Annuity Investing for Retirement, Part 1

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

37

 

Choosing a Financial Path

38

 

Taxation Affects Retirement

38

 

  Tax Efficiency

40

 

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

59

 

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

 

  Roth IRA / the Coverdell IRA

65

 

  Tax-Deferred Accumulation / Flexibility

67

 

Annuity History

67

 

Annuity Basics

71

 

Choosing Between Fixed and Variable Annuities

71

 

  Choosing 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 / 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

 

Investment Risk

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”

125

 

Premium Payments

126

 

Contract Administration Charges and Fees

127

 

ERISA and Tax-Favored Retirement Plans

128

 

Using Annuities in Tax-Favored Retirement Plans

128

 

Group and Individual Annuity Contracts

129

 

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

176

 

     Entire Contract

177

 

     Changes and/or Waivers / Misstatements

177

 

     Required Reporting / State Law / Claims of Creditors

178

 

     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

201

 

  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 Sub-Accounts Specialty Portfolios

216

 

Utility Stock Sub-Accounts Specialty Portfolios

217

 

  1997 Tax Law Hits Variable Annuities / Reallocation of Assets

218

 

  No Sales Charges / Withdrawals

219

 

  Avoids Probate

220

 

  Safety / Reserve Requirements

221

 

  Liquidity / Inflation Protection

222

 

No Investment Ceiling / Major Variable Annuity Features

223

 

  Moving Money from one Vehicle to Another

223

 

  Free-Look Period / SS Income Exclusion

224

 

  Investor Control / Professional Money Managers / Unlimited Contributions

225

 

  Commission Charges

225

 

 

United Insurance Educators, Inc.

PO Box 1030

Eatonville, WA 98328

 

(253) 846-1155

 

mail@uiece.com