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Annuities ExplainedIn Simple Terms with Tips &Ideas That Could Save You ThousandsFinancial &Insurance AgencyToll-free:1-86...
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Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 1AnnuitiesExplainedFirst Publi...
Table of ContentsIntroduction:.............................................................................. 4Annuity Hist...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 34. What are the new features ...
Introduction:Annuities can be a great way to make your money work,but many people may not understand the risks, rewards, o...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 5As a result of all the confus...
annuity principal. One of the oldest and longest lasting tontineswas the annuity called the State Tontine of 1693. It was ...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 7these US annuity contracts we...
"retirement money" such as IRA, 401k, 403b, etc. When youspend a dollar of after tax money, the cost to you is exactly $1....
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 9Today In 20 YearsSpend Regula...
Rules of MoneyRule of 100Simply put the rule of 100 is used as a base line to determinehow much of your assets could be at...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 11Rule of 114The Rule of 114 i...
back, how will your annuity earn credits or interest. All of thesepoints are covered on this web site.Choosing a suitable ...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 13Immediate AnnuityWith an imm...
From FINRA’s website, http://www.finra.org “Investingin a variable annuity within a tax-deferred account, such as anindivi...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 15host of other indices. The i...
appropriate for retirement planning and seniors – beware, ifyou dont understand the product, you should give serioussecond...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 17contract to another annuity ...
appear to be in your best interest, you should always considerthe costs that will often be involved to do this.Your consid...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 19life or long-term care insur...
The income tax rules that apply to all annuity paymentsstart with Section 72(b) of the Internal Revenue Code ("Code").This...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 21Investment In Contract($250,...
Other ConsiderationsNotwithstanding the benefits previously discussed, thereare many other things that should be considere...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 235. Loans and Early Withdrawa...
taxpayer and $32,000 for a married taxpayer) you then pay notax on your Social Security income.For your own benefit, pleas...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 25payments to you even if you ...
Planning for Extended CareMore and more people know someone or have a familymember who has needed extended care. In fact, ...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 27There are ways to shelter yo...
Key Questions to ask your advisorThese are some great questions to consider asking any advisoreither your current advisor ...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 29 What disclosure documents ...
InsuranceAgentStateLife-insurancelicenseLife-insuranceandannuitiesStateInsuranceCommissionersNONERegisteredRepresentativeS...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 31In SummaryAny product may ha...
Definitions Accumulation Value Account – this is the money that isyours, the principal or premium. Annual asset Fee - Ty...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 33 Participation rate - Also ...
iFederal income tax rates range between 10% to 35% under the 2011federal tax code, and are based upon the taxpayers level ...
Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 35AboutMr. Richard LoekMr. Loe...
First Published January 2013, revised May 2013.This booklet is copyrighted. It may not be reproducedwithout express writte...
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Annuities explained

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As a tool for investment and financial security, the life insurance annuity has been around for quite a long time. Annuities first started the ancient Roman Empire. They were a way for Roman citizens to receive a yearly payment for their lifetimes or for several years in exchange for a large upfront payment. Early roman annuities were often given to Roman legionnaires as payment for years of faithful military service. (1) As time passed, the modern life insurance annuity began to take shape.
In medieval times, lifetime annuities bought with a single initial premium became popular among nobles for funding the constant warfare that was a fact of life then. , records show that one of the most popular annuities of the medieval era was called the tontine. (2) In this annuity the participants purchased a share in an annuity pool, and then, in turn, received a lifetime annuity

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  1. 1. Annuities ExplainedIn Simple Terms with Tips &Ideas That Could Save You ThousandsFinancial &Insurance AgencyToll-free:1-866-589-9366Provided to you by:Mr. Richard Loek
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  3. 3. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 1AnnuitiesExplainedFirst Published January 2013byRichard D. Loek123 E San Carlos Street, #221San Jose, CA 95112www.calrima.com / rloek@calrima.comwww.iXrayRetirement.com / www.iXrayAnnuities.com1-866-589-9366Investment Advisory Services offered through Onesta WealthManagement, LLC; Comments regarding safe and secureinvestments, and guaranteed income streams refer only to fixedinsurance products. They do not refer, in any way to securitiesor investment advisory products. Insurance and Annuityproduct guarantees are subject to the claims-paying ability ofthe issuing company, and are not offered by Onesta WealthManagement. Insurance products are sold through CalRimaFinancial & Insurance Agency, California Insurance License#OF34289.No specific individual advice, be it legal, tax or investment isgiven here. As always, consult with your professional tax orlegal advisor before making any final decisions. This bookletis to be used solely for educational purposes.
