CHAPTER TEN - POTPOURRI

 

No, there is no annuity (that we are aware of) that is called the “Potpourri.”  This section is basically a collection of interesting &/or important items in the Annuity field, that could be of value to the students of annuities.

 

“TAXLESS” ANNUITIES

 

The following information is included as an example of ingenuity by Financial Planners and agents in marketing annuities, and is not to be construed as a recommendation or suggestion for the annuity and insurance products described.

 

In a recent issue of Life Insurance Selling, the problems of non-qualified annuities is discussed, and a unique way to assist those who inherit those annuities with the income taxes due.  If this may seem like a small market, consider that according to a recent Gallup pole, there are approximately $1 trillion in annuity assets, and further, many estimate that more than 80% of these assets are to be part of a parent’s legacy for their children. 

 

Obviously, as annuity owners continue to accumulate assets in their tax deferred annuities, the tax liabilities are increasing.  The typical solution has been to annuitize the annuities in force, over a five to seven years, into a life insurance contract with income tax-free death benefits.  Even though this would appear to be a good plan, exceptional sales have not occurred, and possibly because the clients are trying to avoid income taxes – not accelerate them.

 

Many times agents will present an annuity plan to a retired person.  However, as is so typical, the children become involved and one of their first questions could be how the taxes will be paid on the money when they inherit the annuities.  Of course, the children will still have a good amount of money that they possibly would not have otherwise, but this can still be a sticky point with the children.  If the retiree does purchase a deferred annuity and thereby avoids current income taxes, the alternative would be not to leave a tax liability for the children.  In this case it might just be easier to not purchase the annuity.

 

If the parents want to leave money to their heirs in an annuity, if they are afraid that there will be overwhelming taxation when the annuity is distributed, or if they want to avoid paying taxes in today’s dollars, then the possibility might be an annuity “that pays it own taxes.”  This is a very new innovation, so new that there is a patent pending on a version of this plan!

 

This idea started by using an annuity with a term rider equal in amount to 28% of the gain in the contract.  The term insurance provides an increasing death benefit, and a plan with guarantee issue age up to age 90 was used.  The cost of the insurance is taxable to the owner of the annuity each year, thereby making the death benefit income-tax-free.

 

At this point, the idea should start forming as to how this works, exactly.  For an example, assume that a 65 year-old purchases an annuity with a premium of $100,000.  After the annuity has been in force for 10 years, the annuity owner dies and passes $200,000 (his original “investment” into the annuity has doubled) to his children.  Assuming the children are in the 28% income tax level, they would have to pay $28,000 income tax on $100,000 in the annuity gain.  (No tax on the amount invested originally)

 

Using the term-rider concept, it would pay the beneficiaries $28,000 income tax-free to offset the taxes.  Therefore, the children inherit the entire $200,000 (instead of $172,000).

 

To further illustrate this idea, other scenarios can be used.  If the client has an annuity paying 6% interest, with no term-rider, the beneficiaries will pay taxes on that 6% at the 28% rate.  In effect, this is netting 4.32%.  If the term rider is used, then the beneficiaries would net the full 6%.  When the term rider is added to the annuity, not only does the retiree get the benefits of tax deferral, but the beneficiaries also are collecting the full 6%.

 

Another scenario might be a client with a large municipal bond portfolio yielding 6%, (admittedly a high rate in today's market).  Since 6% interest is accumulating tax free, one might ask what benefit is there to purchase a tax-deferred annuity.  If the retiree is drawing Social Security, the municipal bond interest is added back into the tax-payer's tax return for "taxable Social Security" purposes.  So the result would probably still be that they would be better off using the annuity + term rider program.

 

In order for this transaction to be “legal”, the contract would specify a separate non-annuity benefit, for which there is a premium deducted for the cost of insurance.  The taxpayer pays taxes on the cost of insurance.

 

According to IRS private letter rulings, the IRS classifies a rider sold with a deferred annuity contract, which provides a term life insurance benefit, as a separate life insurance contract within the meaning of Section 7702.  As a result, the IRS private letter ruling (PLR 200022003) concludes that the proceeds payable under the rider on the death of the insured are excludable by the beneficiary under Section 101(a)(1) as life insurance proceeds.

