The ABC’s of Annuity Investing

Table of Contents

1. 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
2. Annuity Types		37
	The Test of Time	37
	The Annuity’s Investment Role	38
	Structured Settlements / Annuity Extras; Principal Protection	39
	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 and Variable Annuities / Between a Lifetime Annuity and 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
3. Fixed Rate Annuities		100
	Annuity Bailout Options	101
	Guaranteed Rates of Return / Financial Strength of the Insurer	105
	How Fixed Period Annuities Work	106
4. 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	128
	EIA Safety	129
	A Comprehensive Financial Plan	130
	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
5. Variable Annuities		145
	Variable Annuity Death Benefit	145
	Subaccounts / Immediate or Deferred	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	157
	Alpha and Beta / 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
	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
6. Annuity Riders		185
	Riders and Annuities / 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
7. 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
8. 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 Rule 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?	239
	Life Insurance Illustrations Model Regulation / Purpose / Authority / Applicability and Scope	240
	Definitions	240
	Policies to be Illustrated	243
	General Rules and Prohibitions	243
	Standards for Basic Illustrations/Format	244
	Narrative Summary/Numeric Summary	246
	Statements/Tabular Detail	247
	Standards for Supplemental Illustrations	248
	Delivery of Illustration and Record Retention	248
	Annual Report; Notice to Policyowners	249
	Annual Certifications	251
	Penalties / Separability / Effective Date	252
	Compare Equity Indexed Insurance/Insurer Financial Rating	253
	Credited Interest/Rate/Minimum Interest Rate / Index Cap Rate	253
	Participation Rate / Index Floor/Options Crediting Methods / Segment Periods	254
	Transfer Provisions / Charges / Surrender Charges/Loans / Death Benefit Guarantees	255
	Riders / Final Analysis/ Annual Statements	256
9. Insurance Ethics		257
	Ethic Subject Matter for Continuing Education	257
	Meeting Education Requirements in a Timely Manner	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
	What are our responsibilities to other moral persons?	295
	Objectivist Ethics	297
	Holding on to our Ethical Code	298
	Sympathy and Empathy	303
	Looking the Part / Courtesy	304
	Mores	305
	Education	309
	Product Knowledge	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
10. 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	348
	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	360
	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 / Multiple EIAs with Diversified Indexing Methods	368
	Withdrawing Annuity Funds / Payout Options	370
	Nonhuman Payees Under a Settlement Option / Lifetime Income Payout Option	371
	Life Annuity, Period Certain Payout Option / Joint-and-Last-Survivor Payout Option	372
	Required Distribution / Taxation	373
	Qualified and Non-Qualified Annuitization	374
	ERISA and Tax Favored Retirement Plans / Using Annuities in Tax Favored Plans	375
	IRS Requirements for Annuity Funding / Taxation of Qualified Annuity Distributions	376
	Financially Sound Insurers	377
	State Guaranty Associations / Suitability Standards	379
	Determining Suitability	380
	Sales Practices	381
	Product Replacement / Deceptive Sales Practices / Full Disclosure / Product Knowledge	382
	Identifying Suitability Issues	383
	Long-Term; Not Short-Term Use	384
	A Comprehensive Financial Plan	385
	Tax-Deferred Status	389
	Tax-Deferral Exception / Exchanges	390
	Annuity Gifts / Other Tax Issues / Annuities Might Protect Assets	391
	Probate / An Annuity Might be a Bad Idea: Age	393
	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
	This Completes Your Course	407

United Insurance Educators, Inc.

PO Box 1030

Eatonville, WA  98328

(253) 846-1155