Annuities

Two different animals!

Deferred or Immediate
 What is an annuity?
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 you
have paid. Annuities are most often
bought for future retirement income, and
can pay an income that can be
guaranteed to last as long as you live.

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 Objectives (be able to)
Understand the BASICS of annuities
Distinguish between
using annuities to invest tax-deferred for
retirement &
using annuities to provide income during
retirement that you will never outlive
Describe how to shop for an annuity
Know who should NOT buy deferred
annuities
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 Annuity: Insurance company
contract with 2 distinct phases
Accumulation phase
Invest tax-deferred during earning years
Pay-out phase
Pay regular income for life or for specified
period
Payments cease when annuitant (recipient)
dies

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 Annuity plans offered through
Employers
403(b) or 401(k) plans
Limits on yearly contributions
Today our focus is on individually purchased
annuities, NOT employer plans
Similar concepts
No sales commissions when participating in
employer plan

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 Fixed or Variable?
Guaranteed No guarantee
rate of return Return varies
Guaranteed Based on
payout investment
Insurance options you
product choose
Regulated by Securities
states regulated by SEC
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Annuities b/4 & after Retirement
Deferred Immediate
Investment or Pay out phase in
accumulation phase retirement
Tax deferred Income for life
accumulation

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Annuities: Common Features
Contracts backed by insurance company
Death benefit to heirs if you die prematurely
No limit on amount you can invest
High Commissions & Fees
If purchased from salesperson
No Load or Sales Commissions
If purchased directly from insurance arm of No-
Load MF company
Vanguard, Fidelity, TIAA-CREF, etc.
Surrender charges (always) in first 6-10 years
on withdrawals of >10% of accumulation value/year

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 Accumulation Phase
Purchased during working years
Money is invested in contracts backed by
insurance companies
Fixed or variable rates of return
Penalties & fees for withdrawals b/4 59.5

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 Deferred
Purchased with
Single premium (SPDA), or
multiple payments over a period of years
Contributions MAY be tax-sheltered
If part of 401(k) or 403(b) plan
Most annuities purchased with after-tax $
Earnings are tax-sheltered, until withdrawn

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 Types of Deferred Annuities
Fixed Annuity: your money earns interest at
rates set by the insurance company.
Variable Annuity: the insurance company
invests your money in stocks, bonds or other
investments you choose.
Equity-Indexed Annuity: the interest rate is
based on an outside index, such as a stock
market index. The annuity pays a base return,
but it may be higher if the index increases

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 Fixed Annuities might be for:
Individual who
wants guaranteed interest rate (like a CD)
One co.s rate as of 03/15/2007 is 4.25%
5 year lock in so buy when interest rates are high
wants tax-deferred earnings (CDs don't offer)
has significant assets to set aside for
retirement, and
does not need to access their assets for at
least five years
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 Variable Annuities
An investment in an insurance wrapper
Stocks, bonds, money market investments
Principal & return are not guaranteed
you may lose some or all of your investment
Trade off security for chance for more gain
More features & higher fees than fixed ann.
Regulated as securities by the Securities
and Exchange Commission (SEC)
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 Equity Indexed Annuities
Complicated investment for sophisticated
investors
Minimum guaranteed return
Rate of return on your investment is based on an
underlying index such as the S&P 500
One of the most confusing features of an EIA is the
method used to calculate the gain in the index to
which the annuity is linked.
difficult to compare one EIA to another

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 Dont cash out early!
Penalties for cashing out early
10% Early withdrawal penalty imposed by IRS
Before age 59
Withdrawals taxed as ordinary income
Surrender charges imposed by ins. co.
If funds withdrawn before 5-7 years
Surrender charges (6-7%) decrease over time
Watch out for salespeople who advise you to
switch annuities (churning)
Fees & penalties
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Consider a Deferred Annuity IF
You contribute the maximum to your
employers retirement plan
You fully fund your IRA
$4,000/year or $5,000 if 50+
If self-employed:
Start a SEP-IRA or SIMPLE plan