 

Since this is a new concept, they’re only a few products available at this time, and there are two separate types.  One group is the type of rider as described above.  Another type is the rider that adds an annuity of 28% or 40% bonus. 

 

This second type incurs an additional taxable gain.  Using the example above of the $100,000 annuity with $100,000 gain, after the bonus, the beneficiaries would pay tax on $128,000.  If the beneficiaries were in the 28% bracket, they would receive a net of $92,160.  While $92,160 is better than the $72,000 the beneficiaries would have received with no rider, it still is almost $8,000 less than they could have received from the tax-free term rider.

 

Regardless of the “name” of these products, they still remain an annuity with a term rider.  Probably there will be efforts to generate greater benefits to the client using term riders.  One suggestion has been accelerated death benefits, which would provide the client with the ability to receive part of the term insurance in the event of terminal illness or long-term care needs. 

 

Another idea would make the beneficiary of the annuity/term-rider a charity.  The charity would receive 100% of the annuity value plus the bonus, thereby creating a significant income or estate tax deduction.

 

 

 

WHAT IS HAPPENING TO ANNUITIES TODAY?

 

Please note that the following discussion of annuities “today” was created in the latter part of 2000, when the market was flying high, the Dow Jones was over 10,000 and there seemed to be no “tomorrow.”  Since that time, there has been, at the very least, a “leveling of the stock market,” with a substantial (and warranted according to most financial analysts) slide in the NASDAQ.  However, indications are that the economy still has a good “head of steam”, so this particular discussion should still be timely.

 

Annuities play an important part in financial planning, and have been an integral part of this process for many years.  Recently there has been a change in the use and marketability of annuities, driven by the economy, the low interest rates, and the “bullish” stock market.  Surveys have been made by various publications and organizations in respect to what has happened to the annuity market and the popularity of annuities in financial planning.

 

If the economy were different, for instance if inflation was 2%, interest rates on “risk-free” investments such as CD’s were around 8%, and the stock market would go down as much as going up, then investment choices would be different.  In recent years, this would probably indicate an excellent market for fixed annuities.  But today, this is not the case.

 

One large brokerage firm that specializes in annuities and has been in the market for several years, in a Life Insurance Selling article they reported their experience in the changing annuity market.  Their experience parallels those of other annuity brokerage firms and is worth discussing in this context.

 

In 1992, the annuity brokerage business was nearly totally the traditional fixed deferred annuities with one year guaranteed interest rates.  In the second half of 1999, these types of annuities had fallen to where they were only about 25% of their total brokerage annuity premium.

 

The reason that the number of fixed annuities have decreased is because interest rates have been going down since about 1982, and that downward interest rates continued from 1992 to 1998, with a sign of some increase in 1999 and early 2000.  As interest rates moved down, bond prices moved up, and insurance companies were induced to sell their bonds so as to realize the gains and to invest in other obligations as required by regulatory authorities.

 

Renewal interest rates on one year guaranteed annuity rates were realigned to reflect new lower bond interest rates.  It was customary for annuities to renew at or near the present (current) interest rates, which were consistently lower.  Annuitants that had a 9% return on their annuities, found themselves with 5% returns and were not happy.  Some agents were quite unhappy also, as they had expected that the fixed deferred annuities would at least maintain their original base rate renewal levels.  Where customers expected that returns would not drop to these levels, their agents found themselves losing business and losing “face” among their customers.

 

One large brokerage firm has gone from nearly 100% fixed deferred annuities less than 10 years ago, to only 25% one-year guaranteed rate annuities, 30% long-term guaranteed annuities, 8% single-premium immediate annuities, and 37% equity indexed annuities. 

 

The “long-term guarantee” annuities feature interest rate guarantees that run from 5 to 10 years, usually with an option to surrender without penalty at the end of the interest-guarantee period.  This changes the design of the fixed annuity to where it is much more palatable.  Since these 5-10 year rate guarantees are often higher than one-year base rate guarantees, this product is increasing in market share.

 

The single premium immediate annuities are becoming more popular, for whatever reason.  While there seems to be nothing totally specific about the attractiveness of this product, it is felt that the general trend towards fully guaranteed annuities is increasing for a variety of reasons.  (This was discussed early in this text)

 

The Equity Indexed Annuities has been explored in detail in this text, and the brokers are all excited about this new product and predict a solid place in financial planning.