  4. 4. Table of ContentsIntroduction:.............................................................................. 4Annuity History: ....................................................................... 5Types of Money........................................................................ 7Spend Regular Money First .................................................. 9Spend IRA Money First........................................................ 9Assumptions:......................................................................... 9Rules of Money....................................................................... 10Rule of 100.......................................................................... 10Rule of 72............................................................................ 10Rule of 114.......................................................................... 11Rule of 144.......................................................................... 11Annuity types.......................................................................... 11Understanding the Basics.................................................... 11Flexible premium................................................................ 12Single premium................................................................... 12Annuity Phases.................................................................... 12Accumulation phase............................................................ 12Annuitization phase ............................................................ 12Income phase ...................................................................... 12Immediate Annuity ............................................................. 13Fixed Annuity ..................................................................... 13Variable Annuity................................................................. 13Variable Annuity Riders ..................................................... 14GMIB .................................................................................. 14GMWB................................................................................ 14Fixed Index Annuity or Hybrid Annuity ............................ 14Hybrid Annuity Riders........................................................ 16Does It Make Sense for Me to Change Annuities?................. 161. How safe is my annuity?.............................................. 172. How does the current interest rate compare to theoriginal contract rate? ......................................................... 173. Is my annuity lacking some of the newer annuitybenefits?.............................................................................. 171. What is the total cost to me of this exchange?............. 182. What about losing Death Benefits?.............................. 183. How do the surrender provisions compare?................. 18
  5. 5. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 34. What are the new features and why do I need or wantthose features?..................................................................... 18How Annuity Payments Are Taxed ........................................ 19Other Considerations .............................................................. 221. Surrender Fees. ............................................................ 222. Tax Consequences. ...................................................... 223. Features Vary Among Insurance Companies. ............. 224. Fees and Expenses. ...................................................... 225. Loans and Early Withdrawals...................................... 236. Company Stability and Regulatory Oversight. ............ 23Taxation of Your Social Security Benefits ............................. 23Cash Payments for Life........................................................... 24For whom may a fixed immediate annuity be suitable? ......... 25What can you expect to receive on an immediate annuity? 25Planning for Extended Care.................................................... 26Key Questions to ask your advisor ......................................... 28Advisor Regulation................................................................. 29In Summary............................................................................. 31Definitions............................................................................... 32References............................................................................... 33
  6. 6. Introduction:Annuities can be a great way to make your money work,but many people may not understand the risks, rewards, or theworkings of their annuities! As I have scoured the Internetlooking for information I can hear my doctor saying, “You can’tbelieve everything you read on the Internet…” How true thatcomment has been. False accusations, misinformation and ofcourse simply poor journalism abound.[So much can be said. The purpose of this booklet is togive you a basic foundation, spark questions and inspire you toseek out the truth for your situation]This booklet will point out some common mistakes toavoid and show you how to get a lot out of your annuity. Youllget an education and real understanding of your annuity, in plainEnglish! Most of all, if you already have an annuity, I hope Ican put your fears to rest or you can call and we’ll work withyou to make the most of what you already have.On the positive side, this booklet will point out some"hidden" values of annuities that many people are not aware of.Items such as riders and how to avoid annuitization.Annuitization is where people are often left feeling annuities arebad.When I first go into this industry I was confused by all ofthe different “Experts” giving their opinions and advice. It tooka while to understand and expose the undercurrent that exits inthe financial or investment industry. It has been my experiencewhen someone is slamming another product it is because theydon’t understand that product or that product is causing them tolose business. The varieties of articles I have read typically twistthe context and even worse the content of the article. Tounilaterally discount products or investments classes shows lackof understanding.
  7. 7. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 5As a result of all the confusing and misleading informationI felt compelled to produce this document with valuableinformation I have collected.If you find that you have questions after reading thebooklet, feel free to call CalRima Financial & Insurance Agencyor the Advisor that has provided you with this booklet. TheAdvisor’s phone number is on the last page.Lets get started...Annuity History:As a tool for investment and financial security, the lifeinsurance annuity has been around for quite a long time.Annuities first started the ancient Roman Empire. They were away for Roman citizens to receive a yearly payment for theirlifetimes or for several years in exchange for a large upfrontpayment. Early roman annuities were often given to Romanlegionnaires as payment for years of faithful military service. (1)As time passed, the modern life insurance annuity began to takeshape.In medieval times, lifetime annuities bought with a singleinitial premium became popular among nobles for funding theconstant warfare that was a fact of life then. , records show thatone of the most popular annuities of the medieval era was calledthe tontine. (2) In this annuity the participants purchased a sharein an annuity pool, and then, in turn, received a lifetime annuity.The payments were divided among surviving participantsof the initial annuity pool. Thus, as time passed, each participantwould receive a larger payment. As the participants died off,ever increasing payments would be made to them. The soleremaining survivor would reap the benefits of the remaining
