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annuities_Annuities 101


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									                                                    Annuities 101
                                                    A Basic Guide to
                                             Understanding Annuities

"I'm more concerned about the return of my money than with the return on my money."
                                              ~The American humorist Will Rogers (1879 - 1935)
                               What Is An Annuity
                                 A Quick Vocabulary & Its Parts

  “An annuity is a contract in which an insurance company
  makes a series of income payments at regular intervals in
return for a premium or premiums paid by the policy holder.”

     The Annuity can Be Single Premium or Multiple Premium
           The Annuity can Be Deferred or Immediate
         The Annuity can Be Qualified or Non-Qualified
                The Annuity’s Value can Grow on a
            Variable , Fixed or Equity Indexed Basis.
             The Annuity’s Value can be paid out by
 Lump-Sum, Systematic Withdrawals or though an Annuitization
Single Premium Annuity
Only one premium needed or called a “Dump In”

Multiple Premium Annuity
Annuity allows for multiple premiums to be paid in over time.

Deferred Annuity
A type of annuity that delays payments of income, (installments or a lump sum) until the
investor elects to receive them.

Immediate Annuity
An annuity contract that is purchased with one payment and has a specified payment plan
which starts immediately.

Qualified Annuity
An Annuity purchased with “Qualified” Funds such as 401K, IRA, Pension Money, Etc.
Think of Qualified money as “Pre-Tax” Money

Non-Qualified Annuity
An Annuity purchased with After Tax Money (Cash)
Variable (Has Risk)
A variable annuity is a contract issued by an insurance company offering separate accounts
invested in a wide variety of mutual funds, stocks and/or bonds.
       – The investment risk is borne by the annuity owner
       – Variable annuities are considered securities and require appropriate securities registration

Fixed (No Risk)
In a fixed annuity, the insurance company guarantees that the account will earn a minimum
rate of interest during the time that the account is growing.
       – Fixed Annuities Guarantee a specific rate of return (Minimum)
       – The company can Unilaterally offer to pay more than the Guaranteed Minimum Rate
       – Since the rate is Guaranteed, this product is similar to a CD
          However an Annuity is Tax Deferred in Contrast to the CD

Equity Indexed (No Risk, Yet Participate in Market Upside)
An equity-indexed annuity is a special type of annuity where the insurance company credits
the account with a return that is based on changes in an equity index.
       – The insurance company usually guarantees a minimum rate of return
       – Client can Choose Various Indexes & Crediting Strategies
          The Index Annuity credits a portion, but not all of the gains in the index – WHY, Next Slide
          Interest credited to FIA will be limited by a Rate Cap, Participation Rate or Margin
          Interest Credits will be based on gains in the index, but not losses
                  Caps, Participation & Margins
Floor on Index-Linked Interest                     [Why Annuities are Popular]         ☜
The floor is the minimum rate that can be credited. The most common floor is 0% and assures
that even if the index becomes negative, the client does not lose money.
Participation Rate
The participant rate determines how much of the increase in the index will be used to calculate
index-linked interest. A company may change the participation rate annually, and may
guarantee the participation rate will never be lower/higher than a specified minimum/maximum
       - Example: If the calculated change in the index is 9% and the participation rate is 70%
           The index-linked interest rate will be 6.3% (9% x 70% = 6.3%).

Cap Rate or Cap
Some annuities may place an upper limit, or cap, on the index-linked interest rate. This is the
maximum rate of interest the annuity will earn. Not all annuities have a cap rate.
       - Example: If the calculated change in the index is 9% and the Cap rate is 6%
           The index-linked interest rate will be 6%

Margin, Spread or Administration Fee
With some annuities, the index-linked interest rate is computed by subtracting a specific
percentage from any calculated change in the index.
       - Example, if the calculated change in the index is 10%, the annuity might specify that 2.25% will
         be subtracted from the rate to determine the interest rate credited.
           Here, the rate would be 7.75% (10% - 2.25% = 7.75%).
                                   Crediting Strategies
                                                    Annual Point to Point

                           S&P 500 Ending Index Values
Mar    Apr   May    Jun   Jul   Aug   Sep    Oct    Nov    Dec   Jan    Feb    Mar
880    856   841    848   917   964   975    990    1008   996   1051   1058   1112

 (Ending Number – Beginning Number) / Beginning Number = Crediting Rate

                            (1112 – 880) / 880 = 26%

          Assuming a “Cap Rate” of 9.5% the client would be credited:

                                26%    or   9.5%

      Assuming a “Participation Rate” of 65% the client would be credited:

                               26% x 65% = 17%

             Assuming a “Margin” of 5% the client would be credited:

                                 26% - 5% = 21%
                                      Crediting Strategies
                                                      Monthly Point to Point

                            S&P 500 Ending Index Values
Mar   Apr   May    Jun     Jul   Aug   Sep    Oct    Nov    Dec     Jan    Feb    Mar
880   856   841    848     917   964   975    990    1008   996     1051   1058   1112

 (Ending Month – Beginning Month) / Beginning Month = Monthly Average

 -2.7% -1.7%    0.8%   8.1%    5.1%   1.1%   1.6%   1.8% -1.2%   5.5%    0.7%   5.1%

       Assuming a Cap Rate of 3% (Apply to Each Month, Only Positives Matter)

  -2.7% -1.7%   0.8%   3.0%    3.0%   1.1%   1.6%   1.8% -1.2%    3.0%   0.7%   3.0%

                         Then Just add up the 12 Values…

                              Client Would be Credited:

                                   Crediting Strategies
                                                           Monthly Average
                           S&P 500 Ending Index Values
Mar    Apr   May    Jun   Jul   Aug   Sep    Oct    Nov    Dec   Jan    Feb    Mar
880    856   841    848   917   964   975    990    1008   996   1051   1058   1112

             (Add Last 12 Month End Values) / 12 = Ending Number

  (856+841+848+917+964+975+990+1008+996+1051+1058+1112) / 12 = 968
 (Ending Number – Beginning Number) / Beginning Number = Crediting Rate

