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Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Financial & Insurance Agency Toll-free: 1-866-589-9366

Provided to you by: Mr. Richard Loek


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Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Annuities Explained First Published January 2013

by

Richard D. Loek 123 E San Carlos Street, #221 San Jose, CA 95112 www.calrima.com / rloek@calrima.com www.iXrayRetirement.com / www.iXrayAnnuities.com 1-866-589-9366 Investment Advisory Services offered through Onesta Wealth Management, LLC; Comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered by Onesta Wealth Management. Insurance products are sold through CalRima Financial & Insurance Agency, California Insurance License #OF34289. No specific individual advice, be it legal, tax or investment is given here. As always, consult with your professional tax or legal advisor before making any final decisions. This booklet is to be used solely for educational purposes. Page |1


Table of Contents Introduction: .............................................................................. 4 Annuity History: ....................................................................... 5 Types of Money ........................................................................ 7 Spend Regular Money First .................................................. 9 Spend IRA Money First ........................................................ 9 Assumptions:......................................................................... 9 Rules of Money ....................................................................... 10 Rule of 100 .......................................................................... 10 Rule of 72 ............................................................................ 10 Rule of 114 .......................................................................... 11 Rule of 144 .......................................................................... 11 Annuity types .......................................................................... 11 Understanding the Basics .................................................... 11 Flexible premium ................................................................ 12 Single premium ................................................................... 12 Annuity Phases.................................................................... 12 Accumulation phase ............................................................ 12 Annuitization phase ............................................................ 12 Income phase ...................................................................... 12 Immediate Annuity ............................................................. 13 Fixed Annuity ..................................................................... 13 Variable Annuity................................................................. 13 Variable Annuity Riders ..................................................... 14 GMIB .................................................................................. 14 GMWB................................................................................ 14 Fixed Index Annuity or Hybrid Annuity ............................ 14 Hybrid Annuity Riders ........................................................ 16 Does It Make Sense for Me to Change Annuities? ................. 16 1. How safe is my annuity? .............................................. 17 2. How does the current interest rate compare to the original contract rate? ......................................................... 17 3. Is my annuity lacking some of the newer annuity benefits? .............................................................................. 17 1. What is the total cost to me of this exchange? ............. 18 2. What about losing Death Benefits?.............................. 18 3. How do the surrender provisions compare?................. 18


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

4. What are the new features and why do I need or want those features? ..................................................................... 18 How Annuity Payments Are Taxed ........................................ 19 Other Considerations .............................................................. 22 1. Surrender Fees. ............................................................ 22 2. Tax Consequences. ...................................................... 22 3. Features Vary Among Insurance Companies. ............. 22 4. Fees and Expenses. ...................................................... 22 5. Loans and Early Withdrawals. ..................................... 23 6. Company Stability and Regulatory Oversight. ............ 23 Taxation of Your Social Security Benefits ............................. 23 Cash Payments for Life ........................................................... 24 For whom may a fixed immediate annuity be suitable? ......... 25 What can you expect to receive on an immediate annuity? 25 Planning for Extended Care .................................................... 26 Key Questions to ask your advisor ......................................... 28 Advisor Regulation ................................................................. 29 In Summary............................................................................. 31 Definitions............................................................................... 32 References ............................................................................... 33

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Introduction: Annuities can be a great way to make your money work, but many people may not understand the risks, rewards, or the workings of their annuities! As I have scoured the Internet looking for information I can hear my doctor saying, “You can’t believe everything you read on the Internet…” How true that comment has been. False accusations, misinformation and of course simply poor journalism abound. [So much can be said. The purpose of this booklet is to give you a basic foundation, spark questions and inspire you to seek out the truth for your situation] This booklet will point out some common mistakes to avoid and show you how to get a lot out of your annuity. You'll get an education and real understanding of your annuity, in plain English! Most of all, if you already have an annuity, I hope I can put your fears to rest or you can call and we’ll work with you 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 are bad. When I first go into this industry I was confused by all of the different “Experts” giving their opinions and advice. It took a while to understand and expose the undercurrent that exits in the financial or investment industry. It has been my experience when someone is slamming another product it is because they don’t understand that product or that product is causing them to lose business. The varieties of articles I have read typically twist the context and even worse the content of the article. To unilaterally discount products or investments classes shows lack of understanding.


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

As a result of all the confusing and misleading information I felt compelled to produce this document with valuable information I have collected. If you find that you have questions after reading the booklet, feel free to call CalRima Financial & Insurance Agency or the Advisor that has provided you with this booklet. The Advisorâ&#x20AC;&#x2122;s phone number is on the last page. Let's get started...

