Annuity Investing for Retirement

Table of Contents

 

 

Chapter 1: Retirement’s Surprise

1

 

Finding Retirement Income

1

 

Everyone is Living Longer These Days

5

 

Retirement Risks

6

 

Baby-Boom Generation Reaches Retirement

8

 

Putting Off Retirement

10

 

Gender Issues in Retirement

10

 

Interest, Dividends and Rental Income

14

 

Supplementing SS with Lifetime Annuities

14

 

Retirement is Expensive

17

 

How Much Money is Needed to Fund Retirement?

21

 

Limiting Credit Card Use in Retirement

23

 

Mortgage Debt

25

 

Paying Loans for Others

25

 

Social Security’s Development

27

 

Changing the Age of Retirement / Choosing a Financial Path

37

 

Taxation Affects Retirement

38

 

Tax Efficiency

39

 

After Longevity, Health is a Major Retirement Concern

40

 

The Disappearing Three-legged Stool

41

 

Diversification

42

 

Rule of 100

47

 

Managing the Retirement Money

47

 

Supplementing Other Retirement Income

50

 

Annuity Purchase Advantages

50

 

Annuity Purchase is not Right for Everyone

51

 

Investing Dedication is a Rare Quality

52

Chapter 2: Annuity Types

54

 

An Ancient Instrument

54

 

The Annuity’s Investment Role

55

 

Capital Reserve Requirements of Insurers

56

 

Structured Settlements

57

 

Annuity Extras & Options

59

 

Principal Protection

59

 

Annuity Cost-of-Living Protection Option

59

 

Premium Methods

60

 

Annuity Choices / Joint and Survivorship

60

 

Guaranteed and Life-Time-Certain Annuities

61

 

Level Annuities

61

 

Capital-Back Guaranteed Annuities / Escalating & Inflation Annuities

62

 

Enhanced Annuities

63

 

The Roth and Education IRA

65

 

Tax-Deferred Accumulation / Flexibility

67

 

Annuity History

67

 

Annuity Basics

71

 

Choosing Between Fixed and Variable Annuities

71

 

Between a Lifetime Annuity and Term Annuity

72

 

Determining Investment Type

73

 

Annuity Participants / “Measuring Life”

74

 

Annuity Terminology

75

 

Annuity Contracts are “Driven”

79

 

Meeting Investment Goals

80

 

     How to Sue an Annuity for Losses by Kay Miranda

82

 

Annuity Investment Advantages

83

 

Safety of Principal

84

 

Reserve Pools

87

 

Tax-Deferred Growth

91

 

Tax-Deferred Defined

92

 

Tax-Deferred Status

93

 

Tax-Deferral Exception / Annuity Gifts

94

 

Annuities are (Sometimes) Protected Assets

95

 

Probate / Sometimes an Annuity is a Bad Idea

97

 

Surrender Penalties

98

 

Other Tax Issues

98

 

Death of the Annuitant

99

 

1035 Exchanges

100

 

Making the Right Annuity Choices

100

 

So Many Choices

101

 

Immediate Annuities

103

 

Split Annuities

104

 

Single Premium Annuities

104

 

Flexible Premium Annuities / Policy owner Risk

105

 

Variable Annuities

106

 

Fixed Annuities

110

 

Declared Rate Fixed Annuities / Indexed Fixed Annuities

110

 

Two-Tiered Annuities: Tier 1 and Tier 2

111

 

Interest Rates

112

 

Old Money-New Money

113

 

Interest Rates

115

 

Price Inflation

120

 

Measures of Inflation

122

 

Time Value of Money (TVM) / Issue Age Guidelines

122

 

Annuity Date

123

 

Withdrawal and Surrender Charges and Waivers

124

 

     Chart / “policy term”

124

 

Premium Payments

126

 

Contract Administration Charges and Fees

126

 

ERISA and Tax-Favored Retirement Plans

127

 

Using Annuities in Tax-Favored Retirement Plans

128

 

Group and Individual Annuity Contracts

128

 

IRS Requirements for Annuity Funding

129

 