                            (968 – 880) / 880 = 10%

         Assuming a “Cap Rate” of 12.5% the client would be credited:

                               10%    or   12.5%

      Assuming a “Participation Rate” of 65% the client would be credited:
                               10% x 65% = 6.5%

             Assuming a “Margin” of 5% the client would be credited:

                                 10% - 5% = 5%
                                            Crediting Strategies
                                                           High Water Mark (3 Year)
                                                S&P 500
         Mar    Apr   May    Jun     Jul    Aug   Sep   Oct       Nov    Dec    Jan    Feb    Mar
Year 1   880    856   841    848     917    964   975   990       1008   996    1051   1058   1112

Year 2         1118   1120   1129    1122   1116    1110   1123   1129   1140   1149   1151   1168

Year 3         1169   1175   1140    1138   1121    1110   1108   998    991    989    975    965

 (High Water Mark – Beginning Number) / Beginning Number = Crediting Rate

                                   (1175 – 880) / 880 = 33%

           Assuming a “Cap Rate” of 40% the client would be credited:

                                       40%     or    33%

     Assuming a “Participation Rate” of 65% the client would be credited:

                                      33% x 65% = 21%

               Assuming a “Margin” of 5% the client would be credited:

                                       33% - 5% = 28%
                 Advanced Crediting Strategies
                                   Annual Pt to Pt (0% Guarantee & Cap of 15%)
               With, 3 Year High Watermark Look Back (70% Participation Rate)
                                                 S&P 500
         Mar     Apr   May    Jun     Jul    Aug   Sep   Oct       Nov    Dec    Jan    Feb    Mar
Year 1   880     856   841    848     917    964   975   990       1008   996    1051   1058   1112

Year 2          1118   1120   1129    1122   1116   1110   1123    1129   1140   1149   1151   1168

Year 3          1169   1175   1140    1138   1121   1110   1108    998    991    989    975    965

Calculate Annual Pt to Pt First
Year 1: (1112 – 880) / 880           = 26% or 15%             $100,000 x 1.15 = 115,000
Year 2: (1168 – 1112) / 1112 = 5% or 15%                          115,000 x 1.05 = 120,750
Year 3: (965 – 1168) / 1168 = -17% or 0%                          120,750 x 1.00 = $120,750
Calculate High Watermark Next
(High Water Mark – Beginning Number) / Beginning Number = Crediting Rate
                         (1175 – 880) / 880 = 33% x 70% = 23%

                               $100,000 x 1.23 = $123,000                           AKA, Step   ☜
                                                                                 Forward Strategy
Which Strategy Is Best
       Based on Participation Rate
Which Strategy Is Best
           Based on Cap Rates
Which Strategy Is Best
                 Caps of Participation?


  Cap Rates
                                                     Payout Options
                                                             On Deferred Annuities
Elect Not to Take Payments (TAX TIP– LIFO Accounting after 82’)                           ☜
Some individuals have no need for income from the funds that have accumulated in their
annuity and can elect not to take any payments. They can simply allow the account to pass
to the beneficiary upon death.
Lump Sum (TAX TIP– LIFO Accounting after 82’)
Just as the word suggests the client can take their money in a Lump Sum
       – Not Recommended as the entire investment gain becomes taxable in the year of Payout
       – Highly inefficient payout option from a tax minimization perspective
       – If done, think of rolling annuity over to another annuity through a “1035 Exchange”

Systematic Withdrawal (TAX TIP– LIFO Accounting after 82’)
Under this method, the owner can select the amount of payment that you wish to receive
each month and how many you want to receive.
       – The insurance company will not guarantee the payments will outlive the client
       – How much the client receives and the number of months they receive payments
         depends on how much they have in the account.
                 The burden of life-expectancy risk is born by the annuity holder
                 Can usually choose Interest First, Fixed Amount or Fixed Percentage
                 Benefits include the ability to start/stop withdrawals usually
                                                     Payout Options
                                                                     On Annuitization
Annuitization (TAX TIP– Basis & Earnings Returned)                   ☜
The annuitization method gives the client a guarantee of monthly income for a given period.
    Life Option
       Typically provides the highest payout as the monthly payment is calculated only on
       the life of the annuitant. Provides an income stream for life, which is an effective
       hedge against outliving your retirement income.
    Joint Life Option
       Allows retirement income to continue to the spouse after primary’s death. The
       monthly payment is lower than that of the life option because the calculation is based
       on the life expectancy of both the husband and wife.
    Period Certain
       The value of the annuity is paid out over a defined period of time such as 10, 15 or
       20 years. Should one elect a 15-year period certain and die within the first 10 years,
       the contract will pay the beneficiary for the remaining five years.
    Life with Guaranteed Term
       Gives the client an income stream for life (like the life option), so it pays as long as
       the owner is living! In addition, with this option the client can select a guaranteed
       period such as 10 years, for which the annuity is obligated to pay to the client's
       estate or beneficiaries even if they die before the guaranteed period is over.
                               Riders/Benefits Available
                                             Not Available/Different on Products
Nursing Care Rider
If client is confined to a Qualified Nursing Facility they can withdraw up to 20% Penalty Free
during the surrender period.
       –   Must be licensed by the state
       –   Must provide 24 hour a day nursing care
       –   Cannot be Drug/Alcohol treatment center, Mental facility
       –   Facility cannot be owned by immediate family

Terminal Illness Rider
Allows contract owners access to their annuity penalty free if diagnosed with Terminal
Illness. Can access up to 75% of the contract value during the surrender period.
       – Terminal Illness = Result in Death within one year
       – Diagnosis made by a Physician (MD or DO) who is licensed to practice medicine
       – Doctor cannot be annuitant, contract owner or family member

Annuitization Exception Option
Allows annuitization of greater of contract value or minimum guaranteed surrender value
after 5 or 10 years for a life option with at least 10 years certain.
Tax Assistance Rider
Some contracts allow for a rider to aid in payment of death & income taxes
               Liquidity & Surrender Charges
                                                               The Biggest Drawback
Liquidity During Surrender Period
During the Surrender Period the client can usually access up to 10% of their account value
penalty free after the first contract year.
       – Some contracts allow up access up to 20% of the account value if client is
                In a Nursing Home
                Became Terminally Ill                                       Be Sure to Read and ☜
                Did not take out the 10% in the First Year             Understand the Product You
                                                                            are Selling. Be Able to
                                                                          Explain it to Your Clients!
Surrender Charges
Annuities have a surrender charge period since it helps protect the insurance company from
premature surrenders and makes it possible for the insurance company to compensate
insurance professionals.