Annuity History: 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. The payments were divided among surviving participants of the initial annuity pool. Thus, as time passed, each participant would receive a larger payment. As the participants died off, ever increasing payments would be made to them. The sole remaining survivor would reap the benefits of the remaining Page |5


annuity principal. One of the oldest and longest lasting tontines was the annuity called the State Tontine of 1693. It was started in the United Kingdom as a way to pay for its many wars with France. The modern financial system started to develop. Dr. James Dodson of England formed the Equitable Life Assurance Society of London in 1756. This was one of the first companies formed to offer a modern form of life insurance annuity. (3) Dodson founded this company and the annuity that it offered to provide a form of insurance to persons of all ages. The Equitable Life Assurance Society issued policies based on the assurance of fixed sums on the surviving policyholder's beneficiaryâ&#x20AC;&#x2122;s lives. The company issued policies for any term for which the policyholders wanted to purchase the life insurance annuity. Premiums of this annuity were governed by the age, lifestyle, and health of the policyholders seeking to enter into the annuity. These basic rules laid down the foundation of a distinguished modern life insurance annuity company that still exists today. In the United States, the Presbyterian Ministers Association first developed annuities as a retirement income for minsters, windows. The Presbyterian Church funded the annuity services of this association. The services were passed from the policyholder to their surviving spouse. The annuity offered by the association also passed on to surviving children if they were under the age of adulthood. The history of Benjamin Franklin's annuities are an interesting note in the history of the American life insurance annuity. Franklin left two annuities to the cities of Boston and Philadelphia on his death. Boston city officials finally ended the annuity he left them in 1993. The US developed its banking and insurance industries. The states found that banks were selling their own annuities. In the financial turmoil following the First World War, many of


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

these US annuity contracts were found to be unsafe. As a result, many states passed laws allowing only life insurance companies to issue annuity contracts. This began the modern life insurance annuity as we know it in the US today. The Great Depression of the 1930s came upon us. Then many people were kept financially solvent because they trusted the security that the modern life insurance annuity has come to offer. Thousands lost their entire life savings in the stock market then. At the same time life insurance annuity investors retained a large portion of their savings. Babe Ruth is quoted as saying, â&#x20AC;&#x153;I may take risks in my life, but I will never risk my money. I use annuities and I never have to worry about my money.â&#x20AC;? In today's highly volatile economic climate, perhaps the Babe's advice is worth listening to. The life insurance annuity of today provides a high level of safety and security for an investor's money. That high level of safety and security simply cannot be matched by many traditional investments. Given all of this, one might do very well relying on a modern life insurance annuity for their future economic and financial security.

Types of Money Before we dive in too deeply I need to distinguish that there is more than one type of money. Annuities can be funded with money from retirement accounts or non-retirement accounts; as such we need to spend a moment to explain these two types of money. There are two types of money: The money that has already been taxed, called non-tax qualified money or after tax money. The other type of money, money that has not been taxed, is called qualified money or pre-tax money typically called Page |7


"retirement money" such as IRA, 401k, 403b, etc. When you spend a dollar of after tax money, the cost to you is exactly $1. When you spend $1 of retirement money, the cost to is much higher. Consider you must pay taxes on that dollar. To get one dollar if your federal tax ratei is 25% you must withdraw $1.33(1/.75). Therefore, if you want to reduce your taxes, consider not taking more than the required distribution from your 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 be better to spend some of your regular assets first, so that you can take advantage of the tax-deferral benefits associated with IRAs and qualified retirement plans. You could be better off financially from an income tax standpoint. Your lifetime tax bill can be less or you will at least defer taxes for many years. Consider the following hypothetical example that assumes you have a taxable regular money account and a tax-deferred retirement account with a $100,000 balance each. Let's assume the money in each account earns a return of 6% per year. Let's further assume that annual NET distributions of $6,000 per year are being taken for a 20-year period. Under one scenario, the $6,000 will be taken first from the taxable money. The other scenario considers what would happen if the money was taken first from the qualified money. Under this example, you would have $150,000 more at the end of 20 years by spending your regular money first. The upside is that you could potentially hold onto more money while you are alive. Of course, the down side is that your beneficiaries will eventually have to pay income taxes on the money when you are gone. As the information provided by this example is hypothetical, actual results will vary depending upon the performance of your investments.iiSpend after-tax Money First


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Today

In 20 Years

Spend Regular Money First Regular Money

$100,000

$40,916

IRA Money

$100,000

$320,713

TOTAL

$200,000

$361,629

Spend IRA Money First IRA Money

$100,000

$0

Regular Money

$100,000

$211,247

TOTAL

$200,000

$211,247

Assumptions: All money is assumed to earn 6%. This assumed rate is used for tax illustration purposes only and does not reflect any particular investment. Federal income taxes are assumed to be 35% in this example, and your income tax rate could be lower based upon your annual income. This illustration covers a 20-year duration, with distributions of $6,000 occurring each year. The income taxes on withdrawals are also deducted from the IRA account.