  8. 8. annuity principal. One of the oldest and longest lasting tontineswas the annuity called the State Tontine of 1693. It was startedin the United Kingdom as a way to pay for its many wars withFrance.The modern financial system started to develop. Dr. JamesDodson of England formed the Equitable Life AssuranceSociety of London in 1756. This was one of the first companiesformed to offer a modern form of life insurance annuity. (3)Dodson founded this company and the annuity that it offered toprovide a form of insurance to persons of all ages.The Equitable Life Assurance Society issued policiesbased on the assurance of fixed sums on the survivingpolicyholders beneficiary’s lives. The company issued policiesfor any term for which the policyholders wanted to purchase thelife insurance annuity. Premiums of this annuity were governedby the age, lifestyle, and health of the policyholders seeking toenter into the annuity. These basic rules laid down thefoundation of a distinguished modern life insurance annuitycompany that still exists today.In the United States, the Presbyterian MinistersAssociation first developed annuities as a retirement income forminsters, windows. The Presbyterian Church funded the annuityservices of this association. The services were passed from thepolicyholder to their surviving spouse. The annuity offered bythe association also passed on to surviving children if they wereunder the age of adulthood.The history of Benjamin Franklins annuities are aninteresting note in the history of the American life insuranceannuity. Franklin left two annuities to the cities of Boston andPhiladelphia on his death. Boston city officials finally ended theannuity he left them in 1993.The US developed its banking and insurance industries.The states found that banks were selling their own annuities. Inthe financial turmoil following the First World War, many of
  9. 9. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 7these US annuity contracts were found to be unsafe. As a result,many states passed laws allowing only life insurance companiesto issue annuity contracts. This began the modern life insuranceannuity as we know it in the US today.The Great Depression of the 1930s came upon us. Thenmany people were kept financially solvent because they trustedthe security that the modern life insurance annuity has come tooffer. Thousands lost their entire life savings in the stock marketthen. At the same time life insurance annuity investors retaineda large portion of their savings. Babe Ruth is quoted as saying,“I may take risks in my life, but I will never risk my money. Iuse annuities and I never have to worry about my money.”In todays highly volatile economic climate, perhaps theBabes advice is worth listening to. The life insurance annuity oftoday provides a high level of safety and security for aninvestors money.That high level of safety and security simply cannot bematched by many traditional investments. Given all of this, onemight do very well relying on a modern life insurance annuityfor their future economic and financial security.Types of MoneyBefore we dive in too deeply I need to distinguish thatthere is more than one type of money. Annuities can be fundedwith money from retirement accounts or non-retirementaccounts; as such we need to spend a moment to explain thesetwo types of money.There are two types of money: The money that has alreadybeen taxed, called non-tax qualified money or after tax money.The other type of money, money that has not been taxed, iscalled qualified money or pre-tax money typically called
  10. 10. "retirement money" such as IRA, 401k, 403b, etc. When youspend a dollar of after tax money, the cost to you is exactly $1.When you spend $1 of retirement money, the cost to is muchhigher. Consider you must pay taxes on that dollar. To get onedollar if your federal tax rateiis 25% you must withdraw$1.33(1/.75). Therefore, if you want to reduce your taxes,consider not taking more than the required distribution fromyour retirement money.Some people think they should never spend their principal,but this can be a mistake if you want to save taxes. It could bebetter to spend some of your regular assets first, so that you cantake advantage of the tax-deferral benefits associated with IRAsand qualified retirement plans. You could be better offfinancially from an income tax standpoint. Your lifetime tax billcan be less or you will at least defer taxes for many years.Consider the following hypothetical example that assumesyou have a taxable regular money account and a tax-deferredretirement account with a $100,000 balance each. Lets assumethe money in each account earns a return of 6% per year. Letsfurther assume that annual NET distributions of $6,000 per yearare being taken for a 20-year period. Under one scenario, the$6,000 will be taken first from the taxable money. The otherscenario considers what would happen if the money was takenfirst from the qualified money. Under this example, you wouldhave $150,000 more at the end of 20 years by spending yourregular money first. The upside is that you could potentially holdonto more money while you are alive.Of course, the down side is that your beneficiaries willeventually have to pay income taxes on the money when you aregone. As the information provided by this example ishypothetical, actual results will vary depending upon theperformance of your investments.iiSpend after-tax Money First
  11. 11. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 9Today In 20 YearsSpend Regular Money FirstRegular Money $100,000 $40,916IRA Money $100,000 $320,713TOTAL $200,000 $361,629Spend IRA Money FirstIRA Money $100,000 $0Regular Money $100,000 $211,247TOTAL $200,000 $211,247Assumptions: All money is assumed to earn 6%. Thisassumed rate is used for tax illustration purposes only and doesnot reflect any particular investment. Federal income taxes areassumed to be 35% in this example, and your income tax ratecould be lower based upon your annual income. This illustrationcovers a 20-year duration, with distributions of $6,000 occurringeach year. The income taxes on withdrawals are also deductedfrom the IRA account.
  12. 12. Rules of MoneyRule of 100Simply put the rule of 100 is used as a base line to determinehow much of your assets could be at risk. The rule is asfollows. You take 100 and subtract your age. The result is aguideline stating how much of your money could be at risk.Each person’s situation varies and this is a good starting pointfor your risk planning. See the table below:Age Formula Result40 100 – 60 40%50 100 – 50 50%60 100 – 60 40%70 100 – 70 30%80 100 – 80 20%Rule of 72The power of doubling money through compound interest ontax deferred investments. The rule of 72 states that you dividethe number 72 by the rate of return and the result is the numberof years it will take for your money to double. See the tablebelow:Rate Equation Result2% 72÷2 36 years6% 72÷6 12 years7.2% 72÷7.2 10 years8% 72÷8 9 years10% 72÷10 7.2 years
  13. 13. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 11Rule of 114The Rule of 114 is about how long it will take for your moneyto triple. The same formula is applied as the Rule of 72.Rate Equation Result2% 114÷2 57 years6% 114÷6 19 years7.2% 114÷7.2 15.8 years8% 114÷8 14.3 years10% 114÷10 11.4 yearsRule of 144The Rule of 114 is about how long it will take for your moneyto quadruple. The same formula is applied as the Rule of 72.Rate Equation Result2% 144÷2 72 years6% 144÷6 24 years7.2% 144÷7.2 20 years8% 144÷8 18 years10% 144÷10 14.4 yearsAnnuity typesUnderstanding the BasicsGenerally speaking an annuity is tax deferred. The moneyin an annuity grows tax deferred like a retirement account. Aswith an IRA, (Individual Retirement Arrangement – as namedper IRS document 590) the money in an annuity is ear-markedfor use after age 59 ½.As such, annuities are not to be used without carefulconsideration. Points to consider are surrender charges, howlong you must hold the annuity to get full value or principal
  14. 14. back, how will your annuity earn credits or interest. All of thesepoints are covered on this web site.Choosing a suitable vehicle for your retirement is not aneasy task. With the numerous choices, which product is bettersuited for your needs? On one hand, you might want theguarantee of principal and past earnings. On the other hand,many prefer the potential of higher returns by being linked to theequity markets.Flexible premium - Most annuities will allow foradditional principal (premium) to be added to the contract. Thisis called a flexible premium annuity.Single premium – some annuities will only allow fora single premium payment to be made to an annuity. These arecalled single premium annuities.Annuity PhasesAccumulation phase – money is added to annuitiesand allowed to grow income tax deferred. This stage is calledthe accumulation phase. As noted above, some annuities mayallow more premium(s) to be added to a contract during thisphase.Annuitization phase – during an annuitizationphase the contract is unable to be altered. Annuitization has alsobeen coined as “annuicide”. There are a few different ways toannuitize a contract. From a high-level you may annuitize forthe remainder of person or persons lives, for set period of timeor a combination of the two.Income phase – different products have differentways to address this. For the most part you either have a classicannuity that only allows for annuitization or you have an annuitywith a rider that allows for greater income options withoutcommitting annuicide.
