Annuity Basics

Financial Services Industry Training

Annuities Basics

Date July 2012

Saunders Learning Group, LLC
Saunders Learning Group, LLC, Andover, KS

Training from Saunders Learning Group
Saunders Learning Group provides a variety
of training programs, workshops and
seminars targeted to the financial services
industry.

Programs are available in a wide range of
topics, and we are specialists in developing
custom programs that are targeted to your
needs.

Contact the founder, Floyd Saunders at
316-680-6482 or at
floyd@floydsaunders.com for more
information.

1

Topics
1. Annuity Defined
2. Annuity Basics
3. How Annuities Work
4. Annuity Products
5. Annuity Payments and Distributions

Saunders Learning Group, LLC, Andover, KS Slide 2

Module 1
Annuity Defined


What is the meaning of annuity?

An annuity a contract between two parties, called the
insured and an insurance company.

The insurance company agrees to pay the insured an
agreed upon benefit either in the form of regular interval
payments or in lump sum.


What Annuity Means

 Annuities allow you to save on taxes and
derive benefit on retirement.
 These accumulated funds are later repaid
to you either for a fixed term, say 5 to 10
year, or for the rest part of your life.
 Annuities are quite similar to Certificates of
deposits.
 CDs are offered by banks, similarly,
insurance companies offer different returns
on your Annuity investments.


Who offers an Annuity?

 Annuities sold by Insurance companies by way of
licensed agents.
 But before you chose to invest with the insurance
company, you should check their insurance
licenses.
 State and federal laws and insurance
commissions govern the reserve funds, also
known as State Legal Reserve Pools.

How does an Annuity work?
 The insured makes a deposit with the insurance
company either as a single payment or through
regular small installments.
 Depending upon the type of annuity you choose,
the money deposited with the insurance
company will earn fixed or variable return.


Different Types of Annuity

 Single Premium Immediate Annuity: The amount is paid in lump sum and the benefits
are derived from the immediate next month onwards.

 Single Premium Deferred Annuity: Again, the amount is paid in lump sum but the
withdrawals can be made only after specified time limit.

 Annual Premium Deferred Annuity: The premium paid to the insurance company is
either in form of quarterly, or monthly or bi-annual or annual installments.
Withdrawals are deferred to a later date.

 Variable Annuity: This is more of a combination annuity scheme where you can chose
either to pay a lump sum amount or in installments. You can choose the investment
vehicle as well. Thus, the growth of your fund depends on vehicle chosen.


How An Annuity Works

 An annuity is a contract between you, the purchaser or
owner, and an insurance company, the annuity issuer.
 In its simplest form, you pay money to an annuity issuer, and
the issuer pays out the principal and earnings back to you or
to a named beneficiary.
 Life insurance companies first developed annuities to
provide income to individuals during their retirement years.


Module 2
Annuity Basics


Annuity Companies


Who buys Annuities
 Most annuities are purchased by people over 50 .


Tax Deferral

 One of the attractive aspects of an annuity is that its earnings
are tax deferred until you begin to receive payments back
from the annuity issuer.
 In this respect, an annuity is similar to a qualified retirement
plan.
 Over a long period of time, your investment in an annuity can
grow substantially larger than if you had invested money in a
comparable taxable investment.


Early Withdrawals and Taxes

 Like a qualified retirement plan, a 10 percent tax
penalty may be imposed if you begin withdrawals
from an annuity before age 59½.
 Unlike a qualified retirement plan, contributions to
an annuity are not tax deductible, and taxes are paid
only on the earnings when distributed.


Benefits Associated With Annuities
 Tax Deferral: The money invested in an annuity grows
tax free until the time you withdraw it.
 The age set for withdrawals is 59.5 years. Any funds
withdrawn prior to this age bear an annual penalty
charge of 10%.

 The insured gets a secured guaranteed return typically
for life.
 An Annuity offers you a medium of saving, ensuring
avoiding probate for your heirs, safety of funds and
much more.