 

 

 

WHAT’S OUT THERE IN THE S.P.D.A.  MARKET

 

The Single Premium Deferred Annuity (SPDA) could be considered as the “traditional” annuity, or to draw a parallel with life insurance, one might say that Whole Life is the “traditional policy.”  It has been around as long as any other type of annuity, and still finds substantial use in financial planning.

 

A survey of 64 Single Premium Deferred Annuities was conducted by Tillinghast/Towers, Perrin and published in Life Insurance Selling, March 2001.  Of course, the entire study is too lengthy to publish, but an agent interested in an annuity offered by a company, or who represents several companies, can – and should – contact the insurer for more details.  Certain items that would be important to an agent are not included in this study – such as commissions.  Obviously, with a General Agency system, commissions vary by agency, broker, agent, etc., etc. 

 

A brief review of the various questions asked, and the answers given, show a wide range of requirements, definitions, benefits, etc.  It is not within the scope of this text to go into detail as to specific companies, but a general overall look at this popular plan in today’s market should be of interest.

 

Number of Products:  While most companies offered less than 5 SPDA plans, one company had 19, another 23, and one company had 46! 

 

Individual or Group Trust:  61 were Individual, one was only Group Trust, one was both, and one stated that it depended upon the state.

 

States Available:  As could be expected, the states where their plans were sold were in keeping with the states in which their other insurance lines are sold.  Of course, there is always New York where a company, unless they are domiciled in that state, will not offer their usual products.

 

Qualified or Non-qualified plans:  All companies offer both.

 

Minimum Premium for Qualified Plan:  Runs from $500 to $20,000.  Most companies use either$1,000, $2,000, $5,000 or $10,000.  Obviously, with this much variance, an agent with a client who wants to invest under $10,000 must make sure that the company will accept the small premiums.

 

Minimum Premium for Non qualified plan:  The same as for Qualified plans with most companies, with half-dozen exceptions.

 

Maximum Issue Age:  Ranges from 85 to 100+, with most in the 85-90 range.  Some offer lower maximum ages if the plan is a qualified plan.

 

Maximum Annuitization Age:  Some have no maximum, some go up to 110, but most are 90-95.

 

Current initial interest rate for a $20,000 single premium as of 1/1/01:  This runs the gamut – from 5.25% to over 12%.  Most are in the high 5%, 6% and up to 7.5%.  This is an area to study well, as there can even be different rates after the first year.

 

Bonus included in the interest rate?  about 50% of the companies include a bonus; most of them are 1%.  There are some that go higher, one company has 6%.

 

Initial interest rate guaranteed for:  While this is usually one year, some are 2,3,5,6 and even 10 years.  The 2nd most common guarantee was 5 years.

 

Minimum interest guarantee:  Nearly half (29) use 3%; 13 offer 4%; 9 offer 3.5%; 6 offer 1%; 1 offers 3.25%; 3offer 5%; and the remainder are graded or subject to a formula.

 

The interest rate paid on both new policies and those issued in the past 5 years, with $20,000 premium, range all over the map.  Most of them hover in the 5 to 6% range.

 

Free Partial Withdrawal, when are they available, and how many per year:  This also varies widely, with no apparent pattern.  Several offer up to 10% after 1 year, but others range from unlimited, to no limit after 6 months, to 30 days after policy date, and anytime prior to annuitization, etc.  This is another important area that a professional would research before offering a plan to a client.

 

May withdrawals be set up on an automatic monthly basis with annuitization?  Only 17% of the companies (11) would not allow this.

 

Surrender charge: % of account balance or gross premium:  Most of the companies base surrender charge on account balance.  Most range around 7-9% the first year, with 0% at 10 years.  Again, there are some surprises with a couple of companies going over 10% the first year.

 

Circumstances under which surrender charge waived:  Most all listed death, almost as many listed annuitization, and a large number (probably growing number) list nursing home &/or disability.

 

The results of this study emphasizes that it is really necessary to contact the insurer on each plan and there are so many choices. 