Taxation of Qualified Annuity Distributions

129

Chapter 3: Fixed Rate Annuities

131

 

Annuity Bailout Options

133

 

  Example

134

 

Guaranteed Rates of Return

136

 

1. What is the Guaranteed or Roll-Up Rate?

139

 

2. How Long is Roll-Up Rate Guarantee Period?

140

 

3. What is the Actuarial Payout?

140

 

4. What Fees will be Charged?

140

 

5. What are the Insurance Company Ratings?

141

 

Fixed & Variable Options

141

 

Financial Strength of the Insurer

142

 

How Fixed Period Annuities Work

142

Chapter 4: Equity Indexed Annuities (EIA)

144

 

Researching the Products

145

 

Defining the Equity Indexed Annuity

147

 

EIA Guaranteed Rates of Return

153

 

Know the Facts Prior to Buying

155

 

Index Crediting

156

 

Participation Rates

157

 

Averaging

158

 

Caps

159

 

Spreads, Margins, and Administrative Fees / Returns

159

 

Indexing Formulas

161

 

Annual Reset Indexing Method

162

 

High Water Mark Indexing Method

162

 

Point-to-Point Indexing Method

163

 

Multiple EIAs with Diversified Indexing Methods

164

 

Withdrawing Annuity Funds

165

 

Payout Options

165

 

  Example

166

 

EIA Safety

167

 

A Comprehensive Financial Plan

167

 

  Example

168

 

Grasping Fundamental Aspects of the Product

171

 

Terminology for a Complex Product

173

 

General Contract Provisions

177

 

     Entire Contract

177

 

     Changes and/or Waivers / Misstatements

177

 

     Required Reporting / State Law

178

 

     Claims of Creditors / Other Contract Items

179

 

Additional Payments

179

 

Surrender Values and Penalties / New Developments in Indexed Products

180

Chapter 5:  Variable Annuities

182

 

Variable Annuity Death Benefit

182

 

Subaccounts / Immediate or Deferred / Long-Term Investments

184

 

Annual Expenses

185

 

Variable Annuity Buyback Offers

186

 

Funding Variable Annuities

189

 

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

190

 

The Commitment

191

 

Asset Allocation

192

 

Asset Allocation Importance

193

 

Choosing Asset Allocation

194

 

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

195

 

Business Risk, Market Risk, Interest-Rate risk & Inflation Risk

196

 

Protection Against Inflation

197

 

Measuring All the Risks

198

 

Lifecycle Beta

199

 

Living with Risk and Return

200

 

Managing Sub-Account Strategies

200

 

Relationship Between Variable Accounts

201

 

Sub-Account Options

202

 

     Performance

202

 

     Risk Control / Expense Minimization / Investment Options

203

 

     Family Rating / Management

204

 

Aggressive Growth for Capital Appreciation

204

 

Aggressive Growth for Maximum Growth

205

 

Growth Sub-Accounts Seeking Capital Appreciation

205

 

Growth & Income Sub-Accounts Combining Stock and Bonds

206

 

International Stocks

207

 

Balanced Sub-Accounts Combining Stock & Bonds

208

 

Corporate Bond Sub-Accounts Fixed Income

209

 

Government Bond Sub-Accounts Fixed Income

211

 

High Yield Bond Sub-Accounts Fixed Income

212

 

Global & International Bond Sub-Accounts Fixed Income

213

 

Specialty Portfolios

215

 

Metals and Utility Sub-Accounts Specialty Portfolios

216

 

Utility Stock Sub-Accounts Specialty Portfolios

217

 

1997 Tax Law Hits Variable Annuities

218

 

Reallocation of Assets / No Sales Charges / Withdrawals

219

 

Avoids Probate / Safety

221

 

Reserve Requirements

222

 

Liquidity / Inflation Protection

223

 

No Investment Ceiling / Major Variable Annuity Features

224

 

Moving Money from one Vehicle to Another

224

 

Free-Look Period / SS Income Exclusion

225

 

Investor Control / Professional Money Managers / Unlimited Contributions

226

 

Commission Charges

226

Chapter 6: Annuity Riders

227

 

Riders and Annuities / Long-Term Care Benefits

227

 

A Long-Term Care Rider is not a Premium Waiver

228

 

Guaranteed Minimum Withdrawal Benefit Rider (GMWB)

228

 

Guaranteed Minimum Income Benefit Rider (GMIB)

230

 

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

232

 

Available Benefit Periods / Policy Loans

233

 

Life Insurance Riders / What is a Life Insurance Rider?