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 Alternative to Deferred Annuity
Tax-managed mutual fund
no-load, low expense
Managed to reduce yearly taxes
Manager buys and sells underlying assets strategically to
yearly minimize taxes
Most taxes are long-term capital gains (max. 15%) vs.
ordinary income (max. rate = 35%)
Often require $10,000 minimum
Exchange-Traded Funds (ETFs)
For lump sum investment
Very low expense ratio

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Summary- Deferred Annuities for investing
for retirement during earning years
Be absolutely sure an annuity is right for
you before you buy!
Do your homework! Read!
Dont buy from a salesperson who
contacts you
Dont pay commissions to salesperson
Shop the internet

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Questions on Deferred Annuities?
Investing for retirement by purchasing an
annuity (generally with regular payments)

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 Part 2

How to Avoid Running out of

Money in Retirement
Everything you always wanted to
know about Immediate Annuities!
The payout phase
 Afraid of Outliving Your $?
Babyboomers are at risk of living long
lives and outliving their assets
Want to spend your last $ the day you
die? (or close to it)

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 Buy a Lifetime Income
Immediate annuity
Monthly payments until you die
Fixed $ amount (inflation reduces
purchasing power)
Generally, you cannot change or stop
your payment option once the annuity
payments have begun.

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 Should you annuitize?
How long are you likely to live?
Living to 100 Life Expectancy
Calculator
http://www.livingto100.com/
Calculate your longevity (Module 1b):
http://www.ces.purdue.edu/retirement/

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 Safe Retirement Withdrawal Rate
Withdraw from nest egg no more than 4-
5% yearly ($4,000 payout from $100,000)
What happens if the value of your
investments dives (as did stocks in
2000-2002)?
$1 million in Jan. 2000 = $.5 million in 2003
Expect irregular, unpredictable
investment returns from stocks
Risk outliving your money
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 No Pension ?
No Problem!
Create your own synthetic pension
with an immediate fixed annuity
Purchase a lifetime stream of income for
a lump-sum payment @ retirement
Provides income security for persons
with only defined contribution plans such
as a 401(k)
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 Immediate Annuity
Guaranteed Income Annuity
Purchase a guaranteed income stream
for life with single payment
From IRA, 401(k), etc.
Tax-Free Rollover to immediate annuity
Plain vanilla: Regular payments begin at
once and last for life
Annual, semi-annual, quarterly, monthly
If you die early: No benefits to heirs
If you live long: you (& children) win!
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 Payment Options
Straight annuity
Lifetime income for annuitant only
Installment-certain
For life or at least X years (10-20 years)
Joint & Survivor
Pay spouses (or other 2 people for as long as
either lives)

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 $100,000 SPIA Examples
Straight annuity (until you die)
$790/month
Installment-certain (10 years minimum)
Heirs receive payments if you die b/4 10 yrs
$680/month
Joint & Survivor (lasts as long as 2nd to die)
$640/month

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 Lifetime Annuity Income
Pros Cons
Cant outlive your No inflation protection
income w/ most immediate
Complement to risky fixed annuities
stock investments No $ for heirs
Payments depend on
prevailing interest
rates @ purchase
2001-2002 was a bad
time to buy

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Using Fixed Immediate Annuities in
Retirement
TIAA-CREF research study (2000)
65 year old retiree
Conservative portfolio
4.5% withdrawal rate
Only 33% chance of lasting 30 years
Purchase annuity with 25% of assets
53% chance of lasting 30 years

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 Laddering Strategy
At retirement, purchase immediate fixed
annuity with 25% of assets & invest
remainder moderately aggressively in
growth investments
After 10 years, purchase second annuity
with 25% of assets & continue to invest
remaining assets
After another 10 years, repeat process

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 Is an Annuity right for you?
From the Federal Citizen Information Center
Answer Yes or No to the following
1. Saving for retirement is one of my main goals.
2. I do not want to touch my principal or interest until I am
at least 59 years old.
3. I contribute the maximum deductible amount to my IRA,
401(k) or 403(b).
4. I need an investment that will earn tax-deferred interest
for many years.
5. I am retired or very near retirement now.
6. I have a lump sum of money and I want to begin drawing
an income from it.
7. I want immediate return from my investment.
8. I want to receive a steady monthly check for the rest of
my life. 32
 Quiz Results
If you answered yes to questions 1 through 4, a
deferred annuity may be appropriate for you.
If you answered yes to questions 5 through 8,
an immediate annuity may be suitable.
A trusted financial advisor can help you decide
if an annuity is appropriate for you.
Salesperson will earn a commission if you buy.
Read & educate yourself before you talk with
salesperson!