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Rules of Money Rule of 100 Simply put the rule of 100 is used as a base line to determine how much of your assets could be at risk. The rule is as follows. You take 100 and subtract your age. The result is a guideline stating how much of your money could be at risk. Each person’s situation varies and this is a good starting point for your risk planning. See the table below: Age 40 50 60 70 80

Formula 100 – 60 100 – 50 100 – 60 100 – 70 100 – 80

Result 40% 50% 40% 30% 20%

Rule of 72 The power of doubling money through compound interest on tax deferred investments. The rule of 72 states that you divide the number 72 by the rate of return and the result is the number of years it will take for your money to double. See the table below: Rate 2% 6% 7.2% 8% 10%

Equation 72÷2 72÷6 72÷7.2 72÷8 72÷10

Result 36 years 12 years 10 years 9 years 7.2 years


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Rule of 114 The Rule of 114 is about how long it will take for your money to triple. The same formula is applied as the Rule of 72. Rate Equation Result 2% 114÷2 57 years 6% 114÷6 19 years 7.2% 114÷7.2 15.8 years 8% 114÷8 14.3 years 10% 114÷10 11.4 years

Rule of 144 The Rule of 114 is about how long it will take for your money to quadruple. The same formula is applied as the Rule of 72. Rate Equation Result 2% 144÷2 72 years 6% 144÷6 24 years 7.2% 144÷7.2 20 years 8% 144÷8 18 years 10% 144÷10 14.4 years

Annuity types Understanding the Basics Generally speaking an annuity is tax deferred. The money in an annuity grows tax deferred like a retirement account. As with an IRA, (Individual Retirement Arrangement – as named per IRS document 590) the money in an annuity is ear-marked for use after age 59 ½. As such, annuities are not to be used without careful consideration. Points to consider are surrender charges, how long you must hold the annuity to get full value or principal P a g e | 11


back, how will your annuity earn credits or interest. All of these points are covered on this web site. Choosing a suitable vehicle for your retirement is not an easy task. With the numerous choices, which product is better suited for your needs? On one hand, you might want the guarantee of principal and past earnings. On the other hand, many prefer the potential of higher returns by being linked to the equity markets.

Flexible premium - Most annuities will allow for additional principal (premium) to be added to the contract. This is called a flexible premium annuity.

Single premium – some annuities will only allow for a single premium payment to be made to an annuity. These are called single premium annuities. Annuity Phases Accumulation phase – money is added to annuities and allowed to grow income tax deferred. This stage is called the accumulation phase. As noted above, some annuities may allow more premium(s) to be added to a contract during this phase.

Annuitization phase – during an annuitization phase the contract is unable to be altered. Annuitization has also been coined as “annuicide”. There are a few different ways to annuitize a contract. From a high-level you may annuitize for the remainder of person or persons lives, for set period of time or a combination of the two. Income phase – different products have different ways to address this. For the most part you either have a classic annuity that only allows for annuitization or you have an annuity with a rider that allows for greater income options without committing annuicide.


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Immediate Annuity With an immediate annuity a person gives an insurance company a lump sum of money and that money is turned into an income stream, like a pension. This income stream has options. The income could be for a set period of time, for the rest of the person's life or a couple's lives, or lastly a combination of the two called a period certain with life. An immediate annuity is also known as a SPIA â&#x20AC;&#x201C; single premium, immediate annuity. NOTE: This does offer protection or guarantee of the principal.

Fixed Annuity Is a deferred annuity that works similarly to a certificate of deposit (CD) that you could get at a bank. There are however key distinctions that need to be addressed. With this type of annuity you may get a set rate of return for the period of deferral or you may get a higher rate the first year and lower rates in following years. NOTE: This does offer protection or guarantee of the principal.

Variable Annuity As the name indicates, the principal (premium) in this type of annuity can fluctuate up and down. Careful consideration must be taken as to how much risk an investor wishes to take; variable annuities can fall just as quickly as equities, or mutual funds and no guarantees to the actual principal are offered. Also, investors should make themselves aware of the fees for both the fixed and variable portions of a variable annuity. NOTE: This does not offer protection or guarantee of the principal.