  15. 15. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 13Immediate AnnuityWith an immediate annuity a person gives an insurancecompany a lump sum of money and that money is turned into anincome stream, like a pension. This income stream has options.The income could be for a set period of time, for the rest of thepersons life or a couples lives, or lastly a combination of thetwo called a period certain with life. An immediate annuity isalso known as a SPIA – single premium, immediate annuity.NOTE: This does offer protection or guarantee of the principal.Fixed AnnuityIs a deferred annuity that works similarly to a certificate ofdeposit (CD) that you could get at a bank. There are howeverkey distinctions that need to be addressed. With this type ofannuity you may get a set rate of return for the period of deferralor you may get a higher rate the first year and lower rates infollowing years. NOTE: This does offer protection or guaranteeof the principal.Variable AnnuityAs the name indicates, the principal (premium) in this typeof annuity can fluctuate up and down. Careful considerationmust be taken as to how much risk an investor wishes to take;variable annuities can fall just as quickly as equities, or mutualfunds and no guarantees to the actual principal are offered. Also,investors should make themselves aware of the fees for both thefixed and variable portions of a variable annuity. NOTE: Thisdoes not offer protection or guarantee of the principal.
  16. 16. From FINRA’s website, http://www.finra.org “Investingin a variable annuity within a tax-deferred account, such as anindividual retirement account (IRA) may not be a good idea.Since IRAs are already tax-advantaged, a variable annuity willprovide no additional tax savings. It will, however, increase theexpense of the IRA, while generating fees and commissions forthe broker or salesperson.”iiiVariable Annuity RidersGMIB – Guaranteed Minimum Income Benefit rider canbe added to some variable annuities. What this provides isincome at some point in the future. This usually requiresannuitization, which means you lose control of your money.NOTE: This does not offer protection or guarantee of theprincipal.GMWB – Guaranteed Minimum Withdrawal Benefitrider can be added to some variable annuities. This appears tobe a more flexible cousin of the GMIB. The distinction here isthat you get to withdraw money without annuitization – thuspossibly maintaining more control. NOTE: This does not offerprotection or guarantee of the principal.Fixed Index Annuity or Hybrid AnnuityWould you like an annuity that tracks the performance ofthe stock market, yet helps to protect your principal when themarket declines? The fixed-indexed annuity could help you tocover these objectives.The hybrid annuity can offer some market risk protection,tax deferral, a minimum interest rate guarantee, probateavoidance, and guaranteed minimum income payments for life.The interest earnings for these annuities are based upon thegrowth in an accepted equity index, such as the S&P 500 Index,Dow Jones Industrial Average, and Russell 2000 as well as a
  17. 17. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 15host of other indices. The interest rate applied to these annuitiesis based, in part, upon the overall movement of the index.Many of these annuities will base the interest rate upon apre-determined percentage of the market movement. Forexample, lets assume for illustration purposes that the annuitycompany set its participation rate at 50% of the index movementof the S&P 500. Lets assume that the S&P 500 had a good yearand increased by 30% (this is a hypothetical assumption and isnot based upon the performance of any particular investment).Lets also assume that the interest rate could actually move ashigh as 15% before any rate limitations were applied. Basedupon the facts of this example, the interest rate that would applyto this hypothetical account would be 15% (before contract feesand expenses are subtracted from the account balance). Pleasenote that participation percentages do vary among companiesand can range anywhere from 50% to 90%.ivSome companiesalso set a cap on the interest rate, which can vary from companyto company (typically between 10% or less).The second fundamental feature of these annuities is themarket risk protection. In the event that the market index shouldgo down, this feature will help prevent your principal investmentfrom being reduced below a certain percentage of your principalinvestment. The minimum guaranteed account value typicallycan also vary among companies and generally ranges anywherefrom 75 to 100% of your premium, depending upon the type ofproduct involved.These annuities can be useful for those who wish to participatein the stock and bond markets and not have their principal atminimal risk. These annuities are also called equity indexed orfixed indexed annuities. The short name is FIA or EIA. Theseannuities can be simple or very complex and difficult tounderstand. The more complex the annuity, the less likely it is