 

 

 

ROTH IRA

 

Effective January 1, 1998, most people can now fund a Roth IRA.  The maximum contribution in 2002 is $3,000, as in a regular IRA, but a person cannot establish a Roth IRA if they show an adjusted gross income (AGI) of $110,000 (single) or $160,000 (married).  If a regular IRA is rolled over into a Roth IRA, that money is not subject to the AGI calculation.  Also, all income must be “earned income”, i.e. wages, tips, bonuses, commissions, etc.)

 

There are certain benefits to a Roth IRA, such as:

 

1. Earnings grow and compound tax-free (not tax-deferred).
2. A person does not have to withdraw at age 70 ½ (there are no limits).
3. Contributions can continue past age 70 – but it must be earned income.
4. If the Roth IRA is at least 5 years old and the owner is at least 59 ½, the growth and earnings are TAX-FREE!
5. There are exceptions to the 5-year and age 59 ½ rule, such as if the owner becomes disabled or dies, or a one-time maximum withdrawal of $10,000 is allowed.
6. Withdrawals of the principal are not taxed, even during the early years. 
7. The proceeds of the Roth IRA will pass tax-free to heirs.

 

Whether a Roth IRA or a traditional IRA is best for the individual, much depends upon whether the individual can deduct the contributions of an IRA from their income taxes, and consideration must be made as to tax bracket, how long the money will be allowed to compound, etc.  There really is not an easy answer, but practically it comes down to whether the individual (&/or spouse) needs the benefits of a traditional IRA each year when the tax forms are filed – in other words, the $3,000 per person deductible is important now, and if so, then the traditional IRA will do the job.

 

However, if only the growth for later years is important, then the Roth IRA has substantial advantages.  However, the money each year that goes into the Roth IRA is taxed as ordinary income that year.

 

CONVERTING AN IRA TO A ROTH IRA

 

If one is considering rolling over a traditional IRA into a Roth IRA, they will have to pay income tax on the traditional IRA, but there is no tax penalty.  Whether a person should convert would depend upon several situations:

 

1. The individual’s tax bracket, as the traditional IRA funds will show as ordinary income during that year.  The conversion will definitely add to the AGI for that year, and a rise to another bracket can many times ensue.
2. The expected tax bracket when funds are planned to be removed.  The lower the anticipated tax bracket, the less attractive the Roth IRA becomes.
3. The time frame for the Roth IRA to grow.  The longer the time, the more attractive the Roth IRA becomes.
4. How fast the funds grow, as the higher the rate, the better the Roth IRA appears.

 

ROTH vs ANNUITY

 

The major advantages of an annuity over a Roth IRA are that is that there is no limit as to how much can be invested into an annuity each year, and there is no maximum amount that can be invested. 

 

The advantages of a Roth IRA are:

 

1. A Roth IRA can provide more investment opportunities, such as allowing investments into stocks, bonds, Real Estate Trusts, and, yes, even annuities. 
2. There are no taxes when a withdrawal takes place, either by the owner or an heir.  Remember, with an annuity only the principal can be withdrawn tax-free, and withdrawals of growth is taxed as ordinary income, and not as capital gains.
3. There is no “first time home owner” tax exemption with an annuity.  A Roth IRA has a maximum of $10,000.

 

ANNUITY AND A ROTH?

 

At this point, it might appear that if a prospective client is leaning towards establishing a Roth IRA, the annuity salesperson should walk away.  WHY?  A Roth IRA (or a traditional IRA) is simply a tax vehicle to encourage people to save.  Save in what?  What is wrong with an annuity, for heaven’s sake?  If this is the response, go back and read the chapter EIAs. 

 

 

If a person wants to be able to have a guarantee of a minimum interest rate on an investment, greater than that offered by a Bank’s CD, then the EIA is a great vehicle for a Roth IRA.

 

The advantages of using any annuity in a traditional IRA or a Roth IRA are outlined in various sections of this text.  Remember that the IRA and the Roth IRA programs are specifically designed for those who are savings for retirement.  And what is a better savings vehicle than an annuity?

 

 

 

THE RULE OF 72

 

The Rule of 72 is rather simple and known by many in the investment community.  Basically, it is an easy method of determining when an investment will double in worth, knowing the interest rate.  No calculators, no pencil-and-paper, no “mathematical brain.”