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From FINRA’s website, http://www.finra.org “Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.”iii

Variable Annuity Riders GMIB – Guaranteed Minimum Income Benefit rider can be added to some variable annuities. What this provides is income at some point in the future. This usually requires annuitization, which means you lose control of your money. NOTE: This does not offer protection or guarantee of the principal.

GMWB – Guaranteed Minimum Withdrawal Benefit rider can be added to some variable annuities. This appears to be a more flexible cousin of the GMIB. The distinction here is that you get to withdraw money without annuitization – thus possibly maintaining more control. NOTE: This does not offer protection or guarantee of the principal. Fixed Index Annuity or Hybrid Annuity Would you like an annuity that tracks the performance of the stock market, yet helps to protect your principal when the market declines? The fixed-indexed annuity could help you to cover these objectives. The hybrid annuity can offer some market risk protection, tax deferral, a minimum interest rate guarantee, probate avoidance, and guaranteed minimum income payments for life. The interest earnings for these annuities are based upon the growth in an accepted equity index, such as the S&P 500 Index, Dow Jones Industrial Average, and Russell 2000 as well as a


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

host of other indices. The interest rate applied to these annuities is based, in part, upon the overall movement of the index. Many of these annuities will base the interest rate upon a pre-determined percentage of the market movement. For example, let's assume for illustration purposes that the annuity company set its participation rate at 50% of the index movement of the S&P 500. Let's assume that the S&P 500 had a good year and increased by 30% (this is a hypothetical assumption and is not based upon the performance of any particular investment). Let's also assume that the interest rate could actually move as high as 15% before any rate limitations were applied. Based upon the facts of this example, the interest rate that would apply to this hypothetical account would be 15% (before contract fees and expenses are subtracted from the account balance). Please note that participation percentages do vary among companies and can range anywhere from 50% to 90%.iv Some companies also set a cap on the interest rate, which can vary from company to company (typically between 10% or less). The second fundamental feature of these annuities is the market risk protection. In the event that the market index should go down, this feature will help prevent your principal investment from being reduced below a certain percentage of your principal investment. The minimum guaranteed account value typically can also vary among companies and generally ranges anywhere from 75 to 100% of your premium, depending upon the type of product involved. These annuities can be useful for those who wish to participate in the stock and bond markets and not have their principal at minimal risk. These annuities are also called equity indexed or fixed indexed annuities. The short name is FIA or EIA. These annuities can be simple or very complex and difficult to understand. The more complex the annuity, the less likely it is P a g e | 15


appropriate for retirement planning and seniors â&#x20AC;&#x201C; beware, if you don't understand the product, you should give serious second thought to this product. See below â&#x20AC;&#x153;Key Questions to ask your advisorâ&#x20AC;? to help determine if this is a fit for you. NOTE: This does offer protection or guarantee of the principal.

Hybrid Annuity Riders Many companies have riders for their index annuity products, some are better and each needs to be evaluated for the appropriateness 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 you consider before recommending this one?

Does It Make Sense for Me to Change Annuities? If you have an annuity contract of any kind, you may have been approached about the idea of exchanging it for a new model or one with the latest features. A 1035 exchange could help you to achieve these objectives. 1035 refers to a provision in the federal tax code ("Code") that allows you to transfer the accumulated funds in an existing annuity to another annuity without creating a taxable event. In other words, the earnings from your original investment continue to receive tax-deferred treatment until you take money out of the annuity. But the continuing tax benefit comes with some important conditions. First, the Code says the old annuity contract must be exchanged for a new contract. Therefore, you should have your current annuity company send the account funds directly to the new company. Secondly, the Code says you can make a tax-free exchange from: 1) a life insurance contract to another life insurance contract or an annuity contract or 2) from one annuity


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

contract 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-paying ability of the issuing insurance company, not any government agency. You need to make sure that the issuing company is in sound financial health. Annuity owners will sometimes exchange to a company with greater financial stability. 2. How does the current interest rate compare to the original contract rate? Some fixed annuity products offer competitive initial rates to attract investors. However, the interest rate might only be guaranteed for a limited period of time, say one or two years. With this in mind, your current renewal rate could be lower than what you might otherwise get on a new annuity. 3. Is my annuity lacking some of the newer annuity benefits? In a highly competitive business, many annuity companies work to offer new insurance features, such as interest rate guarantees, bonuses, guaranteed death benefits, long-term or extended care riders and guaranteed income payments to attract investors. Therefore, you could find that a new annuity may better meet your needs or provide you with the opportunity for competitive returns. Whether or not an annuity exchange makes sense depends on your existing policy and your individual financial situation. Although the thought of switching annuities might, at first, P a g e | 17


