral Exception / Annuity Gifts

67

 

Annuities Are (Sometimes) Protected Assets

68

 

Probate / Sometimes an Annuity is a Bad Idea: Age & Surrender Penalties

70

 

Other Tax Issues

71

 

Death of the Annuitant / 1035 Exchanges

72

 

Making the Right Annuity Choices

73

 

So Many Choices

74

 

Immediate Annuities

75

 

Split Annuities

76

 

Single Premium Annuities / Flexible Premium Annuities / Policyowner Risk

77

 

Variable Annuities

78

 

Fixed Annuities / Declared Rate Fixed Annuities / Indexed Fixed Annuities

82

 

Two-Tiered Annuities: Tier 1 and Tier 2

83

 

Investment Risk

84

 

Old Money-New Money

85

 

Interest Rates

87

 

Price Inflation

89

 

Measures of Inflation

90

 

Time Value of Money (TVM) / Issue Age Guidelines

91

 

Annuity Date / Withdrawal and Surrender Charges and Waivers

92

 

     Chart / “policy term”

93

 

Premium Payments

94

 

Contract Administration Charges and Fees

95

 

ERISA and Tax-Favored Retirement Plans / Using Annuities in Tax-Favored Retirement Plans

96

 

Group and Individual Annuity Contracts / IRS Requirements for Annuity Funding

97

 

Taxation of Qualified Annuity Distributions

98

III. Fixed Rate Annuities

100

 

Annuity Bailout Options

101

 

Guaranteed Rates of Return / Financial Strength of the Insurer

105

 

How Fixed Period Annuities Work

106

IV. Equity Indexed Annuities (EIA)

108

 

Researching the Products

109

 

Defining the Equity Indexed Annuity

110

 

EIA Guaranteed Rates of Return

115

 

Know the Facts Prior to Buying

117

 

Index Crediting

119

 

Participation Rates

120

 

Averaging / Caps

121

 

Spreads, Margins, and Administrative Fees / Returns

122

 

Indexing Formulas

123

 

Annual Reset Indexing Method

124

 

High Water Mark Indexing Method

125

 

Point-to-Point Indexing Method

126

 

Multiple EIAs with Diversified Indexing Methods / Withdrawing Annuity Funds

127

 

Payout Options & an Example

128

 

EIA Safety

129

 

A Comprehensive Financial Plan

130

 

  Example

131

 

Grasping Fundamental Aspects of the Product

134

 

Terminology for a Complex Product

136

 

General Contract Provisions / Entire Contract

139

 

     Changes and/or Waivers / Misstatements / Required Reporting

140

 

     State Law / Claims of Creditors / Other Contract Items

141

 

Additional Payments

142

 

Surrender Values and Penalties / New Developments in Indexed Products

143

V. Variable Annuities

145

 

Variable Annuity Death Benefit

145

 

Subaccounts / Immediate or Deferred / Long-Term Investment

147

 

Annual Expenses / Funding Variable Annuities

148

 

Variable Annuity Fees / Surrender Fees / Early Withdrawal Tax Penalty / Taxation

149

 

The Commitment

150

 

Asset Allocation

151

 

Asset Allocation Importance

152

 

Choosing Asset Allocation

153

 

Analyzing the Asset Allocation Model / Risk & Return / Defining Risk

154

 

Business Risk, Market Risk, Interest-Rate Risk and Inflation Risk / Protection Against Inflation

155

 

Measuring All the Risks (Alpha and Beta)

157

 

Lifecycle Beta / Living with Risk and Return

158

 

Managing Sub-Account Strategies

159

 

Sub-Accounts / Sub-Account Options

160

 

     Performance, Risk Control

161

 

     Expense Minimization, Investment Options, Family Rating, Management

162

 

Aggressive Growth for Capital Appreciation and for Maximum Growth

163

 

Growth Sub-Accounts Seeking Capital Appreciation

164

 

Growth & Income Sub-Accounts Combining Stock and Bonds

164

 

International Stocks

165

 

Balanced Sub-Accounts Combining Stock and Bonds

166

 

Corporate Bond Sub-Accounts Fixed Income

167

 

Government Bond Sub-Accounts Fixed Income

169

 

High Yield Bond Sub-Accounts Fixed Income

170

 

Global & International Bond Sub-Accounts Fixed Income

171

 

Specialty Portfolios

173

 

Metals and Utility Sub-Accounts Specialty Portfolios

174

 

1997 Tax Law Hits Variable Annuities

176

 

Reallocation of Assets / No Sales Charges / Withdrawals

177

 

Avoids Probate

178

 

Safety / Reserve Requirements

179

 

Liquidity

180

 

Inflation Protection / No Investment Ceiling / Major Variable Annuity Features

181

 

Moving Money from one Vehicle to Another / Free-Look Period

182

 

SS Income Exclusion / Investor Control / Professional Money Managers / Unlimited Contributions

183

 

Commission Charges

184

VI. Annuity Riders

185

 

Product Riders / Long-Term Care Benefits

185

 

A Long-Term Care Rider is not a Premium Waiver / GMWB

186

 

Guaranteed Minimum Income Benefit Rider (GMIB)

188

 

Guaranteed Minimum Death Benefit Rider (GMDB) / Required Premium / How a GMDB Rider Works

190

 

Available Benefit Periods / Policy Loans / Life Insurance Riders / What is a Life Insurance Rider?