 

Take the rate of return, (whether it is assumed, projected or guaranteed) and divide it into 72! That is all there is to it.

 

For instance:  A fund invested at 7%, will double in (72 divided by 7) a little over 10 years (10.285714 years to be exact – but who wants to be that exact).  A fund invested at 6% will double in 12 years (that one is easy).  How about 8.75%.  Then you might want a calculator, but the answer is a little over 8 years (8.22+, or one could say, nearly 8 years and 3 months)

 

But this rule also shows the effects of inflation.  For instance, if a 6% average annual rate of inflation is forecast, then a dollar will only buy 50 cents worth of goods or services at the end of 12 years.  To continue, at the end of another 12 years, the same dollar would only buy 25 cents worth of goods or services.  It can be stated otherwise, at the end of 12 years, it would take 2 dollars to buy what one dollar had purchased originally, or 4 dollars at the end of 24 years.  However, inflation comes and goes, and presently is not significant, but this is still an interesting exercise.

 

An interesting display of the dangers of procrastination is shown in the following:

 

 

What happens if a “procrastinator” tries to catch up?  That is very difficult to do.

 

 

 

 

PERFORMANCE OF VARIABLE ANNUITIES VS MUTUAL FUNDS

 

 

The following graphs represent the comparative performance of various types of Mutual Funds with Variable Annuities, and covers the time period from the end of 1987 through 1997, in increments of 3 years, 5 years and 10 years.  Unfortunately the significance of these comparisons has been diminished somewhat by the booming economy from 1997 through 2000, however it is believed by many economists that the stock market boom was caused in part by the “dot-com” companies and other incidents that is considered as quite outside of the “norm.”  Therefore, the growths over this previous period indicated in these graphs are proportionately viable and future growths could easily follow the same patterns. 

 

Since Variable Annuities are invested in sub-accounts, the comparison here is apples-to-apples, as both the Variable Annuity sub-accounts and the mutual funds should continue to show comparative appreciation, just the amounts (percentages) of growth would have increased but for both Variable Annuities and mutual funds.

 

Remember in the early part of this text, the annuity compared to a Certificate of Deposit, at 8% interest and at 33% tax bracket, showed how the net funds can grow.  The following graphs do not take into consideration the tax deferral feature of the annuity, but is just “raw data.”

 

The numbers on the side of the charts represent percentage (i.e. 25%, 20%, etc.)

This graph shows the funds invested in “aggressive”, which are “riskier” but which can produce higher yields than the more conservative funds.  These funds are quite volatile, and are the most risky.  There are over 200 sub-accounts in this category.

 

This graph shows the comparison of mutual funds and Variable Annuities in growth funds.  Note that the growth is nearly identical until the 5^th year when mutual funds outperform the Variable Annuities.  Growth funds are those expected to grow at or more than the expected overall market.  Growth (appreciation) of the stock is the primary objective.  There are more sub-accounts what would fit this category, than any other category.

 

This graph shows comparisons of mutual funds and Variable Annuities in balanced funds.  Balanced funds are as the name implies – “balanced” between aggressive and bond funds.  Mutual funds outperform Variable Annuities but again not drastically until the 5^th year.

 

 

According to this graph, Corporate Bonds as an investment in a mutual fund did quite well as compared to a Variable Annuity investment in these bonds.  Corporate bond sub-accounts invest in fixed-income instruments issued by U.S. companies.  They are of high quality and there are a substantial number of corporate bond sub-accounts.

 

 

And lastly, the comparisons using Government Bonds as the investment instrument.  The greatest percentage of Government Bonds used in sub-accounts are principally federal agency issues, such as GNMA and FNMA.  The average maturity is 7 to 8 years.  There are fewer sub-accounts in Government Bonds that in the other types of sub-accounts.

 

 

SPLIT ANNUITY

 

A “Split Annuity” is not a product, actually it is a technique that can be used with either a fixed-premium annuity, or a Variable Annuity.  It is designed to allow a certain percentage of the principal and interest to be withdrawn by the contract owner, while the remaining investment grows (and compounds) and with the prospect of eventually equaling the original investment amount.