appear to be in your best interest, you should always consider the costs that will often be involved to do this. Your consideration of the consequences should also take into account the following additional questions: 1. What is the total cost to me of this exchange? Although income taxes continue to be deferred, there are some other costs to consider before making the switch. For example, will the annual fees or other charges assessed by the new insurance company offset the higher interest or bonus payments? Does the surrender charge justify the added benefits? What are the comparative costs associated with the guaranteed benefits and investment options? 2. What about losing Death Benefits? Often with a variable annuity there is a death benefit provided. If the underlying annuity sub-accounts have performed poorly there could a larger death benefit you will be giving up. This is possibly the most complex issue we have to review with clients. There is not an answer that works for all clients 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 into play for any annuity exchange is the surrender charge. For many companies, surrender charges eventually expire with an existing contract after a certain period of time. However, a new contract could increase or reinstate these charges and could even increase the period of time in which the surrender charges apply. 4. What are the new features and why do I need or want those features? For example, you might realize the terminal illness guarantee or extended care or long-term care benefit rider is not really needed if other resources already exist. Of course, just the opposite could hold true if you need the coverage and cannot find a


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

life or long-term care insurer to take you because of health reasons. Please, also consider whether there are any limitations that apply to the features. For example, if there is a guaranteed interest rate, then how long does the interest guarantee last? Although the current interest rate for one company might be better, it's also important to consider past payment history. Also, what are the relevant expenses? Do they justify the benefits? Keep in mind that a 1035 exchange does not provide permanent income tax exclusion for gains on such exchanges, but merely a deferral-since the basis of the annuity contract exchanged is carried over as the basis of the new contract received. One major benefit of surrendering or transferring a variable annuity is that you may realize a tax benefit. If your annuity has lost value (is worth less than you put into the annuity) you may be able to write off the loss on your taxes. If you would like to find out whether an annuity exchange can benefit you, we offer a complimentary service to evaluate the appropriateness of performing a 1035 exchange.

How Annuity Payments Are Taxed Getting the most value from any annuity arrangement begins with an understanding of the relevant income tax rules. This helps us to understand how much income taxes will be taken from our annuity payments during retirement. This article will discuss some important tax rules you need to be aware of with respect to annuities.

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The income tax rules that apply to all annuity payments start with Section 72(b) of the Internal Revenue Code ("Code"). This rule begins with the idea that every person should be allowed to recover his or her own contributions to a nonqualified annuity free of tax. This makes perfect sense, as your own non-qualified contributions were paid for with after-tax money. Your personal investment in a non-qualified annuity is commonly referred to as your cost basis. The Code allows you to recover your cost basis gradually over the time you are receiving annuity payments. So, out of each payment received by you, a portion will represent a tax-free return of your basis. The amount of the payment that exceeds the basis portion is subject to federal income taxes at your respective tax rate. This will range anywhere from 10 to 35%, depending on your income level during your retirement years. To understand how this works, let's look at an example. First, let's assume that our annuity owner, who is a non-smoking 60-year-old male and in good health, invests $250,000 of his own funds into a fixed deferred annuity that will start making income payments to him for the rest of his life when he turns 65. Let's assume that this taxpayer will pay income taxes at a 15% marginal rate when he retires.v Let's also assume that the annuity payments in our example come to $2,164 based on the accumulated value of $304,000 when the annuity owner starts taking payments.vi Now we have enough information to determine the federal income tax on the annuity. Looking at the life expectancy tables published by the Internal Revenue Service, we would see that the life expectancy established by these tables for a 65-year old male is 85 years of age. Based upon the initial investment, annuity payment, and life expectancy, the annuity owner will be allowed to exclude $1,042 of each annuity payment from income taxation.vii Once we apply the 15% rate to the remaining portion of the payment, we come up with a federal income tax of $168 for each annuity payment.viii Here's a breakdown of how the excluded part of the annuity payment was calculated:


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

Investment In Contract ($250,000) x Payment ($2,164) = $1,042 Excluded Amount Expected Payment over Life ($2,164 x 12 mo x 20 yr)

In the event of an unfortunate death prior to the life expectancy, the Code still allows you to recover your unused cost basis by taking this as a deduction on the final tax return. For example, if we assume in our previous example that something happened to the annuity owner in the fifteenth year, he would be entitled to a $62,520 deduction on the final return.ix On the other hand, if annuity payments are received after the life expectancy period, then the entire amount of these payments are subject to taxes. Like all annuity guarantees, annuity payments are subject to the claims-paying ability of the issuing company. The payment assumptions were taken from a hypothetical annuity illustration of a healthy male who is eligible for preferred underwriting rates. Your results could vary based, among other things, 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 regarding your individual circumstances.