          Why Surrender Charges?
                 Allow company to recoup their upfront costs in establishing the contract
                 Allow company to effectively match Assets & liabilities
                 Insure Solvency of Company (Not allow a Run on Carrier)
                 Allow use of Long Term, Higher Yielding Bonds
                 Potentially reward those that stay in the contract long term with
                  higher/guaranteed returns & Punish those that are “Flighty”
                 Allow Insurer to enter longer term hedging options that guarantee returns
                                                Surrender Charges
                                                    Be Proud of Surrender Charges

        Remember, the annuity provides tax-deferred growth, guarantee of
           principle, guaranteed growth and possibly, lifetime income.
          This is made possible because of the surrender charge period.
    In other words, be proud of the surrender charge period since surrender
       charges make many of the benefits to owning an annuity possible.

   Main Reason of Objection…
   Most people do not like Surrender charges as everyone wants immediate access to their
   assets. However, if you leave the client sufficient liquidity there should be no real issue!

             Liquid Accounts:
                      Money Market
                                                                   The failure of an agent to keep
                                                                   “liquid” assets available to the
                      Savings Account                          client is where the problem occurs.
                      CD’s
                      If they still need more money they can access up to 10-20% of their annuity
                      At worst they could surrender the annuity

Determine with the client “what their liquidity needs are”. What do you need ALL your money for?
Also, Surrender Charges Allow for EXACT Future Values of the Contract EX: (Securities)
                                            Surrender Charges
                                             Designed In Your Client’s Interest

The Market Value Adjustment
Most carriers offer a “Market Value Adjustment” to the clients account in the event of
liquidation or partial surrender.
       –    This is how it works:
                 In the event market interest rates are lower at the time of liquidation than at
                     the time of purchase, less of a surrender charge is recognized
                          (More cash to the Client)

                   Things to watch on MVA contracts:
                    1. Be sure the MVA it is not longer than the surrender period
                    2. Be Sure the Surrender charge is Guaranteed in the event of
                                        “increasing interest rates”

 For Example-
 Suppose you purchased an annuity with a market interest rate of 6%. Over the next
 year, the market interest rates dropped to 4%. If you liquidated your annuity (before
 your MVA period expires), your MVA would be positive. That is, money would be added
 to your early liquidation proceeds since interest rates were lower than when you placed
 the investment. (Of course, any surrender penalties would still apply.)
                                                 Putting it All Together
                                                                                    Advising Your Client

                                                           Type of
Premium       Annuity       Funds           Account       Crediting Strategy      Payout        Annuitization        Riders

 Single      Deferred      Qualified       Variable                            No Payout                          Nursing care

Multi-Year   Immediate   Non-Qualified       Fixed                             Systematic                        Terminal Illness

                                         Equity Indexed   Annual Pt. To Pt.    Annuitization        Life          Annuitization
                                                          Monthly Pt. To Pt.                        Joint
                                                          Monthly Average                       Period Certain

                                                              Others…                              Life w/
                                                                                               Guaranteed Term

           Be an Educator & a Question Asker
                A fully informed annuity owner is in your bests interests.

           Place the needs of the consumer above your own.
           Do not compare fixed annuities to variable annuities, stocks, bonds etc…
                                                                                 unless you have a securities license.

                                                            NAIC – “Introduction to Index Annuities.pdf”
                       Understanding The Illustration
                         Be Aware of Different Accounts & Use as a Sales Tool

            Income Account Values                                         Projected Values
            Guaranteed Value                                              Surrender Values (Next Slide)
                                      Income Account Value          Gaurenteed (3.0% Gaurenteed)      Projected Value (10.0% Cap Rate)
       Surrender                   Gaurenteed        Projected                          Surrender                          Surrender
Year               Premium                                         Contract Value                     Contract Value
        Charge                        7.2%             10.0%                              Value                             Value

 1       10%       $ 100,000   $       107,200   $       110,000   $      103,000   $        92,700   $      110,000   $        99,000
 2       10%                           114,918           121,000          106,090            95,481          121,000           108,900
 3       9%                            123,193           133,100          109,273            99,438          133,100           121,121
 4       9%                            132,062           146,410          112,551           102,421          146,410           133,233
 5       8%                            141,571           161,051          115,927           106,653          161,051           148,167
 6       8%                            151,764           177,156          119,405           109,853          177,156           162,984
 7       7%                            162,691           194,872          122,987           114,378          194,872           181,231
 8       7%                            174,405           214,359          126,677           117,810          214,359           199,354
 9       6%                            186,962           235,795          130,477           122,649          235,795           221,647
 10      6%                            200,423           259,374          134,392           126,328          259,374           243,812
 11      5%                            214,854           285,312          138,423           131,502          285,312           271,046
 12      4%                            230,323           313,843          142,576           136,873          313,843           301,289
 13      3%                            246,906           345,227          146,853           142,448          345,227           334,870
 14      2%                            264,684           379,750          151,259           148,234          379,750           372,155
 15      1%                            283,741           417,725          155,797           154,239          417,725           413,548
 16      0%                            304,170           459,497          160,471           160,471          459,497           459,497
 17      0%                            326,070           505,447          165,285           165,285          505,447           505,447
 18      0%                            349,547           555,992          170,243           170,243          555,992           555,992
 19      0%                            374,715           611,591          175,351           175,351          611,591           611,591
 20      0%                    $       401,694   $       672,750   $      180,611   $       180,611   $      672,750   $       672,750
                      Where Do Annuities Fit?
                                Safe Money Advising Questions…