233

 

Guaranteed Insurability Rider (Renewal Provision) / Spouse Insurance Rider

234

 

Accidental Death or Double Indemnity Rider / Waiver of Premium Rider

234

 

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

235

 

Return of Premium Rider / Other Riders

236

Chapter 7: Annuitization Options

237

 

Withdrawal Privilege Options

238

 

Annuitization Ramifications

239

 

Qualified and Non-Qualified Annuity Annuitization

239

 

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

241

 

     Lump Sum, and Joint-and-Survivorship

242

 

  Example

243

 

Nonhuman Payees under a Settlement Option

244

 

Lifetime Income Payout Option

245

 

Life Annuity, Period Certain Payout Option

245

 

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

246

 

Required Distribution

247

 

Loan Provisions

247

 

Maturity Dates

248

Chapter 8: Life Insurance

253

 

Participating Whole Life

253

 

Interest Sensitive Whole Life / Universal Life / Term Life

254

 

Indexed Life / Variable Life Insurance Products

255

 

Variable Life / Variable Universal Life

256

 

Indexed Life and Indexed Annuities

257

 

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

258

 

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

258

 

Interest Rate Guarantee

258

 

Guarantees Among Strategies / Basic Interest Strategy

259

 

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

259

 

Equity Indexed Life Insurance Loans/Withdrawals

259

 

Similarities / Differences

260

 

Paying for the Life Insurance Contract / Single Premium / Fixed Premium

261

 

     Flexible Premium / Premium Load

262

 

Monthly Life Insurance Deductions

263

 

Bands in Life Insurance Policies

264

 

Similar to Break Points / Consumer Awareness

265

 

Policyholder Risk

266

 

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

266

 

Withdrawals / Collateral Assignments

267

 

Bucket Investing

268

 

“Laddering” or “Buckets of Income”

268

 

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

270

 

The IRC and Over-funding Life Insurance

270

 

TAMRA / DEFRA

271

 

How to Over-fund Equity Indexed Universal Life Insurance

271

 

Monthly Deductions / Bonus Rate Annuity / Cash Surrender Values (Life Insurance)

272

 

Guaranteed Cash Value

273

 

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

273

 

1035 Exchanges

274

 

Important 1035 Exchange Procedures

274

 

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

276

 

Withdrawals of Cash Value / Estate Taxation / Annuities and Taxation

277

 

Tax Surprises / Withdrawal Impact on Death Benefits

278

 

Taking a Policy Loan to Avoid Surrender Charges

279

 

Understanding the Purchase

280

 

Life Insurance Illustrations Model Regulation / Purpose / Authority / Applicability and Scope

281

 

Section 4: Definitions

281

 

Section 5: Policies to be Illustrated

284

 

Section 6: General Rules and Prohibitions

284

 

Section 7: Standards for Basic Illustrations / Format

285

 

Narrative Summary

286

 

Numeric Summary / Statements

287

 

Tabular Detail / Section 8: Standards for Supplemental Illustrations

288

 

Section 9: Delivery of Illustration and Record Retention

289

 

Section 10: Annual Report; Notice to Policyowners

290

 

Section 11: Annual Certifications

291

 

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

293

 

Compare Equity Indexed Insurance

293

 

What is the financial rating of the insurance company?

293

 

What is the illustrated index credited interest rate?

293

 

Is there a guaranteed minimum interest rate?

294

 

What is the current index cap rate? What is the guaranteed minimum cap rate?

294

 

What is the current participation rate? What is the guaranteed participation rate?

294

 

What is the index floor?

294

 

How many index account options are available?

294

 

How many index crediting methods are available?

294

 

How long are the index segment periods?

295

 

What are the transfer provisions among accounts?