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Other Considerations Notwithstanding the benefits previously discussed, there are many other things that should be considered before a purchase is made, including: 1. Surrender Fees. Like fixed deferred annuities, equity-indexed annuities have penalties for early withdrawal called surrender charges. These charges can result in a loss of your principal investment (see discussion below on withdrawals). These charges typically decline over the length of the surrender charge period (typically 5 to 15 years, depending upon the company). 2. Tax Consequences. These annuities are also suited for investors with long-term investment horizons. Withdrawals from these annuities prior to age 59½ can also subject the annuity owner to income taxes and an additional 10% income tax penalty on the distributed amount. 3. Features Vary Among Insurance Companies. There are many companies that are offering these types of annuities, and the methods of calculating the minimum and maximum interest rate vary greatly among them. Although many companies offer a minimum interest rate (typically ranging between 1.5 to 3%), some companies offer minimum interest rates as low as 0%. 4. Fees and Expenses. Asset management fees will be incurred on these annuities. Maintenance fees, sales commissions, trading costs and other contract charges could also apply. These charges will, in many cases, reduce the account value of these annuities.


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

5. Loans and Early Withdrawals. Although some companies do allow you to take minimal withdrawals with surrender charges, it is important to remember that some withdrawals can affect the amount of market downside protection provided under the contract. 6. Company Stability and Regulatory Oversight. All annuity features are guaranteed by the claims-paying ability of the issuing company. Please note guarantees associated with an equity index applies only if the annuity is held until the end of the contract term and that loss of principal is possible if the annuity is surrendered before the end of the contract term. Despite the market participation feature, the various state insurance departments regulate these products.

Taxation of Your Social Security Benefits Prior to 1984, Social Security income was tax-free. Today, however, taxpayers could be paying tax on up to 85% of their Social Security income.x The good news is that annuities can help reduce and sometimes eliminate the income tax on your Social Security income! The IRS calculates the tax on your Social Security income based on your total income from all sources. However, income you earn on an annuity that is left to accumulate does not appear on your current tax return. Therefore, annuities may reduce your total income for Social Security benefit taxation purposes. In fact, if you shelter enough income in annuities and bring your income below the thresholds (adjusted gross income of $25,000 for a single P a g e | 23


taxpayer and $32,000 for a married taxpayer) you then pay no tax on your Social Security income. For your own benefit, please consult with a qualified tax advisor or attorney. Want to see if these calculations work to your advantage? Bring in a copy of your tax return (including Schedule B) to the advisor who has provided this booklet to you. They should be able to let you know how much you could save in taxes. Annuities can provide yet another benefit....

Cash Payments for Life It's possible to get a fixed return on your money with a fixed immediate annuity. Similar to other types of annuities, an immediate annuity involves a premium payment to an insurance company. In exchange, the company will immediately start making monthly payments to you. Part of these payments is considered income and part comes from your principal investment. These payments can last for a term of years or even for your lifetime if you so choose. Note that immediate annuity payments could incur premium taxes in some states. Maintenance expenses and contract fees charged by the insurance company could also reduce your payments. For a detailed discussion on annuity income taxes, please revisit the article appearing earlier this booklet. The amount of money you receive each month is dependent on several factors, including your estimated life expectancy, the amount of money you have invested and the current interest rate being paid by the annuity company (which is locked in at the time of purchase). The payout will typically be higher the older you are because the insurance company does not expect to have to make payments as long as they would to a younger person. Assuming that you have chosen the lifetime payment option, your annuity company will continue to make


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

payments to you even if you live past your normal life expectancy. If you die sooner, the insurance company keeps the balance of the annuity. You may also be able to elect to receive a lower payment in exchange for having the payments continued to your heirs until the entire amount of your original premium has been paid out.

For whom may a fixed immediate annuity be suitable?    