  18. 18. appropriate for retirement planning and seniors – beware, ifyou dont understand the product, you should give serioussecond thought to this product. See below “Key Questions toask your advisor” to help determine if this is a fit for you.NOTE: This does offer protection or guarantee of theprincipal.Hybrid Annuity RidersMany companies have riders for their index annuityproducts, some are better and each needs to be evaluated for theappropriateness and if this is a fit for each client.Features: income for life, rising income, death benefit,compound interest during deferral, (4%, 5%, 6%, 7%, 8%)Ask your advisor, what other income riders did youconsider before recommending this one?Does It Make Sense for Me to ChangeAnnuities?If you have an annuity contract of any kind, you may havebeen approached about the idea of exchanging it for a new modelor one with the latest features. A 1035 exchange could help youto achieve these objectives. 1035 refers to a provision in thefederal tax code ("Code") that allows you to transfer theaccumulated funds in an existing annuity to another annuitywithout creating a taxable event. In other words, the earningsfrom your original investment continue to receive tax-deferredtreatment until you take money out of the annuity.But the continuing tax benefit comes with some importantconditions. First, the Code says the old annuity contract must beexchanged for a new contract. Therefore, you should have yourcurrent annuity company send the account funds directly to thenew company. Secondly, the Code says you can make a tax-freeexchange from: 1) a life insurance contract to another lifeinsurance contract or an annuity contract or 2) from one annuity
  19. 19. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 17contract to another annuity contract. You cannot, however,exchange an annuity contract for a life insurance contract.Why might you want to exchange or roll over an annuity?Here are some questions to consider on this:1. How safe is my annuity? For any annuity product,the safety of your money is backed by the claims-payingability of the issuing insurance company, not anygovernment agency. You need to make sure that theissuing company is in sound financial health. Annuityowners will sometimes exchange to a company withgreater financial stability.2. How does the current interest rate compareto the original contract rate? Some fixed annuityproducts offer competitive initial rates to attract investors.However, the interest rate might only be guaranteed for alimited period of time, say one or two years. With this inmind, your current renewal rate could be lower than whatyou might otherwise get on a new annuity.3. Is my annuity lacking some of the newerannuity benefits? In a highly competitive business,many annuity companies work to offer new insurancefeatures, such as interest rate guarantees, bonuses,guaranteed death benefits, long-term or extended careriders and guaranteed income payments to attractinvestors. Therefore, you could find that a new annuitymay better meet your needs or provide you with theopportunity for competitive returns.Whether or not an annuity exchange makes sense dependson your existing policy and your individual financial situation.Although the thought of switching annuities might, at first,
  20. 20. appear to be in your best interest, you should always considerthe costs that will often be involved to do this.Your consideration of the consequences should also takeinto account the following additional questions:1. What is the total cost to me of thisexchange? Although income taxes continue to bedeferred, there are some other costs to consider beforemaking the switch. For example, will the annual fees orother charges assessed by the new insurance companyoffset the higher interest or bonus payments? Does thesurrender charge justify the added benefits? What are thecomparative costs associated with the guaranteed benefitsand investment options?2. What about losing Death Benefits? Often witha variable annuity there is a death benefit provided. If theunderlying annuity sub-accounts have performed poorlythere could a larger death benefit you will be giving up.This is possibly the most complex issue we have to reviewwith clients. There is not an answer that works for allclients in all situations. This will require a consultation.Please contact the advisor who provided you this booklet.3. How do the surrender provisions compare?Often the biggest transactional cost that often comes intoplay for any annuity exchange is the surrender charge. Formany companies, surrender charges eventually expire withan existing contract after a certain period of time.However, a new contract could increase or reinstate thesecharges and could even increase the period of time inwhich the surrender charges apply.4. What are the new features and why do Ineed or want those features? For example, youmight realize the terminal illness guarantee or extendedcare or long-term care benefit rider is not really needed ifother resources already exist. Of course, just the oppositecould hold true if you need the coverage and cannot find a
  21. 21. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 19life or long-term care insurer to take you because of healthreasons. Please, also consider whether there are anylimitations that apply to the features. For example, if thereis a guaranteed interest rate, then how long does theinterest guarantee last? Although the current interest ratefor one company might be better, its also important toconsider past payment history. Also, what are the relevantexpenses? Do they justify the benefits?Keep in mind that a 1035 exchange does not providepermanent income tax exclusion for gains on such exchanges,but merely a deferral-since the basis of the annuity contractexchanged is carried over as the basis of the new contractreceived.One major benefit of surrendering or transferring avariable annuity is that you may realize a tax benefit. If yourannuity has lost value (is worth less than you put into theannuity) you may be able to write off the loss on your taxes.If you would like to find out whether an annuity exchangecan benefit you, we offer a complimentary service to evaluatethe appropriateness of performing a 1035 exchange.How Annuity Payments Are TaxedGetting the most value from any annuity arrangementbegins with an understanding of the relevant income tax rules.This helps us to understand how much income taxes will betaken from our annuity payments during retirement. This articlewill discuss some important tax rules you need to be aware ofwith respect to annuities.