 

The concept is simple:  The contract owner divides the account into two parts.  One part is completely liquidated, and the other part is used strictly for growth.  While either a fixed-premium annuity, or a Variable Annuity can be used, obviously only the fixed-premium contract can make the guarantee that the original amount will be completely restored within a pre-determined period of time.

 

The purpose of the Split Annuity concept is to maximize income and at the same time, keep wealth intact.  It also has a tax advantage.  The way that this would work can best be explained in the following Consumer Application.

 

 

As an alternative, Bradley could invest the $40,000 into a variable account that could take advantage of the returns of 12% - 13% growth of the stocks (over the past 50 years).  If he had invested 8 years ago, with the recent stock market gains, he would have had substantial growth in his sub-accounts.  Just at $12%, it would have grown to over $90,000.

 

 

 

 

 

THE AFTER-TAX ADVANTAGES OF AN ANNUITY

 

It goes without saying that a fund will grow faster if the increase in the fund from interest or appreciation is tax deferred, as opposed to being taxed as ordinary income each year.  However often this is stated and no matter as to how it is stated, the effect is more startling and easier to remember if it is “seen.” 

 

The following charts show what happens when a single $10,000 investment is made into a tax deferred vehicle such as an annuity, as opposed to the growth rate in an investment with the same rate of return but subject to current income taxes.  These graphs only show Federal income tax rates (MAX TAX), but if there are state tax rates also, the difference would even be more “graphic.”

 

The following graphs illustrate this effect over period of 5 – 10 –15- and 20 years, at varying rates of interest.  The numbers at the left side of the graphs are dollar amounts.  And, of course, the higher the interest, the wider the difference.

 

With the present Administration pushing for a reduction in Federal Taxes, and with the Fed dropping interest rates at this time, these graphs may be obsolete by the time this text is published, but regardless, these graphs give a visual indication of the differences in growth when annuities are used. 

 

These graphs are a simple compilation of (1) determining the maximum tax (“MAX TAX”)
by taking the $10,000 at the indicated interest rate, and then subtracting the tax each year; and (2) taking the same $10,000 at the same interest rate, but not taking the taxes out each year.  Therefore, the interest will compound on the full amount each year. 

 

One does not need a mathematical background to produce such a chart, and if the situation arises where the interest rate is not at an even amount (for instance, 6.75%) then such a comparison chart is easy to assemble.

 

 

 

 

SAMPLE FIXED ANNUITY FORM

 

The following is an example of a Joint and Last Survivor Immediate Fixed annuity.  This particular policy form is relatively simple and straightforward and the format is that used by most of the insurers.  This particular form is chosen for use as an example as a Variable product and the Equity Indexed Annuities are, by their very nature, quite complicated

 

ANNUITY POLICY FORM

 

POLICY NUMBER   XXXX                       DATE OF FIRST PAYMENT APRIL 08, 1995

ANNUITANT JOHN H. DOE          SEX    MALE AGE    65 3/12

JOINT ANNUITANT JANE R. DOE           SEX    FEMALE        AGE    63 4/12

            SINGLE PREMIUM $50,000

 

OWNER:   THE JOINT ANNUITANTS

JOINT LIFE ANNUITY:  Payments will be made to the annuitants while either is living. Payments are to begin April 08, 1995. If both annuitants die before the total sum of the annuity is paid, the difference will be paid to the estate of the second annuitant to die as a benefit at death.

 

JOINT ANNUITY PAYMENT WHILE BOTH ANNUITANTS ARE LIVING:

$409.08 EACH MONTH

SURVIVOR ANNUITY PAYMENT UPON THE DEATH OF THE FIRST ANNUITANT TO DIE

$205.04 EACH MONTH

 

AJAX INSURANCE COMPANY (the “Company”) will pay the above periodic payment to the Annuitants, while both living or one is living, at its Home Office in Podunk, Texas, subject to the provisions of this Policy.  The Date of the First Payment is shown above.  The payments will be payable according to the Annuity Plan shown above.

 

This Policy is issued in consideration of the application and receipt of the Single Premium by the Company. This Policy is a legal contract between the Owner and Ajax  Insurance Company.