A retiree needing increased monthly cash-flow A person with no heirs or who is not concerned about leaving an estate Someone who has set aside other funds to leave to heirs if they desire to leave an inheritance A retiree desiring the fixed payment and wanting to avoid maturities, rolling over investments and the maintenance and administration required of investing on one's own

What can you expect to receive on an immediate annuity?xi $100,000 Premium, Male Age

Monthly

65

$646

70

$707

75

$800

Life annuity payments, Comparative Annuity Reports, January 2008

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Planning for Extended Care More and more people know someone or have a family member who has needed extended care. In fact, over half of those almost age 65 spend at least some time requiring nursing care.xii This is not medical care, but the type of care received in the home (shopping, meal preparation, assistance with bathing, eating, etc.) or in a nursing home. As you know, Medicare does not usually pay for this care. People are left to pay for this in one of three ways: 1. Out of their own pocket (about $6,478 per month).xiii 2. Purchasing long-term care insurance while they are healthy. 3. Qualifying for Medicaid (different than Medicare). Many people cannot afford the $6,478 or more per month that some nursing homes charge. That's why many people are feeling the financial pinch within a year of entering a nursing home. This leaves many people exposed and unprotected from the catastrophic cost of extended care. The state government may pick up the tab for you, but you may have to spend down your assets. Depending upon your state's Medicaid rules, this could leave you with as little as $2,000 in liquid assets (Medicaid allowances do allow spouses to retain some additional assets). So, if you have $100,000 in the bank, you could be required to spend it on your care before the state provides any assistance. Prior to applying for Medicaid, it might be possible to shift some assets to the healthy spouse. Please note that transfers to other relatives could be subject to a look-back period of 60 months. If the transfer took place within the look-back period, the transferred asset will be counted as your property for Medicaid spend down purposes.


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

There are ways to shelter your assets, however, and qualify for Medicaid without spending down your assets! One option is to place your funds in an immediate annuity. These annuities (when purchased in compliance with Medicaid rules) may be exempt assets, depending on how much you get and the state where you live. Some states exempt annuity payouts only up to a certain amount. That means you can keep this asset and still qualify for Medicaid payments. This is one way to obtain government support for extended care and not have to spend your last dime. The rules on this are particular and vary by state so please consult someone knowledgeable on Medicaid procedures or call for more information.

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Key Questions to ask your advisor These are some great questions to consider asking any advisor either your current advisor or an advisor you are evaluating working 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 into consideration before recommending this to me?  When do I get the money?  What is contract, cash or walk-away value vs. the rider's value?  What is the partial withdrawal and how does it work?  How will I be taxed?  What happens when I die?  Guarantees – what are they and how do they work?  What can go wrong?  Can we read the prospectus/disclosure together?  How much of my money should I put in this product? 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 by my buying this?


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

 What disclosure documents are you required to give? Did I get them yet?  How sound is this company? What is their rating?  How is this annuity the best income option for me? (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 the income account?  Can we call the insurance company and ask them the same questions? (HINT: you can after you purchase 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. what is hypothetical?  How is this suitable for me?

Advisor Regulation When it comes to hiring an advisor you want to determine the qualifications 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.

P a g e | 29


Not licensed; Board of Standards Certified Financial Planner requires CFP holders to meet educational, examination and continuing education requirements

NONE

NONE;

NONE

License Requirements

Permitted Sales

Regulated by

Required Disclosure

Certified Financial Planner

Qualifications; Compensation; potential Conflicts of interest

SEC or state securities regulators

Investment advice

Registration with the SEC or individual state; Series 65; background check; examinations

Registered Investment Advisor

NONE

FINRA and state securities regulators

Securities

Series 6 or Series 7 License; background check; examinations

Registered Representative

NONE

State Insurance Commissioners

Life-insurance and annuities

State Life-insurance license

Insurance Agent


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

In Summary Any product may have a position in your portfolio Not to be all one or another Diversify what you are doing A process to determine what makes the best sense or fit for you These are only a few ideas to help you better protect your annuity assets and make the most of what you worked hard to accumulate. Financial and retirement planning can have an impact on 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 well as answer questions that you have not thought to ask. Find an advisor who will point out opportunities and caution you about risks and one who is knowledgeable about the special needs of retired individuals.

With the sound advice of experience and a conservative retirement plan, you and your family can get the most out of your assets.

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Definitions  Accumulation Value Account – this is the money that is yours, the principal or premium.  Annual asset Fee - Typically a charge or a percentage amount that is deducted from the index growth calculation.(4)  Annual lock-in - the act of locking in earned credits in regards to annuities.  Annual reset - A way of calculating annual yield for an index annuity in which the baseline from which growth is measured resets every year. With an annual reset, previous years' growth is never lost.(1)  Arm's Distance - an idiom meaning keeping oneself at a distance. If one is at arm's distance from someone or something, then that someone or something cannot touch them.  Being Transparent - allowing all information and intents to be boldly spoken of and addressed.  Cap - Some annuities may put an upper limit, or cap, on the index-linked interest credit. This is the maximum credit or rate of interest the annuity will earn, typically expressed as a percentage. Not all annuities carry a cap rate. (2 , 4)  Crediting Strategy – the concept of earning interest in an index annuity product.  Custodian – the company that is holding funds, usually IRA funds are what we are speaking of.  Fiduciary – acting in the best interest of the client. Not all advisors are bound by this principle. Investment Advisors are bound by this principle.  Spread - A preset deduction from the percentage of indexed growth that is used to calculate the indexed interest rate that is credited to an annuity contract each year. The spread will reduce the percentage of annual growth that an annuity can potentially earn in a given contract year. (3.)  Suitability – define