Would You Like to Double Your Money in 10 Years?
                               Income Account Value
Would You Like to Have a Life-Time Income?
                               Annuitization with Life Option, Nursing Home Rider!
Would You Like to Have No Downside or Market Risk?
                               Yet Participate in Market Upsides!
Would You Like to Grow Your Money Tax Deferred?
                               See the power of tax deferred growth!
Would You Like to Save Income Taxes on Your Tax Return?
                               Especially those that have taxable social security!
Would You Like to Protect Your Assets From Creditors/Medicare?
                               State specific and certain criteria apply.
Would You Like to Avoid Probate Fees?
                               Can be as high as 10%
Would You Like to have an Investment that Helps with Transfer Taxes?
                               Can be as high as 35% and 55% for Estate Taxes!
                           Why Practice Safe Money
                                     So Clients DO Not Loose Their Money!
What is Safe Money
Safe money is the investment in products that do not allow one’s principal to be at risk of
loss, yet allow one to earn a return on their money

                   "I'm more concerned about the return of my money
                         than with the return on my money."

                                 ~The American humorist Will Rogers

    1. What Safe Money Options Are Available
    2. The Rule of 100 & How it Applies to Clients
    3. The Power of Zero
    4. When Does –50 + 100 = 0?
    5. Concept of Tax Deferred Growth & The Rule of 72/110
    6. Additional Powers of Tax Deferred Growth, Restructuring the 1040
                                      Safe Money Options
                      Income      Withdrawal       Makes SS      Market     Investment
                      Taxable      Penalty          Taxable       Risk      Guaranteed

                                                                   N             100K
CD’s                                                 
 Pro: Guaranteed a rate of return for a given period of investment
 Con: Higher returns require longer maturities. Does have Penalty on Early Withdrawal

                                      N                            N            1-500K
Money Market                                          
 Pro: Cash is immediately available and very liquid
 Con: Low rate of return, tends to favor wealthy investors

Regular Bonds                        N                                        N
Federal Bonds           N             N                ☜                       
 Pro: Higher rates of return on longer term investments
 Con: May be less than PAR Value during investment period

EI/Fix Annuity N                                      N           N             
 Pro: Tax Deferred growth and market downside protection while in the annuity
 Con: Contains surrender charges, ties up client’s money for longer periods
                  What is Safe Money
                            Rule of 100 & Pyramid of Risk

                                  100 – 65 = 35%
                                    100 minus current age
                                    results in approximate
    Market Based Products
                                        Portfolio Risk.
   Growth with Risk

    Insured Products

Growth with Safety
                          The Power of ZERO
                               How would you like NO Losses

               Annual Return          Growth of $100,000
   Year      S&P 500     EIA          S&P           EIA
   Start                            $ 100,000    $ 100,000
   1998      26.07%      8.00%      $ 126,070    $ 108,000
   1999      19.64%      8.00%        150,830      116,640
   2000       -9.27%     0.00%        136,848      116,640
   2001      -10.53%     0.00%        122,438      116,640
   2002      -23.80%     0.00%         93,298      116,640
   2003      22.32%      8.00%        114,122      125,971
   2004        9.33%     8.00%        124,769      136,049
   2005        5.07%     5.07%        131,095      142,947
   2006      11.78%      8.00%        146,538      154,382
   2007        3.65%     3.65%        151,887      160,017
   2008      -15.00%     0.00%      $ 129,104    $ 160,017

           Actual S&P 500 Returns for Last 10 Years
                       – Compared To –
Equity Index Annuity (EIA) with 0% Downside and 8% Cap Rate
                                                        The Power of ZERO
                                                                                 How About a Chart

                                             Equity Indexed Annuity vs. S&P 500 Return
                                                        EIA with 0% Loss & 8% Cap

Growth of $100K

                  $100                                                                                  EIA






















                                 Actual S&P 500 Returns for Last 10 Years
                                                     – Compared To –
                   Equity Index Annuity (EIA) with 0% Downside and 8% Cap Rate
            When does –50 + 100 = 0?
                          Still Don’t Believe in the Power of Zero…

One day your broker calls telling you some bad news. I am sorry
Mr. Client that “WE” had a bad year and that “YOUR” account is
down 50% from last year. But don’t worry, “WE’LL” have a better
year next year and get “YOUR” account back to where it should be!

You hang up the phone thinking you lost 50% but you feel assured
your broker will get your 50% back. Just give it some time…

             However, Let us look at the actual math…

         Initial Investment                    $ 100,000

         Loss in Market                -50%        (50,000)

         Remaining Capital                         50,000

         Return Needed to be Whole     100%    $ 100,000

                                       50%     $         0
Deferred Tax Growth
         A Bit of the Basics
  Deferred Tax Growth
A Calculator for Your Use & Illustration

                                      Found in
                                    Annuity Bible
                                     Deferred Tax Growth
                                                        Running the Numbers

                     Annual Return                           Growth of $100,000
                      S&P Return
        Actual S&P                     EIA Tax    S&P Tax        S&P Taxed        EIA Tax
                       Taxed at
          Return                       Deferred   Deferred         at 35%         Deferred
Year                     35%
Start        30%                                  $    100,000   $   100,000   $    100,000
1998      26.07%        16.95%          8.00%     $    126,070   $   116,946   $    108,000
1999      19.64%        12.77%          8.00%          150,830       131,875        116,640
2000       -9.27%        -9.27%         0.00%          136,848       119,650        116,640
2001      -10.53%       -10.53%         0.00%          122,438       107,051        116,640
2002      -23.80%       -23.80%         0.00%           93,298        81,573        116,640
2003      22.32%        14.51%          8.00%          114,122        93,407        125,971
2004       9.33%         6.06%          8.00%          124,769        99,072        136,049
2005       5.07%         3.30%          5.07%          131,095       102,337        142,947
2006      11.78%         7.66%          8.00%          146,538       110,173        154,382
2007       3.65%         2.37%          3.65%          151,887       112,787        160,017
2008      -15.00%       -15.00%         0.00%     $    129,104   $    95,869   $    160,017