191

 

Guaranteed Insurability Rider (Renewal Provision) / Spouse Insurance Rider

192

 

Accidental Death or Double Indemnity Rider / Waiver of Premium Rider

192

 

Family Income Benefit Rider / Accelerated Death Benefit Rider / Child Term Rider / LTC Rider

193

 

Return of Premium Rider / Other Riders

 

194

VII. Annuitization Options

195

 

Withdrawal Privilege Options

196

 

Annuitization Ramifications / Qualified and Non-Qualified Annuity Annuitization

197

 

Annuitizing the Contract / Life-time Income, Lifetime and Period Certain, Period Certain

199

 

     Lump Sum, and Joint-and-Survivorship

200

 

Nonhuman Payees under a Settlement Option / Lifetime Income Payout Option

202

 

Life Annuity, Period Certain Payout Option

203

 

Joint-and-Last Survivor Payout Option / Specific Dollar Amount Annuitization / Required Distribution

204

 

Loan Provisions

205

 

Guaranteed Principal

206

VIII. Life Insurance

210

 

Participating Whole Life

210

 

Interest Sensitive Whole Life / Universal Life / Term Life

211

 

Indexed Life / Variable Life Insurance Products

212

 

Variable Life / Variable Universal Life

213

 

Indexed Life and Indexed Annuities

214

 

Basic Interest Crediting Strategy / Five-Year Fixed-Term Interest Strategy

215

 

Five-Year Equity Indexed Strategy / Principal Protection / Annual Lock-In of Earnings

215

 

Interest Rate Guarantee / Guarantees Among Strategies / Basic Interest Strategy

216

 

Five-Year Fixed-Term Strategy / Five-Year Equity Indexed Strategy

216

 

Equity Indexed Life Insurance Loans/Withdrawals

216

 

Similarities

217

 

Differences / Paying for the Life Insurance Contract / Single Premium

218

 

     Fixed Premium, Flexible Premium, Premium Load

219

 

Monthly Life Insurance Deductions

220

 

Bands in Life Insurance Policies / Similar to Break Points / Consumer Awareness

222

 

Policyholder Risk / Interest Rate Risk / No Lapse Guarantees or Death Benefit Guarantees Risk

223

 

Withdrawals

224

 

Collateral Assignments / Bucket Investing

225

 

“Laddering” or “Buckets of Income”

226

 

Strategy Development / Strategies for Buying EI Universal Life Insurance / Over-funding an EI Policy

227

 

The IRC and Over-funding Life Insurance / TAMRA / DEFRA

228

 

How to Over-fund Equity Indexed Universal Life Insurance

229

 

Monthly Deductions / Bonus Rate Annuity / Cash Surrender Values / Guaranteed Cash Value

230

 

Liquidity Transfer Provisions: Access to Cash Values / Surrenders / Loans / 1035 Exchanges

231

 

Important 1035 Exchange Procedures

232

 

Withdrawal Tax Treatment / Income Tax-Free Death Benefit / Internal Buildup

234

 

Withdrawals of Cash Value / Estate Taxation / Annuities and Taxation

235

 

Tax Surprises / Withdrawal Impact on Death Benefits

236

 

To Avoid Surrender Charges, Take a Policy Loan

237

 

Does the Policyowner Understand the Purchase?

238

 

Life Insurance Illustrations Model Regulation / Section 1: Purpose / Authority / Applicability and Scope

239

 

Section 4:  Definitions

240

 

Section 5:  Policies to be Illustrated

242

 

Section 6:  General Rules and Prohibitions

243

 

Section 7:  Standards for Basic Illustrations / Format

244

 

Narrative Summary

245

 

Numeric Summary / Statements

246

 

Tabular Detail / Section 8:  Standards for Supplemental Illustrations

247

 

Section 9:  Delivery of Illustration and Record Retention

248

 

Section 10:  Annual Report; Notice to Policyowners

249

 

Section 11:  Annual Certifications

250

 

Section 12:  Penalties / Section 13:  Separability / Section 14:  Effective Date

252

 

Compare Equity Indexed Insurance / What is the financial rating of the Insurer?

252

 

Credited Interest Rate / Minimum Interest Rate / Index Cap Rate / Participation Rate

253

 

Crediting Methods / Segment Periods / Transfer Provisions / Charges / Surrender

254

 

Loans / Death Benefit Guarantees / Riders / Final Analysis

255

 

Annual Statements

256

IX. Insurance Ethics

257

 

Ethic Subject Matter for Continuing Education

257

 

Meeting Education Requirements in a Timely Manner & Example

258

 

The Doctrine of Utmost Good Faith / Breach of Utmost Good Faith

259

 

Duty of Disclosure / Representations and Warranty / Representations

260

 

Warranty / Action Taken by Insurer against a Breach / Principle of Waiver & Estoppel

261

 

Guaranty Association / Rating Companies

262

 

Knowledge of the Product

268

 

A Difficult Career Choice

269

 

It is a Matter of Perspective

270

 

Establishing Ethical Goals

271

 

Why Be Ethical?