  22. 22. The income tax rules that apply to all annuity paymentsstart with Section 72(b) of the Internal Revenue Code ("Code").This rule begins with the idea that every person should beallowed to recover his or her own contributions to a non-qualified annuity free of tax. This makes perfect sense, as yourown non-qualified contributions were paid for with after-taxmoney. Your personal investment in a non-qualified annuity iscommonly referred to as your cost basis.The Code allows you to recover your cost basis graduallyover the time you are receiving annuity payments. So, out ofeach payment received by you, a portion will represent a tax-freereturn of your basis. The amount of the payment that exceeds thebasis portion is subject to federal income taxes at your respectivetax rate. This will range anywhere from 10 to 35%, dependingon your income level during your retirement years.To understand how this works, lets look at an example.First, lets assume that our annuity owner, who is a non-smoking60-year-old male and in good health, invests $250,000 of hisown funds into a fixed deferred annuity that will start makingincome payments to him for the rest of his life when he turns 65.Lets assume that this taxpayer will pay income taxes at a 15%marginal rate when he retires.vLets also assume that the annuitypayments in our example come to $2,164 based on theaccumulated value of $304,000 when the annuity owner startstaking payments.viNow we have enough information todetermine the federal income tax on the annuity.Looking at the life expectancy tables published by theInternal Revenue Service, we would see that the life expectancyestablished by these tables for a 65-year old male is 85 years ofage. Based upon the initial investment, annuity payment, and lifeexpectancy, the annuity owner will be allowed to exclude $1,042of each annuity payment from income taxation.viiOnce we applythe 15% rate to the remaining portion of the payment, we comeup with a federal income tax of $168 for each annuitypayment.viiiHeres a breakdown of how the excluded part of theannuity payment was calculated:
  23. 23. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 21Investment In Contract($250,000)x Payment ($2,164) = $1,042 ExcludedAmountExpected Payment overLife($2,164 x 12 mo x 20 yr)In the event of an unfortunate death prior to the lifeexpectancy, the Code still allows you to recover your unusedcost basis by taking this as a deduction on the final tax return.For example, if we assume in our previous example thatsomething happened to the annuity owner in the fifteenth year,he would be entitled to a $62,520 deduction on the final return.ixOn the other hand, if annuity payments are received after the lifeexpectancy period, then the entire amount of these payments aresubject to taxes.Like all annuity guarantees, annuity payments are subjectto the claims-paying ability of the issuing company. Thepayment assumptions were taken from a hypothetical annuityillustration of a healthy male who is eligible for preferredunderwriting rates. Your results could vary based, among otherthings, upon your age, income and tax rate status, contribution,annuity payment beginning date, health and tobacco-user status.Please also note that tax laws are subject to frequent changes.You should therefore consult with your tax advisor regardingyour individual circumstances.
  24. 24. Other ConsiderationsNotwithstanding the benefits previously discussed, thereare many other things that should be considered before apurchase is made, including:1. Surrender Fees. Like fixed deferred annuities,equity-indexed annuities have penalties for earlywithdrawal called surrender charges. These charges canresult in a loss of your principal investment (see discussionbelow on withdrawals). These charges typically declineover the length of the surrender charge period (typically 5to 15 years, depending upon the company).2. Tax Consequences. These annuities are also suitedfor investors with long-term investment horizons.Withdrawals from these annuities prior to age 59½ canalso subject the annuity owner to income taxes and anadditional 10% income tax penalty on the distributedamount.3. Features Vary Among InsuranceCompanies. There are many companies that areoffering these types of annuities, and the methods ofcalculating the minimum and maximum interest rate varygreatly among them. Although many companies offer aminimum interest rate (typically ranging between 1.5 to3%), some companies offer minimum interest rates as lowas 0%.4. Fees and Expenses. Asset management fees will beincurred on these annuities. Maintenance fees, salescommissions, trading costs and other contract chargescould also apply. These charges will, in many cases,reduce the account value of these annuities.
  25. 25. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 235. Loans and Early Withdrawals. Although somecompanies do allow you to take minimal withdrawals withsurrender charges, it is important to remember that somewithdrawals can affect the amount of market downsideprotection provided under the contract.6. Company Stability and RegulatoryOversight. All annuity features are guaranteed by theclaims-paying ability of the issuing company. Please noteguarantees associated with an equity index applies only ifthe annuity is held until the end of the contract term andthat loss of principal is possible if the annuity issurrendered before the end of the contract term. Despitethe market participation feature, the various state insurancedepartments regulate these products.Taxation of Your Social SecurityBenefitsPrior to 1984, Social Security income was tax-free. Today,however, taxpayers could be paying tax on up to 85% of theirSocial Security income.xThe good news is that annuities canhelp reduce and sometimes eliminate the income tax on yourSocial Security income!The IRS calculates the tax on your Social Security incomebased on your total income from all sources. However, incomeyou earn on an annuity that is left to accumulate does not appearon your current tax return.Therefore, annuities may reduce your total income forSocial Security benefit taxation purposes. In fact, if you shelterenough income in annuities and bring your income below thethresholds (adjusted gross income of $25,000 for a single
  26. 26. taxpayer and $32,000 for a married taxpayer) you then pay notax on your Social Security income.For your own benefit, please consult with a qualified taxadvisor or attorney. Want to see if these calculations work toyour advantage? Bring in a copy of your tax return (includingSchedule B) to the advisor who has provided this booklet to you.They should be able to let you know how much you could savein taxes.Annuities can provide yet another benefit....Cash Payments for LifeIts possible to get a fixed return on your money with afixed immediate annuity.Similar to other types of annuities, an immediate annuityinvolves a premium payment to an insurance company. Inexchange, the company will immediately start making monthlypayments to you. Part of these payments is considered incomeand part comes from your principal investment. These paymentscan last for a term of years or even for your lifetime if you sochoose. Note that immediate annuity payments could incurpremium taxes in some states. Maintenance expenses andcontract fees charged by the insurance company could alsoreduce your payments. For a detailed discussion on annuityincome taxes, please revisit the article appearing earlier thisbooklet.The amount of money you receive each month isdependent on several factors, including your estimated lifeexpectancy, the amount of money you have invested and thecurrent interest rate being paid by the annuity company (whichis locked in at the time of purchase). The payout will typicallybe higher the older you are because the insurance company doesnot expect to have to make payments as long as they would to ayounger person. Assuming that you have chosen the lifetimepayment option, your annuity company will continue to make