                     Actual S&P 500 Returns for Last 10 Years
                                     – Compared To –
        Equity Index Annuity (EIA) with 0% Downside and 8% Cap Rate
                      Including Tax Effects on S&P 500
                                                         Deferred Tax Growth
                                              Chart Form & The Power of Zero Continued

                                              Equity Indexed Annuity vs. S&P 500 Return
                                                           EIA with 0% Loss & 8% Cap
                                                      Consider 35% Income Tax Effects
Growth of $100K



                  $90                                                                          S&P 500 Retun
                                                                                               Taxed S&P 500
                                                                                               Euity Indexed Annuity






















                                      Actual S&P 500 Returns for Last 10 Years
                                                        – Compared To –
                         Equity Index Annuity (EIA) with 0% Downside and 8% Cap Rate                             Found in
                                       Including Tax Effects on S&P 500                                        Annuity Bible
                                          Additional Tax Savings
                               Understanding the Individual 1040 & it’s Powers
  Why is the 1040 Important
  By understanding how the 1040 works and the effects taxable income has on social
  security for those receiving it, one can better help a client position or reposition
  themselves tax wise using annuities.
           Clients can not Only Grow investments Tax Deferred
           Clients can reduce taxable Social Security thus reducing Income Taxes
     Tax Topics & Illustrations We’ll Cover
           1.   Understanding the 1040
           2.   Using the Excel Tax Application [Great for What if Scenarios]          ☜
           3.   Are Annuity Losses Tax Deductible
           4.   Reducing Taxable Social Security Income
           5.   Does Non-Taxable Income Effect taxability of Social Security
           6.   Helping Clients with Required Minimum Distribution Calculations
           7.   Tax Benefits of Annuitization Vs. Systematic Withdrawal Method

Clients should still consult with their tax advisor in the event you are not qualified to give tax advise. Take the
  position that you are mainly educating your client such that they can have a better conversation with their
 advisor and the client can confirm/deny with their advisor. You will find that a good amount of professionals
      have a poor understanding of annuities and their uses. Most advisors are “after the fact” advisors.
                      Restructuring the 1040
                           Using the Tax Return as a Sales Tool

Why are clients Paying Taxes? Where is their investment Income?
                     How to read a return…               Found in Annuity Bible
                                                    1040 Strategies
                                 Deducting Non-Qualified Losses
                                     on Poor Performing Annuities
Client Lost Money in Old/Poor Annuity
Many times clients are in a variable annuity that
  has lost money but refuses to liquidate it as
they are hoping that the value “will come back”.
   In addition, Clients (and sometimes their
   accountant) are not aware that losses on
            annuities are deductible.
      Must be a NON-Qualified Annuity
                                                                a $50K
       (With After Tax Dollars)
      Must be a complete liquidation                          taken on
      1035 Exchanges do not count                              Sch. A

      Liquidation with losses not subject
       to pre-59 ½ Penalty
           10% withdrawal penalty only
              applies to “gains on contract”
              before 59 ½
      Deductible on Schedule A “Subject to 2%”
      1040 Strategies
Reducing Taxable Social Security

         1040 Strategies
Does Non-Taxable Income Effect SS?

                                 Tax Issues
Required Minimum Distribution for those 70 ½ +

               Many times clients are taking too much out of
               their annuities in order to satisfy their “RMD”s
                for their various account types such as their
                        IRAs, Annuity Contracts, Etc.

               Do check with them to make sure they are not
                 recognizing unnecessary taxable income.

                Clients may be Subject to the “Uniform Life
               Expectancy Table” or if they have a younger
               spousal beneficiary (10 yrs) they can use the
                       “Joint Life Expectancy Table”

                                           Found in Annuity Bible
Tax Issues
   Excess RMD

                           Tax Issues
Using Systematic Withdrawals vs. Annuitization

                                        Annuity Tax Topics
                How Withdrawals are Effected by Income Taxes
 FIFO & LIFO Accounting
    In 1982 the taxation of distributions received from annuities changed.
        Pre 1982 rules
           Allowed the annuitant to withdrawal their initial investment tax free (FIFO)
                              First In First Out Accounting
        Post 1982 rules                                                       1035 Exchanges
           Withdrawals distributed are subject to income taxes (LIFO)
                              Last In First Out Accounting

  Remember Distributions from Qualified (Pretax) Accounts Are ALWAYS Taxable

 How Deferred Annuities are Taxed
    Distributions From Deferred Annuities (Post 82) are earning Only first. After earnings
    are distributed, the basis is then distributed tax free

 How Annuitized Annuities are Taxed
    Annuitized payments have a return of basis portion (Tax free) and a tax deferred
    earning portion. The basis is divided by the “Expected” life of the annuitant & an
    “Exclusion” factor is developed where a portion of the distribution is “Excluded” from
    income taxes until the original Tax Basis (Investment) in the contract is recovered.
                                        Annuity Tax Topics
                                                IRS Penalties to be Aware of
Here is a Tip & a Sales Tip…
   …Why not Convert Deferred Holders to Annuitized Contracts?
        Many times one can convert such that payments are not “Fully Taxable” and
        some of the payment has a basis!

                                ! POINT to NOTE !

        Deferred to Annuitized Conversion BEFORE age 59 ½
           The Conversion of Deferred to an Annuitized contract before age 59 ½
                   results in the 10% IRS penalty. [Watch out for this]

Pre 59 ½ Withdrawal Penalty
    In the event the client takes withdrawals from their annuity or retirement account
    before age 59 ½ the withdrawals (Earnings Only) & Qualified Portion are subject
    to a 10% penalty imposed by the IRS (Pub 575).
          Some Exceptions…
               Disabled, Education, Medical, Health Insurance, First Time Home Buyer
               Payments Made Under an Immediate Annuity Contract (72T…)
               Pre-1982 Investments (Where Premium is Returned)
                                        Annuity Tax Topics
                                                    IRS Topics to Be Aware of

 72T Guidelines (Avoiding the 59 ½ Penalty)
   A Little known IRS rule that allows for pre 59 ½ withdrawals from tax deferred accounts
   to be penalty free.
         The Catch
          The owner must take at least five years of "substantially equal periodic payments”
                 (Cannot stop even after age 59 ½)
          The payment amount depends on the owner's (IRS Based) life expectancy

         Great for those that want to retire Early & Want Lifetime income!