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 Tips from the SEC
Before buying any variable annuity do
your homework and compare; evaluate
insurance company
Request a prospectus from the insurance
company or from your financial
professional, and read it carefully.
The annuity contract contains: fees and
charges, investment options, death
benefits, and annuity payout options.
Compare it to other annuities and other
types of investments like mutual funds.
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 Escape Clause:
How to Dump a Bad (deferred variable
or equity indexed) Annuity
Strategy depends on:
How long youve owned the annuity & amount
of surrender charge
Wait until surrender period expires
Withdraw 10%/year w/o charge
Tax consequences of cashing out
If owned inside a retirement account, cash out and
reinvest w/o paying taxes
If owned outside a ret. acct. you owe taxes on gain
Kiplingers January 2007 @ kiplingers.com 35
 Annuities and Senior Citizens
http://www.insurance.utah.gov/Annuities_alert.htm
Senior Citizens Should Be Aware Of Deceptive Sales
Practices When Purchasing Annuities
Annuity sales to seniors have significantly increased in
recent years. However, as annuity sales have risen, so
has a sense of confusion among consumers. This is due,
in part, to questionable or deceptive sales practices
employed by companies and agents looking to take
advantage of uninformed consumers. It is extremely
important, when considering whether or not to buy an
annuity, to take the necessary precautions in order to
make an informed decision that is best for you.

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 Annuity sales pitches to sellers:
Who can you trust?*
Not all annuities are created equal. Some
pay MUCH higher commissions while
providing GREAT benefits to your clients.
Introducing a 13% commission equity
indexed annuity.
Info that puts clients and customers at
your marketing mercy using maximum
persuasion
*Probably not the sales person
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 Annuity University
Spend 2 days with me and I will turn you
into a premium machine or suggest that
you get into a different type of work.
Books:
11 Amazing secrets of outrageously successful
insurance agents
Kick your But: 18 steps to removing the
obstacles to sales success
Red-hot cold call selling: Prospecting
techniques that pay off
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Dinner Seminar Marketing Concept
has helped thousands of advisors across
the country generate the highest
commissions and see more prospects in
one month than most advisors see in a
year
Double your Fun: Sell enough annuities to
qualify for both a 5 night stay in Cancun
and a 7-night Caribbean cruise.
Thanks to Wall Street Journal writer Jonathan Clements
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 Annuity Seller Websites
Find out the sales pitches to be wary of
ProducersWeb.com
http://www.producersweb.com
Life Insurance Selling
http://www.lifeinsuranceselling.com/

Baby boomers arent driving the economy; they are

the economy!
Discover how to have better, deeper relationships
with aging boomers and older clients!
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 Reporting Unethical Sales
Blow the Whistle
Contact state insurance & securities
regulators
Utah Division of Securities
UT Insurance Dept. http://www.insurance.utah.gov/
Regulators may pressure insurer to allow
withdrawal w/o penalty
Help protect other consumers

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 Summary
Annuities come in two basic types
Deferred- for investing for retirement
Immediate- for a retirement income you wont
outlive
Many different flavors with lots of variety
Guarantees only as good as the insurance
company selling the annuity
Caveat emptor!

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 Annuity Resources
Morningstar & Lipper- var. annuities
http://www.immediateannuities.com/
http://www.sec.gov/investor/pubs/varannty
.htm
http://www.pueblo.gsa.gov/cic_text/money/
annuity/annuities.htm
http://invest-faq.com/articles/ins-annuities.
html

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Questions?

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