Annuities and Variable Products

Question 1

Qualified Annuities

Answer 1

Product sponsored by insurance cos in which investment income grows tax-deferred. For qualified

• offered to employees of tax-exempt orgs, public schools (403b plans) or employees of state/local govs (457 plans)
• contributions are tax deductible
• max contribution of $17,500
• Subject to Required Minimum Dist (RMD) rules

Question 2

Non-Qualified Annuities

Answer 2

Income goes tax deferred.

• Available to anyone thru insurance co or B/D
• Contributions are non-deductible
• No contribution limit
• Not subject to withdrawal reqs

Question 3

Variable Annuities

Answer 3

Inv Risk: Annuitant
Security: Yes
Account: Separate
Portfolio: Sub accts (mutual funds) to meet investor objectives
Hedge against inflation: superior to fixed annuity

Pay-In Phase: valued in accumulation units
During accum/pay in phase annuitants can withdraw from their annuity. Only earnings portion is taxable

Premature withdrawals: before age 59.5, 10% penalty on investment income
On death of annuitant: death benefit is greater of cost basis or accumulated value. Proceeds above basis are taxable to beneficiary as ordinary income.

Annuitization: Accumulations units are exchanged for fixed number of annuity units based on life expectancy, payout est by multiplying fixed number of annuity units by the unit value, unit value fluctuates based on separate acct performance.

Question 4

Fixed Annuity

Answer 4

Inv Risk: Insurance co
Security: No
Acct: General
Portfolio: Safe, secure, predictable
Hedge against inflation: Poor

Question 5

Payout Options: Straight life annuity

Answer 5

Annuitant receives payments for life. Highest possible payout w highest risk

Question 6

Payout options: Unit Refund LIfe Annuity

Answer 6

Annuitant receives amount at least equal to original investment. At death, any remaining amt is paid to beneficiary.

Question 7

Assumed Interest Rate (AIR)

Answer 7

Hypothetical return on investment. Fixed percentage, NOT a guaranteed/minimum rate.

Question 8

1035 Exchange

Answer 8

Permits direct transfer of one annuity contract for another without creating a taxable event. 
Allowed:
-Life to Annuity
-Life to Life
-Annuity to Annuity

NOT allowed:
-Annuity to Life