 Age 70 ½ Required Minimum Distribution
   After the client reaches age 70 ½ they must take out of their “tax deferred” accounts
   their Required minimum distribution as mandated by the IRS by December 31st of the
   current tax year.
      Access RMD Accumulation not taken subject to 50% IRS Penalties
      Many time RMD’s are incorrectly calculated by the carriers
           Look at Uniform or Joint Survivor Tables
          Remember Like Kind accounts can be pooled together
                What is a 1035 Exchange
                     Tax Free Exchange of Insurance Products

        Per IRS Guidelines it is a “Like Kind”
   Tax Free Exchange of Insurance Type Products

                  Therefore from one
       UL or Annuity – to another – UL or Annuity
                          Please Note
             Try to do Carrier to Carrier Transfers!
       Avoids up to 20% withholding (Client must make up)
      Avoids second thoughts or Cash in Hand Syndrome

If Exchanging an Annuity for a UL Policy via lump sum,
        The New UL will be considered a MEC.
             “Does it Matter…Question?”
(See When an Annuity Becomes a Tax Time Bomb & Benefits of Conversion)
                      Best Tax References
                              Do You Want to be an Expert

IRC Circular 575 (Pension & Annuity Income Taxation)
               Good Reference Site
        Think About Becoming an Enrolled Agent!

           Excellent Reference Books

                                                         Sales Ideas
                                                 Cash Value Life to Annuity
 Client Has an OLD Whole Life Policy
You are meeting with a client who is a female age 55 who has an old UL/Whole Life
Policy with a face value of 500K, a cash value of $200K and is paying about $1K per
                          month to keep the policy in force.
The client is sick of making the monthly payment and was thinking of letting the policy
            lapse. Is there anything that we could do to help the client out?

   A: How about a Lump sum paid up UL policy that has a greater benefit?

                    $750,000 of Coverage! & No More Premiums!
   B: How about an Immediate Annuity with the Lifetime Income Rider?

       American Equities: $992.39 for lifetime of owner (59% not Taxable)

   C: How about a Deferred Annuity for 20 years at a guaranteed rate of 6%?

        $200,000 x (1+.06)^20 = $641,427 [$441,427 Subject to Income Tax]

                   We will do These under 1035 exchange rules!
                                                                 Sales Ideas
                          Initial Investment
                                                                           Split Annuity
                                                                       Gives the Client
                                                                  • Income Stream with
                                                                    an Immediate Annuity
         Immediate Annuity                 Deffered Annuity
             $392,839                          $607,161           • Recaptures Original

            Growth Rate               Growth Rate (Gaurenteed)     Possible Growth Rate
                5%                               5%                         7%

      Income Gaurentee Period            Deffered Period (Yrs)     Deffered Period (Yrs)
                10                                10                        10

     Gaurenteed Monthly Income         Value at End of Year 10   Possible Value at Year 10
              $4,167                         $1,000,000                  $1,220,188

     Portion of monthly payment
      not subject to income tax
                                                                  • Possible Higher
                 79%                                                Principle if Market
                                                                    Performs Well
                       Found in Annuity Bible
                                                                                         Sales Ideas
                                  Laddering Strategies, an Advanced Split Annuity
                                                          Initial Investment

       Bonus Amount                      Bonus Amount                          Bonus Amount                Bonus Amount
            0%                                5%                                    5%                         10%

     Immediate Annuity               Short Term Deferred                Longer Term Deferred              Deferred Annuity
        $132,477                           $130,066                          $118,239                         $681,141

        Growth Rate                       Growth Rate                          Growth Rate                  Growth Rate
            5%                                5%                                   5%                           5%

                                     Deferred Period (Yrs)               Deferred Period (Yrs)          Deferred Period (Yrs)
                                              5                                   10                             15

 Income Guarantee Period          Income Guarantee Period             Income Guarantee Period
           5                                5                                   5

 Monthly Income Desired            Monthly Income Desired              Monthly Income Desired          Value at End of Year 15
         $2,500                            $3,000                              $3,500                        $1,439,729

Portion of monthly payment        Portion of monthly payment         Portion of monthly payment
 not subject to income tax         not subject to income tax          not subject to income tax
            88%                               72%                                56%
If Investment was Non-Qualified   If Investment was Non-Qualified    If Investment was Non-Qualified

WP                                                    Found in Annuity Bible
                                                                                                 Sales Ideas
                                                                                      Annuity Tax Time Bombs
     Does the Client Know About the Annuity's Income Tax Liability
               The Issues of Tax Deferring too long
               Tax Effects to Spouse & Beneficiary upon Death
                                                       A Possible Solution…
                           Beneficiary Calculations                                                Annuity Holder Calculations

     Initial Investment in Annuity                           $   250,000       Initial Investment in Annuity                              $ 250,000
     Current Value Today                                     $   750,000       Current Value Today                                        $ 750,000
     Assumed Rate of Return                                      6%
     Growth Period Assumed Until Death (Yrs)                      10
     Assumed Income Tax Rate                                     35%           Assumed Income Tax Rate                                      35%

     Illustration Assumes No Withdrawals Ever Made                  from                Illustration Assumes No Withdrawals Ever Made
                             Annuity Account                                                           from Annuity Account

     Initial Investment Amount (Basis)                       $   250,000       Initial Investment Amount (Basis)                          $ 250,000

     Current Value                                           $   750,000       Current Value                                              $ 750,000

     Future Value of Account at Death                        $ 1,343,136

     Taxable Basis Attributed to beneficiary                 $ 1,093,136       Taxable Basis Attributed to Annuity Holder                 $ 500,000

     Assuming an Income Tax Rate of 35%                                        Assuming an Income Tax Rate of 35%
     The tax the Beneficiary must pay is                     $   382,598       The tax the Annuity Holder must pay is                     $ 175,000
     This Leaves the Beneficiary with (after Income Taxes)   $   710,538       This Leaves the Annuity Holder with (after Income Taxes)   $ 575,000

