Annuities (Linda Lanam)

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Annuity FundamentalsAnnuity Fundamentals

Linda L. LanamLinda L. LanamVice President,Vice President,Annuities & Market RegulationAnnuities & Market Regulation

May 2005



Copyright American Council of Lif e Insurers 2004

Why annuities?

Why annuities?

Why annuities?

Why annuities?

Changing workplace retirement plans

Increasing longevity

Continuing low savings rate

Gr owing possibility of outliving assets




What is an annuity?

What is an annuity?

What is an annuity?

What is an annuity?

An annuity is a contract issued by a lif e insurance company.

An annuity can pr ovide for savings and income in

retirement. An annuity can off er either def erred or immediate payout.

An annuity can off er f ixed or variable earnings.




Deferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesDeferred Annuities A def erred annuity has two phases: accumulation and payout.

A def erred annuity pr ovides tax-def erred savings in accumulation and

insurance against outliving accumulated assets in payout.

In a def erred annuity, the policyholder may make single or multiple

premium payments.

There are no f ederal premium limits but the premiums are paid with

af ter-tax dollars.

Earnings on the premium(s) are credited until the contract issurrendered or annuitized.

The earnings are tax-def erred until withdrawal or annuitization.




Deferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesDef erred annuity policyholders can obtain funds

f r om their annuity by:

± full surrender ± partial surrender/withdrawal

± term certain payout

± lif etime payout (annuitization)




Deferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesDeferred Annuities

Withdrawals f r om a def erred annuity before the policyholder

is age 59 ½ are generally subject to a 10% penalty tax.

Surrenders are taxed on an ³income out f irst´ basis.

Surrender of a def erred annuity may be subject to a charge

in the initial years of the contract. The surrender charge is a

percentage of the account value of the contract.




Deferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesDeferred AnnuitiesPayout f r om a def erred annuity may be either for a f ixed term

or for lif e (i.e., lif e contingent). A lif e contingent payout is

also ref erred to as annuitization.

Lif e contingent annuity payouts pr ovide a higher level of

sustainable lif etime income than withdrawals f r om non-

annuitized investments alone




I mmediate AnnuitiesI mmediate AnnuitiesI mmediate AnnuitiesI mmediate AnnuitiesAn immediate annuity has only one phase: payout.

Periodic payments f r om an immediate annuity must begin

within one year af ter the initial premium payment.Periodic payments can be monthly, quarterly or annual.




Fixed vs. Variable AnnuitiesFixed vs. Variable AnnuitiesFixed vs. Variable AnnuitiesFixed vs. Variable Annuities A f ixed annuity earns a f ixed rate of return and pr ovides a

f ixed periodic payout at annuitization.

A variable annuity earns a return based on the per formanceof an underlying account, usually of stocks and bonds, and

payout can be either f ixed or variable.




Deat h

BenefitsDeat h

BenefitsDeat h

BenefitsDeat h

Benefits Most annuities pr ovide a death benef it if the policyholder

dies prior to annuitization.

The benef iciary of the contract will usually receive a deathbenef it based on the premiums paid or the cash value.




R egulation of AnnuitiesR egulation of AnnuitiesR egulation of AnnuitiesR egulation of Annuities Pr oduct Content

Advertising and disclosure materials

Sales Practices




Q ualified AnnuitiesQ ualified AnnuitiesQ ualified AnnuitiesQ ualified Annuities Qualif ied annuities are those issued in connection with

workplace retirement plans, such as 403(b) or 457(b) plans.

Premiums paid into a qualif ied annuity are excluded f r omincome.

An IRA can also be an annuity (Individual Retirement

Annuity).

Funds accumulated in a 401(k) plan may be ³r olled over´into an Individual Retirement Annuity.




Who owns individual annuities?




7%

19%

15%

21%19%

18%

0%

5%

10%

15%

20%

25%

% ownership by income of policyholder

>20K$20K - $40K

$40K - $50K

$50K - $75K

$75K - $100K

<100K

Based on the Gallup S urvey Of Owners Of Non-Qualified Annuity Contracts, November 2001








Age of Policyholder

35%

22%

23%

20%>54

54-63

64-71

72

Based on the Gallup S urvey Of Owners Of Non-Qualified Annuity Contracts, November 2001

Annuities (Linda Lanam)

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