READ YOUR POLICY CAREFULLY.

 

NOTICE OF 10 DAY RIGHT TO CANCEL POLICY. The Owner may cancel this Policy not later than ten days after the date it is delivered.  The Owner must request in writing that this Policy be cancelled, and this Policy must be returned to the Company’s Home Office.  The Owner may also return this Policy along with the written cancellation request to an agency office of the Company or to the agent through whom this Policy was bought.  The Company will refund the premium paid not later than ten days after receipt of the notice to cancel and this Policy. If the Owner cancels this Policy, it will be completely void and not obligate the Company in any way.

 

(Signed by an Officer of the Company at the Home Office of the Company, on the Date of Issue)

 

(The Second page of the Annuity is a copy of the Application, asking following questions:)

Name, Sex, Date of Birth, Age and Social Security Number of the Annuitant

Name, Sex, Date of Birth, Age and Social Security Number of the Joint Annuitant

Address of Annuitant:

Owner if other than Annuitant:  Name, Relationship to Annuitant, Address, Owners Social
            Security No.

Send Premium Notices to  (  ) Owner       (  ) Annuitant     If other, give name and address.

Beneficiary:                       Relationship to Annuitant            Date of Birth

Type of annuity: (check one)

r         Flexible Premium Deferred

r         Single Premium Deferred

r         Tax Qualified              r         Non-tax Qualified

Age at Maturity: (not to exceed 70 ½ for tax qualification)

Annuity Certain for  ______ years

SINGLE PREMIUM IMMEDIATE ANNUITY

Date of First Annuity Income Payment __________

Premium Mode: r Annual r Semi-annual r Quarterly r Monthly r Single Premium

Premium Method: r Direct r Pre-authorized pay r Government Allotment r Salary Deduct.

Premium Amount:  Amount paid with Application $ _____   

                                Amount to be billed on above mode  $ _____

Annuity Income Options: (Defaults to 10 year C & L  if option is not selected

            r 10 yr C&L      r Life No Refund      r Life Installment Refund     r 20 year C&L    

            r Life Cash Refund    r Joint & Survivor   (______% to Survivor)

Frequency of Annuity Income Payments: r Annually  r Semi-ann.  r Quarterly  r Monthly

If intended to be tax-qualified, policy is to be issued as part of the following type of plan:

            r Pension or Profit Sharing

            r Tax Sheltered Annuity Plan

            r I.R.A.

            r I.R.A.  Rollover

            r Other

Will the Annuity be applied for replace or use cash values of any existing insurance or annuity policy issued by any company?  (ryes or rno)  If “yes” give details.

 

Each of the undersign declared for themselves, and for all other interested parties, that all of the answers in this application and any supplements to it are full, complete and true to the best of their knowledge and belief.  They also agree that (1)  these answers as written; (i)  were given to induce the Company to issue an Annuity Policy; and (ii) shall form the basis for and become a part of any Annuity Policy issued on this application; (2)  the Company may issue an Annuity Policy different than that specified in this application; no change in:  (i) type of Annuity; (ii) Premium Mode; (iii) Premium Amount; (iv) Annuity Income Option; or; (v) issue age, will be effective unless agreed to by the owner in writing; and (3) only an authorized Officer of the Company has the authority to waive any of the Company rights or requirements or to waive any of the provisions of (i) this application; or (ii) any Annuity Policy issued on this application.

 

Signed by the Annuitant and dated.      -Witnessed by Soliciting Agent or Owner

 

 

SECTION 1  NONPARTICIPATING POLICY

 This policy is nonparticipating; it does not share in the Company’s profits or surplus.

 

SECTION 2 OWNERSHIP

 

The Owner is named on the Front Page. The Owner may exercise all rights of ownership as long as the Company continues to make Annuity Payments under this Policy.

The Owner’s rights are subject to the rights of any assignee of record.

TRANSFER OF OWNERSHIP. If the Owner is other than the Joint Annuitants named on the Data Page, ownership will pass to the Owner’s estate upon death.

If the Owner is named on the Data Page as being the Joint Annuitants, then upon the death of the first annuitant to die, ownership will pass to the surviving annuitant unless otherwise specified.