                                                                                   Now Dump The After Tax Proceeds into an EIUL. Run the
                                                                                         Illustration for the Former Annuity Holder.
WP                                                                Found in Annuity Bible
                                                                                         Sales Ideas
                                            Annuity Gifts from Parents/Grand Parents
 Investment Amount
  Gift From Grandfather/Father   $      12,000
  Gift From Grandmother/Mother          12,000              Show Column?                               Show Column?
 Total Initial Investment        $      24,000                   Yes                                        Yes

                    Annual Growth Rate             Pre 59 1/2 Liquidation Value                 After Tax Value w/Penalty
   Growth        Guaranteed     Possible           Gaurenteed         Possible               Gaurenteed            Possible
 Period (Yrs)        5%            8%               Assuming 10% IRS Penalty                 Assuming a    15%    Tax Brack et
                                                  Applied to Earnings Only (Non-Qualified)

     10          $     39,093    $      51,814    $        37,584       $         49,033     $     31,947         $      41,678

     20                63,679          111,863             59,711               103,077            50,755                87,615

     30               103,727          241,504             95,754               219,753            81,391               186,790

     40               168,960          521,389            154,464               471,650           131,294               400,902

     50               275,218         1,125,639           250,096             1,015,475           212,581               863,154

     60               448,300         2,430,170                                                   381,055              2,065,644
                                                         59 ½ Exceptions
     70               730,234         5,246,554           First time Home                         620,699              4,459,571
     80              1,189,475       11,326,916                                                  1,011,053             9,627,879
     90              1,937,529       24,453,962           Health Insurance                       1,646,899            20,785,868

     100         $   3,156,030   $ 52,794,270             Equal Pmts (72t)                   $   2,682,626        $ 44,875,130
                                                      Found in Annuity Bible
                Recall the UL Option We Discussed the other day…
                   …$172 per month gives 50K in Cash Value 20 Yrs Later                                                  529 Limit
WP                                        ($172 x 20yrs x 12pmt/yr = $41,280 Pd In!)                                    60k & Uses
                                                             Sales Ideas
                                 The IRA, 401k Rules & Phase Out Strategy
   Recommend Clients to Max Out Retirement Accounts First
          401k, 403b allows up to $15,500 or 20,500 for those 50+
          IRAs Allow for $4,000 or $5,000 for those 50+
          Roth IRAs allow for “Tax Free”Income!
          Some are Still Interested in Having an Annuity Though

                                         Look for Old Qualified Accounts
                                                Those Sick of Losing Money
                                                    Current 401k can be “Liquid” Call…
                                                Lost or Forgotten Retirement Accounts
                                                Those Looking for a Lifetime Income
                                                Those that do not want “Market Hassle”

                                         Look for Those “Phased Out” (Wealthy)
                                                They Want Tax Deferred Growth…
                                                  …But are phased out or maxed out!
                                                Those that want to “Catch up Retirement”
Cheat Sheet                                     Those Looking for a Lifetime Income
                                         412 Savings Plans…(More Advanced)
                             Sales Ideas
                    The Coming 2009 Tax Change

               In 2009…
One can use Proceeds from Their Annuity
           Income Tax Free
   to Fund Long Term Care Insurance

   Find People That Have Annuities &
        Meet with them in 2009!
   These are 1035s Waiting to Happen
                                                     Sales Strategies
                                         Prospecting During Life/Health Sales
Selling Annuities During Life Sales
While you are meeting with your Life Clients are you asking about their Investable Assets?
       – When are you planning on Retiring?
             Future Prospecting Database…
                Are you Using KIT Marketing at Least?
                GET GOOD CRM SOFTWARE!                                       This is the Reason We
                                                                               Went into Mortgage
             Do You Work With Anyone Planning on Retiring…
                                                                              Protection First as it is
       – Safe Money Questions You Should Be Asking                             a Cheap Entry Point
                                                                                 Into other Sales.
            Would You Like to Stop losing Money in the Market
                Sometimes we can “Roll Out” while client is still vesting      Good Annuity Leads
            Are you REALLY Happy with Your current Retirement Plan              Run about $150
            Would you Like to Have NO Market Downside                            Seminars can be
            Would You Like to Have Market Upside                                  costly with an
            Would You Like to Grow Your Money Tax Deferred                     investment of about
            Would You Like to Save Income Taxes on Your Return                $25K and an Office is
            Would You Like to Stop Paying Taxes on YOUR Social Security
            Would You Like to Protect your Assets From Creditors
            Would You Like to Double Your Income Potential Every 10 Years

       – If You meet a Self Employed Person or High Money Earner
              Call Kip ASAP, Gather Facts & Set up a Second Meeting (Jerry’s (2) $500k EIULs)
                                 Sales Ideas & Strategies
                                                                  Professional Seminars
This seminar caters to those about to retire age 55 to 85 and who have incomes between
30K and 150K & Live in a “nice” neighborhood.
       –   Clients are looking for a Secure & Worry Free Retirement
                                                                                  Ideal Clients Do
       –   Offer a free tax review & help Clients reduce all forms of taxes
                                                                                    Not Require
       –   Help clients increase Spendable income                                  Estate Planning
       –   Protect Client’s Financial Legacy
       –   Restructure old Life Policies
       –   Create a referral Network to YOUR accountant and YOUR Elder Law Attorney