  27. 27. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 25payments to you even if you live past your normal lifeexpectancy. If you die sooner, the insurance company keeps thebalance of the annuity. You may also be able to elect to receivea lower payment in exchange for having the payments continuedto your heirs until the entire amount of your original premiumhas been paid out.For whom may a fixed immediateannuity be suitable? A retiree needing increased monthly cash-flow A person with no heirs or who is not concerned aboutleaving an estate Someone who has set aside other funds to leave to heirsif they desire to leave an inheritance A retiree desiring the fixed payment and wanting toavoid maturities, rolling over investments and themaintenance and administration required of investingon ones ownWhat can you expect to receive on animmediate annuity?xi$100,000 Premium, MaleAge Monthly65 $64670 $70775 $800Life annuity payments, Comparative Annuity Reports, January 2008
  28. 28. Planning for Extended CareMore and more people know someone or have a familymember who has needed extended care. In fact, over half ofthose almost age 65 spend at least some time requiring nursingcare.xiiThis is not medical care, but the type of care received inthe home (shopping, meal preparation, assistance with bathing,eating, etc.) or in a nursing home.As you know, Medicare does not usually pay for thiscare. People are left to pay for this in one of three ways:1. Out of their own pocket (about $6,478 per month).xiii2. Purchasing long-term care insurance while they arehealthy.3. Qualifying for Medicaid (different than Medicare).Many people cannot afford the $6,478 or more per monththat some nursing homes charge. Thats why many people arefeeling the financial pinch within a year of entering a nursinghome. This leaves many people exposed and unprotected fromthe catastrophic cost of extended care.The state government may pick up the tab for you, but youmay have to spend down your assets. Depending upon yourstates Medicaid rules, this could leave you with as little as$2,000 in liquid assets (Medicaid allowances do allow spousesto retain some additional assets). So, if you have $100,000 in thebank, you could be required to spend it on your care before thestate provides any assistance. Prior to applying for Medicaid, itmight be possible to shift some assets to the healthy spouse.Please note that transfers to other relatives could be subject to alook-back period of 60 months. If the transfer took place withinthe look-back period, the transferred asset will be counted asyour property for Medicaid spend down purposes.
  29. 29. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 27There are ways to shelter your assets, however, and qualifyfor Medicaid without spending down your assets! One option isto place your funds in an immediate annuity. These annuities(when purchased in compliance with Medicaid rules) may beexempt assets, depending on how much you get and the statewhere you live. Some states exempt annuity payouts only up toa certain amount. That means you can keep this asset and stillqualify for Medicaid payments. This is one way to obtaingovernment support for extended care and not have to spendyour last dime.The rules on this are particular and vary by state so pleaseconsult someone knowledgeable on Medicaid procedures or callfor more information.
  30. 30. Key Questions to ask your advisorThese are some great questions to consider asking any advisoreither your current advisor or an advisor you are evaluatingworking with. What is the minimum guaranteed interest rate?How long are they guaranteed at this rate? How does the income stream work? Who bears the risk? What other products did you take intoconsideration before recommending this to me? When do I get the money? What is contract, cash or walk-away value vs. theriders value? What is the partial withdrawal and how does itwork? How will I be taxed? What happens when I die? Guarantees – what are they and how do theywork? What can go wrong? Can we read the prospectus/disclosure together? How much of my money should I put in thisproduct? Why? What are the fees or charges?How are the deducted from my principal? Is interest earned compounding? How much money will you (the advisor) make bymy buying this?
  31. 31. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 29 What disclosure documents are you required togive? Did I get them yet? How sound is this company? What is theirrating? How is this annuity the best income option forme? (if income is the deciding factor). What riders do I have and how do they work?Specifically, why is this rider appropriate for me? How long can I receive the roll-up interest in theincome account? Can we call the insurance company and ask themthe same questions? (HINT: you can after youpurchase the contract or already have one). How will my beneficiary get the money?What will they get? (Do they get the GMIB,accumulation value or something else?) How much income will I receive?What can you promise or guarantee me vs. whatis hypothetical? How is this suitable for me?Advisor RegulationWhen it comes to hiring an advisor you want to determine thequalifications and who regulates the advisor. From the book,(Jason) “The AARP RETIREMENT SURVIVAL GUIDE”.Chapter 7 explains the how various advisors are regulated.Here is summary of key advisor classifications.
  32. 32. InsuranceAgentStateLife-insurancelicenseLife-insuranceandannuitiesStateInsuranceCommissionersNONERegisteredRepresentativeSeries6orSeries7License;backgroundcheck;examinationsSecuritiesFINRAandstatesecuritiesregulatorsNONERegisteredInvestmentAdvisorRegistrationwiththeSECorindividualstate;Series65;backgroundcheck;examinationsInvestmentadviceSECorstatesecuritiesregulatorsQualifications;Compensation;potentialConflictsofinterestCertifiedFinancialPlannerNotlicensed;BoardofStandardsCertifiedFinancialPlannerrequiresCFPholderstomeeteducational,examinationandcontinuingeducationrequirementsNONENONE;NONELicenseRequirementsPermittedSalesRegulatedbyRequiredDisclosure
  33. 33. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 31In SummaryAny product may have a position in your portfolioNot to be all one or anotherDiversify what you are doingA process to determine what makes the best sense or fit for youThese are only a few ideas to help you better protect yourannuity assets and make the most of what you worked hard toaccumulate.Financial and retirement planning can have an impacton your estate, even if your estate is of modest size. Find an advisor who is knowledgeable in senior matters. Find an advisor who will answer your questions as wellas answer questions that you have not thought to ask. Find an advisor who will point out opportunities andcaution you about risks and one who is knowledgeableabout the special needs of retired individuals.With the sound advice of experience and a conservativeretirement plan, you and your family can get the most out ofyour assets.