275

 

Following the Law / Ethics in the Workplace

276

 

The Same by Any Name (values and morality)

277

 

Putting the Past into the Future

278

 

Personal Values

279

 

Companies Set Guidelines

281

 

Promoting Ethical Behavior

287

 

Is it possible to teach ethical behavior to others? / What is the scope of ethics?

290

 

What does it take to be a moral person?

291

 

What quality of work do you want to perform?

292

 

What do I want my legacy to be? / The Leaders of the Pack

293

 

  Example #1

294

 

What are our responsibilities to other moral persons? & Example #2

295

 

Objectivist Ethics

297

 

Holding on to our Ethical Code

298

 

     Sympathy and Empathy

303

 

Looking the Part / Courtesy

304

 

Mores

305

 

Education

309

 

Getting Education in a Timely Manner

310

 

Product Knowledge & Example

311

 

Laying Out Policy Benefits and Limitations

312

 

     Minimizing consumer misunderstandings

313

 

Policy Replacement / Why would an agent replace their own business?

315

 

When an Agent Allows Misconceptions

316

 

When the Client Thinks the Premiums are too High

317

 

Obtaining Proper Application Signatures / Keeping in Touch after the Sale

318

 

Selling the “Fast Buck” Item

319

 

Commingling Funds / The Professional

320

 

Preparing for Tomorrow / Financial Management

321

 

Due Diligence

322

 

If It’s Legal . . .

331

X. NAIC Suitability

335

 

2010 Suitability in Annuity Transactions Model Regulations

335

 

Suitability Information / Some Repeated Information / Selecting Appropriate Products

336

 

What is an Annuity? / Making Decisions

337

 

Annuities Have Many Uses / Safety of Investment

338

 

Funding Retirement / Structured Settlements

339

 

Beneficiary Designated Money / Avoiding Probate / Old Money versus New Money Rates of Interest

340

 

Annuity Participants / Types of Annuities

341

 

Categorizing Annuities / Benefit Payment: Immediate Annuities

342

 

Deferred Annuities / Split Annuities / Payment Methods: Single Premium  / Flexible Premium

343

 

Annuity Type Based on Policyowner Risk

344

 

Variable Annuities / Fixed Annuities

345

 

Declared Rate Fixed Annuities / Indexed Fixed Annuities / Two-Tiered Annuities

346

 

Fixed Rate Annuities

347

 

Equity Indexed Annuities

350

 

Variable Annuities

352

 

     Annual Expenses

353

 

Funding Variable Annuities / Variable Annuity Death Benefit

354

 

Contract Provisions Affect Consumers / Surrender Values and Penalties

355

 

Guaranteed Rates of Return (“floor”)

358

 

Index Crediting

361

 

Participation Rates

362

 

Averaging / Caps

363

 

Spreads, Margins and Administrative Fees / Returns

364

 

Indexing Formulas

365

 

Annual Reset Indexing Method

366

 

High Water Mark Indexing Method

367

 

Point-to-Point Indexing Method

368

 

Multiple EIAs with Diversified Indexing Methods / Withdrawing Annuity Funds

369

 

Payout Options

370

 

Nonhuman Payees Under a Settlement Option / Lifetime Income Payout Option

371

 

Life Annuity, Period Certain Payout Option

372

 

Joint-and-Last-Survivor Payout Option / Required Distribution / Taxation

373

 

Qualified and Non-Qualified Annuitization

374

 

ERISA and Tax Favored Retirement Plans / Using Annuities in Tax Favored Retirement Plans

375

 

IRS Requirements for Annuity Funding

376

 

Taxation of Qualified Annuity Distributions / Financially Sound Insurers

377

 

State Guaranty Associations / Suitability Standards

379

 

Determining Suitability

380

 

Sales Practices / Product Replacement / Deceptive Sales Practices / Full Disclosure

382

 

Product Knowledge / Identifying Suitability Issues

383

 

Long-Term; Not Short Use

384

 

A Comprehensive Financial Plan

385

 

Tax-Deferred Status

389

 

Tax-Deferral Exception / Exchanges / Annuity Gifts

391

 

Other Tax Issues / Annuities Might Protect Assets

392

 

Probate

393

 

An Annuity Might be a Bad Idea: Age / Surrender Penalties

394

 

Grasping Fundamental Aspects of the Product

395

 

Basic Information Requirements

396

 

Terminology for Equity Indexed Annuity Products

397

 

General Contract Provisions

400

 

Additional Payments

403

 

Stranger-Originated Annuity Transactions (STAT)

404

 

This Completes Your Reading Material

407

 

Thank you,

United Insurance Educators, Inc.