72-T (Early Retirement & Baby Boomers)
This seminar caters to those age 40 to age 60 and who have incomes from 35K to 250K.
We also have screened people with large mortgages (Over 300K).
       – Clients Have a large retirement account and are looking to retire
       – Clients are may have inherited Large Amounts of money                            Market has 72
                                                                                         Million Persons
       – Have Large Qualified & non qualified assets to move ASAP
             If still Working ask If current plan allows for rollovers while working   Average assets of
       – Most have cash value life insurance (Rollovers & Trade ups)                    500K to 1 million
       – Develop a database of those planning on retiring in future                     More wealth here
       – Want safety and have experienced losses                                         than in seniors
       – Young enough to be thinking about LTC coverage
                                                                                        In 10 Yrs Boomers
                                                                                          will inherit $10T
                                  Sales Ideas & Strategies
                                              Professional Seminars & Tax Office
412 Savings Plans (Businesses & High Wage Earners)
This is a presentation we use for professionals (Doctors, Lawyers, Self-Employed, Employed High
Income Professionals, Etc) who probably already have their Current Retirement Plans Maxed
out or who do not or have not started saving for retirement.
       –   Defined benefits plan that are tax deductible to the business
       –   Great for Self employed that have high positive cash flow and small number of employees
       –   Plan invested with Annuities & Life Insurance
       –   Better option than using UL/EIUL Strategy as with the 412i you use “Pre-Tax Dollars”

Life Trade Up (Conversion of Old Cash Value Policies)
This seminar is Nearly always included in all other seminars. Always be on the lookout for
those that have old cash value type policies who may be able to get into something better!
       – Recall the example: $500K face certificate paying $1,000/Mo and has $200k in Value
       – How about the young professional that has an unneeded UL policy

Seasonal Tax Office/Preparation
Put together a tax office that does tax returns for those age 55 and older and who have
incomes between 30K and 150K & Live in a “nice” neighborhood.
       –   Doing a Client’s return allows you access to “Their Financial Picture”
       –   Accountants usually do not review their client's taxes or try to save them money
       –   Accountant’s are Typically “After the Fact” and never have time to “Consult” with clients
       –   Do not “Work With an Accountant” “Hire an Accountant to work for you”
                                           Sales Ideas & Strategies
                                                                                 News Paper Advertising

          New Job
         Downsized                                  RETIRING?                              Own a 401k or IRA?
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  Do Not Forget About Your 401k /403b      Maximize Your Pension -- Call us to Find Out   Maximize Your Retirement -- Call us to Find Out
    Receive income penalty free before
                                                     Receive Higher Benefits               Receive the Income YOU need today to retire
       age 59 1/2 without penalty!
  Protect your assets from market losses         Keep Control of YOUR Benefits                  Keep Control of YOUR Retirement
    FREE Information -- Call Today!             FREE Information -- Call Today!                 FREE Information -- Call Today!
    Family Protection &                        Family Protection &                              Family Protection &
         Tax Planning Group                         Tax Planning Group                               Tax Planning Group
       Phone: 863-644-3810                         Phone: 863-644-3810                             Phone: 863-644-3810

   Current Life Policy                     Receiving Social Security                         Sick of Losing Money
    About to Lapse or Expire?               Are Your Benefits Being Taxed?                               in the Market
    Learn How to Save Your Coverage         Learn How to Reduce Your Income Taxes!         Learn How to Have No Mark et Risk /Downside
Let us Increase Your Coverage for FREE!                                                         Yet Participate in Market Upside
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   Can't Afford Your Current Policy?
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    FREE Information -- Call Today!            Family Protection &                              FREE Information -- Call Today!
    Family Protection &                             Tax Planning Group                          Family Protection &
         Tax Planning Group                                                                          Tax Planning Group
                                                   Phone: 863-644-3810
       Phone: 863-644-3810                                                                         Phone: 863-644-3810
                   Carriers & Product Selection
                               Which Product /Carrier in Which Situation
Notice We Do Not Focus on Carriers or Carrier Training…
We feel that if you understand what, how and the reasons behind annuities the products
will take care of themselves. There are literally thousands of products on the market and
you really only need to know one or two. Let us know the rest, You find the deals! KISS

                                                                         NAA Carriers
                                                                        American Equity
                                                                          Old Mutual
                                                                            Allianz under Product Cheat Sheets
              Handling Annuity Objections
                                                  Typical Objections

 I Want to Think About it
 I Want to Discuss this with my Wife
 I Want to Discuss this with my Son
 I Want to Discuss this with My Broker/Financial Planner
 I Have been with my Financial Planner for a Long Time
 I Want to Discuss this with my Accountant/Attorney
 I want to Wait for the Market to Rebound
 I Have Penalties if I Liquidate my Accounts
 I Have a Capital Gains Liability if I do This
 My CDs Are Not Due for Another Year
 I Do Not want to Tie Up my Money For 10/20 Years
                 Handling Annuity Objections
                                           How You Should Handle Them…
 So, When you go home what are you going to think about/discuss?
 So, For years your accountant, attorney or financial planner never showed
  you this…
 So, At your age can you really afford to “wait” for the market to return…
 So, You are worried about the penalties and taxes, the tax deferred nature
  and the possible bonus should alleviate your concerns
 Most of All: Build Trust, Educate the Client, Show the Value/Benefits

               Your Plan                               Our Plan
          100% Risk, 0% Gaurenteed             No Risk AND 100% Gaurenteed
     Causes $8,000 in EXTRA Income TAXES       Saves $8,000 in Income TAXES
          Causes Your SS to be Taxed           Eliminates Your SS Being Taxed
            Causes Capital Gains                      No Capital Gains
            Does Not Lock In Gains                     Locks in Gains
              Subject to Probate                       Avoids Probate
         In Last 5 Years You Lost 30%         In The last 30 Years Returned 25%
                  Help Your Clients Annually
                             Reallocate, Prospect & Customer Service

Good Agents Should…
     …Annually Meet with Their Clients to

          Review Their Allocation Choices & Rebalance Their Allocations
          Look at Options such as “Index Blending” or “Strategy Blending”
          Review if there are any “Beneficial” or “Better products available
          Remind the client of their “Liquidity Options”
          Re-Examine the Clients Changing Needs
               Retired, CD Matured, Sick of Paying Taxes, Tired of Mutual Funds, Etc.

     …Good Customer Service &
          Transparency is the Key to Success!
                Referrals
                More Current Client Sales
                      Client’s Feet are wet
                      Client is Comfortable with Product
Making Money and Helping Families
           Has Never Been Easier

                …Your Opportunity Awaits.

                        Kip Ambrosius
                          Ph: 863-644-3810

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