Annuities

Question 1

Types of Annuities

Answer 1

Types: Immediate, Deferred
Periods:Fixed, Variable (Index)
Payout Methods: Fixed period
fixed amount
straight life (removed from estate)
period certain
Joint survivor Annuity
Joint life Annuity (stops at end of first life. No practical use)
Premium Payment Methods:
SPDA
FPDA
SPIA

Question 2

Fixed Annuity

Answer 2

1. premiums invested in general account
2. insurer bears risk
3. min guaranteed interest rate
4. suitable conservative investor

Question 3

Variable Annuity

Answer 3

1. Premiums invested in sub accounts
2. insured bears investment risk
3. no guaranteed return
4. suitable for investors with slightly higher risk tolerance
5. sold with prospectus

Question 4

Equity Index Annuity

Answer 4

1. Return is based on changes in an Equity Index like S&P
2. typically guaranteed floor and ability to earn more
3. Participation rate determines what % of index return will be credited to account. 10% return/ 80% participation =8%
4. Cap Rate - Max that can be earned
5. Spread - % subtracted from return (up to 3%)

Question 5

Questionable Annuity Reccomendations

Answer 5

1. There are other ways to earn tax deferred growth (IRA and qualified retirement plans)
2. Annuities in IRA no additional tax benefits

Twisting - misrepresentations to entice owner to lapse, forfeit, or surrender policy to buy another

Churning - policy values in one contract are used to purchase another with the same insurer for the purposes of earning a commission.

1035 - must prove client will be better off in new product

Question 6

Annuity Disclosures

Answer 6

1. fees
2. cost of riders
3. surrender charges (0-5 years)
4. terms and conditions

Question 7

Taxation of Annuities

Answer 7

Income earned - not taxable until distributed (natural person only otherwised taxed in yr received ORDINARY gain or loss)

Payments- earnings portion = ordinary income
                - return of principle = not taxable
                - once all principle is recovered entire amount 
                  is taxable (if not all recovered prior to death can claim loss on final tax return)
Investment/return (mo payment x12 x expected life) = excluded amount

After 1982- LIFO

Prior to 59 1/2 10% penalty

Qualified Assets - amount included in estate of first death= replacement cost of single life annuity on 2nds life

Can claim a loss if entered into annuity for profit - (variable annuity) not financial well being of another