  34. 34. Definitions Accumulation Value Account – this is the money that isyours, the principal or premium. Annual asset Fee - Typically a charge or a percentageamount that is deducted from the index growthcalculation.(4) Annual lock-in - the act of locking in earned credits inregards to annuities. Annual reset - A way of calculating annual yield for anindex annuity in which the baseline from which growth ismeasured resets every year. With an annual reset, previousyears growth is never lost.(1) Arms Distance - an idiom meaning keeping oneself at adistance. If one is at arms distance from someone orsomething, then that someone or something cannot touchthem. Being Transparent - allowing all information and intents tobe boldly spoken of and addressed. Cap - Some annuities may put an upper limit, or cap, on theindex-linked interest credit. This is the maximum credit orrate of interest the annuity will earn, typically expressed as apercentage. Not all annuities carry a cap rate. (2 , 4) Crediting Strategy – the concept of earning interest in anindex annuity product. Custodian – the company that is holding funds, usually IRAfunds are what we are speaking of. Fiduciary – acting in the best interest of the client. Not alladvisors are bound by this principle. Investment Advisorsare bound by this principle. Spread - A preset deduction from the percentage of indexedgrowth that is used to calculate the indexed interest rate thatis credited to an annuity contract each year. The spread willreduce the percentage of annual growth that an annuity canpotentially earn in a given contract year. (3.) Suitability – define
  35. 35. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 33 Participation rate - Also referred to as the Index Rate, thisindicates the part of the indexs increase credited to anequity-indexed annuitys account value. In some contracts, acap is imposed on this amount.( 1.) Walk-away – this is the money or time that you can take100% of the accumulation account value and put it back inyour pocket.Referenceshttp://www.freeannuityrates.com/annuities/glossary.phphttp://www.freeannuityrates.com/annuities/article.php?title=Is-an-Annuity-For-Mehttp://financial-dictionary.thefreedictionary.com/spreadhttp://capitalindemnitygroup.com/AnnuitiesFIA.aspxhttp://www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p005976http://www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p010614
  36. 36. iFederal income tax rates range between 10% to 35% under the 2011federal tax code, and are based upon the taxpayers level of annual income.State income taxes could also apply, which vary from state to state. Pleasenote that federal and state tax laws are subject to frequent changes.iiThe fact that the beneficiaries are going to pay income taxes at a later datecould be an advantage if they are in a lower tax bracket. As previouslyexplained, estate taxes could also apply.iiihttp://www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p005976ivAccuquote blog 9/17/07.vMarried couples filing joint returns are taxed on the first $65,100 of theirtaxable income at the lower 10% and 15% rates (2008 IRS tax tables).viAmerican National Life, assumes 4% during deferral period and lifepayout based on January 2007 monthly rates of $7.12 per $1,000, male age65.viiReg. 1.72-9 (Table V).viii($1122 multiplied by 15% tax rate).ix(1042 x 12 mo) x 5 remaining years = $62,520 deduction on final return.xPer IRS Publication 17, 2007, single individuals and married withmodified adjusted gross incomes exceeding $34,000 and $44,000,respectively, pay tax on up to 85% of their Social Security income. Theexplanation of the tax treatment of payments under an annuity contract isfound in IRS Publication 17, 2007.xiSubject to the claims-paying ability of the insurance company, please noteimmediate annuities are designed to enhance cash flow and save taxes butare not the only investment vehicles by which these goals may be achieved.Always consider all possible investment options before you invest.xiiPenn State University Policy Research Institute 3/2/06.xiiiThe MetLife Market Survey of Nursing Home and Care Costs, 2007.Survey calculations based on private room rates in licensed nursing homesfor 87 metropolitan areas of all 50 states and the District of Columbia.
  37. 37. Annuities ExplainedIn Simple Terms with Tips & Ideas That Could Save You ThousandsP a g e | 35AboutMr. Richard LoekMr. Loek is a San Francisco Bay Area Native and enjoyssupporting people in accomplishing tasks & goals that areimportant to them. Mr. Loek is an Investment AdvisorRepresentative, a licensed Life and Health Insurance Agent anda member Ed Slotts Master Elite IRA Advisor group. Mr.Loek and his team at CalRima Financial & Insurance Agency(CalRima) have been working with people in a variety ofcapacities for over 20 years. CalRima has a comprehensiveteam of associates and affiliates that pride themselves inproviding outstanding customer service and achievingcustomer loyalty.Ed Slotts Elite IRA Advisor Group™ is an exclusivegroup of advisors who are dedicated to being leaders in theIRA industry. Because being the best in business requires anenormous amount of ongoing education, time and effort. TheElite IRA Advisor Group™ is a single resource for seriousprofessionals. The Elite IRA Advisors are equipped with up-to-date tools and resources to help their clients.http://irahelp.com/eliteGroup.phpMr. Loek volunteers his time to coach people in accomplishingwhat is important to them. Mr. Loek holds a variety ofpositions in the community. Mr. Loek served as the CharterPresident of the San Jose Willow Glen Lions club; The MentalHealth Advisory Board of Santa Clara County, has participatedin half-marathons & triathlons and is a program leader at thecompany that is widely recognized as the industry leader intraining and personal development.©2013 CalRima Financial & Insurance AgencyCalifornia Insurance License #0F34289
  38. 38. First Published January 2013, revised May 2013.This booklet is copyrighted. It may not be reproducedwithout express written permission of the author.Published by Richard Loek

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