Module 3
How Annuities Work


Structure of Annuity
1. Premiums are paid to
annuity company
2. Premiums are in company’s
general account
3. The General Account accumulates
funds
4. Fees and expenses are deducted
5. Death benefits paid out (it
applicable
6. Withdrawals occur (6,7 & 8)
9. Taxes are paid


Parties To An Annuity

 There are four parties to an annuity
contract: the annuity issuer, the owner
(or Contract holder), the annuitant, and
the beneficiary.
 The annuity issuer is the company (e.g.,
an insurance company) that issues the
annuity.
 The owner is the individual or
other entity who buys the annuity
from the annuity issuer and makes
the contributions to the annuity.


Parties To An Annuity

 The annuitant is entitled to
receive benefits from an annuity.
 The owner and the annuitant are
usually the same person but do
not have to be.
 The beneficiary is the person who
receives a death benefit from the
annuity at the death of the
annuitant.


Annuity Phases

Two distinct phases to an annuity

 There are two distinct phases to
an annuity: (1) the accumulation (or investment) phase and
(2) the distribution phase.
 The accumulation (or investment) phase is the time period
when you add money to the annuity.
 When using this option, you'll have purchased a deferred
annuity.


Module 4
Annuities Products


Single Premium Deffered Annuity

 You can purchase the annuity in one lump sum (known as a
single premium annuity), or you make investments
periodically, over time.


Immediate Annuity
If you want to start receiving payments within the first year, you'll
purchase an immediate annuity.
 You can elect to receive payments over both your lifetime and the lifetime of
another person (known as a joint and survivor annuity).
 Under a joint and survivor annuity, the annuity issuer promises to pay you an
amount of money on a periodic basis (e.g., monthly, quarterly, or yearly).


Life Time Annuity

 If you are age 65 and elect to receive annuity
distributions over your entire lifetime, the amount
you will receive with each payment will be less than
if you had elected to receive annuity distributions
over five years.


An Annuity As a Charitable Gift
 Assets in the form of an annuity can be transferred to a Charity
 You receives payments for your life
 Charity is designated as the beneficiary


Module 5
Annuities Distributions and
Payments


Distribution Options

The distribution phase is when
you begin receiving distributions.
 You have two options:
 Under the first option, you can withdraw some or all of the
money in the annuity in lump sums.
 The second option (referred to as the guaranteed income or
annuitization option) provides a guaranteed income stream for
your entire lifetime (no matter how long you live) or for a
specific period of time (e.g., 10 years).
(Guarantees are based on the claims-paying ability of the issuing insurance
company.)
This option can be elected at any time on your deferred annuity.


Annuity Payments
The amount you receive for each
payment period will depend on:
 how much money you have in
the annuity
 how earnings are credited to
your account (whether fixed or
variable)
 the age at which you begin the
annuitization phase.
 The length of the distribution
period will also affect how
much you receive.


Is Annuity For You?

When is an annuity
appropriate?

 It is important to understand that annuities can be an excellent
tool if you use them properly.
 Annuities are not right for everyone.
 Annuity contributions are not tax deductible.
 That's why most experts advise funding other retirement plans
first.


Annuity vs. other Retirement Plans
If you have already contributed the maximum allowable amount to other
available retirement plans, an annuity can be an excellent choice.
There is no limit to how much you can invest in an annuity, and like other
retirement plans, the funds are allowed to grow tax deferred until you begin
taking distributions.
An Annuity can
fill any gap in your
retirement plan.


Annuity Summary

 Annuities are designed to be very-long-term investment vehicles.
 In most cases, you'll pay a penalty for early withdrawals.
 If you take a lump-sum distribution of your annuity funds within the first
few years after purchasing your annuity, you may be subject to surrender
charges imposed by the issuer.
 As long as you're sure you won't need the money until at least age 59½,
an annuity is worth considering.
 If your needs are more short term, you should explore other options.


Questions


Thank You !


Annuity Basics

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