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

 Participation rate - Also referred to as the Index Rate, this indicates the part of the index's increase credited to an equity-indexed annuity's account value. In some contracts, a cap is imposed on this amount.( 1.)  Walk-away – this is the money or time that you can take 100% of the accumulation account value and put it back in your pocket.

References http://www.freeannuityrates.com/annuities/glossary.php

http://www.freeannuityrates.com/annuities/article.php?title=Isan-Annuity-For-Me http://financial-dictionary.thefreedictionary.com/spread http://capitalindemnitygroup.com/AnnuitiesFIA.aspx http://www.finra.org/investors/protectyourself/investoralerts/an nuitiesandinsurance/p005976 http://www.finra.org/investors/protectyourself/investoralerts/an nuitiesandinsurance/p010614

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i

Federal income tax rates range between 10% to 35% under the 2011 federal tax code, and are based upon the taxpayer's level of annual income. State income taxes could also apply, which vary from state to state. Please note that federal and state tax laws are subject to frequent changes. ii The fact that the beneficiaries are going to pay income taxes at a later date could be an advantage if they are in a lower tax bracket. As previously explained, estate taxes could also apply. iii

http://www.finra.org/investors/protectyourself/investoralerts/annuitiesandin surance/p005976 iv

Accuquote blog 9/17/07.

v

Married couples filing joint returns are taxed on the first $65,100 of their taxable income at the lower 10% and 15% rates (2008 IRS tax tables).

vi

American National Life, assumes 4% during deferral period and life payout based on January 2007 monthly rates of $7.12 per $1,000, male age 65. vii Reg. 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. x Per IRS Publication 17, 2007, single individuals and married with modified adjusted gross incomes exceeding $34,000 and $44,000, respectively, pay tax on up to 85% of their Social Security income. The explanation of the tax treatment of payments under an annuity contract is found in IRS Publication 17, 2007. xi Subject to the claims-paying ability of the insurance company, please note immediate annuities are designed to enhance cash flow and save taxes but are not the only investment vehicles by which these goals may be achieved. Always consider all possible investment options before you invest. xii Penn State University Policy Research Institute 3/2/06. xiii The MetLife Market Survey of Nursing Home and Care Costs, 2007. Survey calculations based on private room rates in licensed nursing homes for 87 metropolitan areas of all 50 states and the District of Columbia.


Annuities Explained In Simple Terms with Tips & Ideas That Could Save You Thousands

About Mr. Richard Loek Mr. Loek is a San Francisco Bay Area Native and enjoys supporting people in accomplishing tasks & goals that are important to them. Mr. Loek is an Investment Advisor Representative, a licensed Life and Health Insurance Agent and a member Ed Slott's Master Elite IRA Advisor group. Mr. Loek and his team at CalRima Financial & Insurance Agency (CalRima) have been working with people in a variety of capacities for over 20 years. CalRima has a comprehensive team of associates and affiliates that pride themselves in providing outstanding customer service and achieving customer loyalty.

Ed Slott's Elite IRA Advisor Group™ is an exclusive group of advisors who are dedicated to being leaders in the IRA industry. Because being the best in business requires an enormous amount of ongoing education, time and effort. The Elite IRA Advisor Group™ is a single resource for serious professionals. The Elite IRA Advisors are equipped with upto-date tools and resources to help their clients. http://irahelp.com/eliteGroup.php Mr. Loek volunteers his time to coach people in accomplishing what is important to them. Mr. Loek holds a variety of positions in the community. Mr. Loek served as the Charter President of the San Jose Willow Glen Lions club; The Mental Health Advisory Board of Santa Clara County, has participated in half-marathons & triathlons and is a program leader at the company that is widely recognized as the industry leader in training and personal development.

P a g e | 35

©2013 CalRima Financial & Insurance Agency California Insurance License #0F34289


First Published January 2013, revised May 2013. This booklet is copyrighted. It may not be reproduced without express written permission of the author. Published by Richard Loek

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