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Annuities by Brett Salzer Annuities • What is an Annuity? – The term annuity is used in finance to refer to any terminating stream of fixed payments over a specified period of time. – This usage is most commonly seen in academic discussions of finance, usually in connection with the valuation of the stream of payments, taking into account time value of money concepts. • Annuities as a Financial Product – An annuity contract is a product, typically offered by a financial institution or insurance company, that may accumulate value and take a current value and pay it out over a period of years. • Old Fashion Annuities Types of Annuities • Two major types of annuities – Immediate • Life Annuities • Period Certain – Deferred • Fixed Annuities • Variable Annuities • Equity Indexed Annuities Deferred Annuities • What are they? – Chiefly a vehicle for accumulating savings with a view to eventually distributing them either in the manner of an immediate annuity or as a lump-sum payment. • Taxation – All growth is tax deferred – FIFO and LIFO • Guarantees – Insurance Company Ratings Fixed Annuities • Introductory Rates • Minimum Rates • Free Withdrawal • Bailout Rates • CD Comparison • CDSC Variable Annuities • Tax Deferral in amounts > than IRS Code • Living Benefits • Death Benefits • Insurance component – Insuring success – Protecting Investment Portfolio Why VAs? • Tax Deferral • Insuring Success – Other forms of insurance • Professional Mgmt of Sub Accounts • Riders and Benefits • Personal Pensions – Income can’t outlive 2 ways of Investing +98.5% •Individual Stocks •Variable Annuities +96.0% •Separately Managed Accounts •Mutual Funds •ETFs +6.0% -100.0% Living Benefits • Guaranteed minimum income benefit (GMIB) – a guarantee that one will get a minimum income stream upon annuitization at a particular point in the future • Guaranteed minimum accumulation benefit (GMAB) – a guarantee that the account value will be at a certain amount at a certain point in the future • Guaranteed minimum withdrawal benefit (GMWB or GWBL) – a guarantee similar to the income benefit, but one that doesn't require annuitizing • Guaranteed-for-life income benefit (GLIB) – a guarantee similar to a withdrawal benefit, but will pay you for as long as you live and does not require annuitization Death Benefits • Return of premium – a guarantee that you will not have a negative return • Roll-up of premium at a particular rate – a guarantee that you will achieve a minimum rate of return, greater than 0 • Maximum anniversary value – looks back at account value on the anniversaries, and guarantees you will get at least as much as the highest values upon death • Greater of MAV or particular roll-up VA Components • 3 “Buckets” of Values – Account Value • Floats with market performance – Income Base • Increase determined by Living Rider – Death Benefit • Determined by Death Rider Declining Markets Upside Participation Zero Return Hypothetical Market Return Hypothetical Market Return Hypothetical Market Return Hypothetical Age 85? • Three Choices at Age 85 – Continue Annuity • DB will start to decrease • Free to take any % withdrawal – Annuitize • Period Certain • Give up DB – Stop taking income – Surrender Contract Criticism of VAs • High Fees • High Surrenders • Lack of Liquidity • Lack of Return – Long Term vs Short Term Market Indexed Annuities • Linked to various benchmarks • Large Upside fee • Have shelf or floor returns • Also have ceiling returns • QUESTIONS?
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