 

SECTION 3 GENERAL PROVISIONS

 

ENTIRE CONTRACT.  This Policy and the application, if attached on the date of issue, form the entire contract.

 

POWER TO MODIFY.  Only the Company’s President, a Vice President, or Secretary has the power to:

(1)        change the Policy; or

(2)        waive any Policy provisions.

 

Any change in the Policy will be by endorsement signed by one of the above-named officers.

 

EFFECTIVE DATE.  The Policy takes effect on the Date of Issue shown on the Front Page upon payment of the Singe Premium on or before the Date of Issue.

 

INCONTESTABILITY.  This Policy will be incontestable from its Date of Issue.

 

MISSTATEMENT OF AGE OR SEX. If age or sex were misstated, any future benefits or amounts payable will be changed to what the premium would have bought for the correct age and sex.  An adjustment will be made for any prior underpayments or overpayments.  Amounts will be based on the Company’s rates on the Issue Date.  As used in this Policy, “age” means age last birthday.

 

ASSIGNMENT.  No assignment will bind the Company until recorded at the Home Office.  The Company is not obliged to see that an assignment is valid or sufficient.  Any claim by an assignee is subject to proof of the validity and extent of the assignee’s interest in the Policy.

 

CONTRACT SETTLEMENT. All amounts due under this Policy are payable at the Home Office.  The Company may require proof that an Annuitant is living.

 

 

 

1.  A major concern that a parent has who has large annuities for the benefit of heirs is

      A.  the company won’t be around when they money is to be paid.

      B.  there can be overwhelming taxes when the annuity funds are paid to the children.

      C.  inflation.

      D.  scam artists.

 

2.  The “Taxless Annuity” is simply put,

      A.  an EIA and a deferred fixed annuity.

      B.  a Variable Annuity.

      C.  a deferred annuity with a term life rider.

      D.  a Variable Annuity  and a fixed premium deferred annuity.

 

3.  The reason that sales of fixed annuities has decreased over the past few years is

      A.  interest climbing skyward.

      B.  annuities have been outlawed in some of the major states.

      C.  the number of agents marketing annuities, and few companies offering annuities.

      D.  interest rates have been going down.

 

4.  In trying to determine which IRA is best for a client, much will depend upon

      A.  whether the individual can deduct the contributions of an IRA from their income taxes.

      B.  the stability of all of the assets outside of the proposed IRA.

      C.  the age of the owner of the IRA.

      D.  the commissions that are paid to the agent.

 

5.  The earnings from a Roth IRA are tax-free if the IRA is at least _____ years old, and the owner is at least ______ years old.

      A.  10  -  70 ½

      B.  10  -  59 ½

      C.  5  -  59 ½

      D.  5  -  70 ½

 

6.  The advantages of a Roth IRA over an annuity, include

      A.  the fact that there are no taxes when a withdrawal takes place, either by the owner or heir.

      B.  the conservative requirements as to what a Roth IRA can be invested in.

      C.  investments in a Roth IRA must only be from certain “blue-ribbon” stocks.

      D.  guaranteed return on the Roth investment, regardless of investment vehicle.

 

7.  The Rule of 72 is a method to determine

      A.  what the interest rate is going to be at a future date.

      B.  when an investment will double in worth.

      C.  the present value of future investments.

      D.  the amount of taxes due at annuitizaton.

 

8.  A major advantage of an annuity over a Roth IRA is

      A.  with the annuity there are no income taxes paid upon withdraw.

      B.  there is no limit as to how much can be invested into an annuity.

      C.  principal and interest can be withdrawn from the annuity tax-free.

      D.  interest withdrawn is taxed as capital gains

 

9.  When an investor withdraws funds from an annuity, but leaves enough invested so that it will eventually equal the original investment amount, this is called

      A.  a deferred annuity.

      B.  impossible.

      C.  a Split Annuity.

      D.  vesting.

 

10. A fund will grow faster if the increases in the fund

      A.  are taxed as ordinary income each year.

      B.  is tax deferred.

      C.  are taxed as capital gains each year.

      D.  are tied to the consumer priced indexed.

 

ANSWERS TO STUDY QUESTIONS
1B     2C     3D     4A     5C     6A     7B     8B     9C     10B