295

 

What are the policy charges and fees associated with equity indexed life policies?

295

 

How long are the policy surrender charges?

295

 

How are loans treated? Do the companies offer fixed or variable loans or both?

295

 

How long is the death benefit guaranteed?

296

 

What policy riders are available?

296

 

Final Analysis

296

 

Annual Statements

296

Chapter 9: Product Suitability

297

 

What is Suitability?

297

 

Annuity Suitability

297

 

Suitability Standards

298

 

Determining Suitability

298

 

    Age of the Buyer / Annual Income / Financial Situation & Needs

300

 

    Annuity Funding / Financial Experience

301

 

    Financial Objectives (Do the Math)

302

 

    Intended Use of the Annuity / Time Horizons

303

 

    Existing Assets / Liquidity Needs or Requirements

304

 

    Net Worth / Rick Tolerance

305

 

    Tax Status

306

 

    Entering Retirement

307

 

Assessing Suitability

307

 

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

309

 

  Product Knowledge / Communication Skills / Identifying Suitability Issues

310

 

It is Not a Liquidity Issue but Rather a Suitability Issue

311

 

Who is the Unsuitable Annuity Buyer?

312

 

Annuity Suitability Recommendations

313

 

Requesting Information to Obtain Suitability Status

315

 

The Legal Side of Suitability Standards

318

 

Self-Protection Through Errors and Omissions Insurance

324

 

Insurance Agents / Financial Planners

329

 

Public Harm / Triggers

330

 

Insurance Recommendations in the Real World

331

 

Degree of Risk

333

 

Risk Classifications

334

 

The Burden of Risk

335

 

What Type of Documentation?

336

 

Claiming Unearned Education or Experience

337

 

Full Disclosure

337

 

Release of Liability Form

338

 

What is Due Diligence?

338

 

Fiduciary Duties / Keeping Current on New Trends

339

Chapter 10: Insurance Ethics

341

 

Ethic Subject Matter for Continuing Education

341

 

Meeting Education Requirements in a Timely Manner

342

 

  Example

342

 

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

343

 

Duty of Disclosure / Representations and Warranty

344

 

Representations

345

 

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

345

 

Guaranty Association

346

 

Knowledge of the Product

347

 

A Difficult Career Choice

347

 

It is a Matter of Perspective

348

 

  Three Reasons why people seem to find it difficult to save

349

 

Establishing Ethical Goals

350

 

  Example

352

 

Why Be Ethical?

353

 

Ethics in the Workplace

355

 

The Same by Any Name

356

 

Putting the Past into the Future

357

 

Personal Values

358

 

Companies Set Guidelines

360

 

  Example:  Scenario #1 & #2

365

 

Promoting Ethical Behavior

366

 

Is it possible to teach ethical behavior to others?

368

 

What is the scope of ethics?

369

 

What does it take to be a moral person?

370

 

What quality of work do you want to perform?

371

 

What do I want my legacy to be?

371

 

The Leaders of the Pack

372

 

  Example #1

372

 

  Example #2

373

 

What are our responsibilities to other moral persons?

374

 

Objectivist Ethics

376

 

Holding on to our Ethical Code

377

 

  Example

378

 

     Sympathy and Empathy

382

 

Looking the Part / Courtesy

383

 

Mores

384

 

  Example

384

 

  Example

387

 

Education

388

 

Getting Education in a Timely Manner

389

 

Product Knowledge

390

 

  Example

390

 

Laying Out Policy Benefits and Limitations

391

 

     Minimizing consumer misunderstandings

392

 

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

394

 

When an Agent Allows Misconceptions

395

 

When the Client Thinks the Premiums are too High

396

 

Obtaining Proper Application Signatures / Keeping in Touch after the Sale

397

 

Selling the “Fast Buck” Item

398

 

Commingling Funds / The Professional

399

 

Preparing for Tomorrow / Financial Management

400

 

Due Diligence

401

 

If It’s Legal . . .

410

 

United Insurance Educators, Inc.

8213 – 352nd Street East

Eatonville, WA  98328

(253) 846-1155