ANNUITY INCOME, WITHDRAWALS AND PAYMENTS

Question 1

What 3 methods do deferred annuities provide income?

Answer 1

Deferred annuities can provide income through (1) systematic withdrawal programs, (2) through random withdrawals and (3) through annuitization.

Question 2

What income options do Immediate annuities offer?

Answer 2

Immediate annuities offer a variety of income options.

Question 3

What payout options do Variable products (annuities) offer?

Answer 3

Variable products may offer both variable and fixed payout options.

Question 4

What payout options do fixed products offer?

Answer 4

Fixed products provide fixed payout options.

Question 5

Regarding SYSTEMATIC WITHDRAWAL PROGRAMS, annuities may offer the ability to take withdrawals during the ACCUMULATION PHASE on a regular periodic basis through systematic withdrawals. What is the limit percentage of the account value or earnings?

Answer 5

They are usually limited to 10% of the account value or earnings only during the surrender charge period. The payments may be taken monthly, quarterly, semi-annually or annually.

However, variable products allow for a stated amount of money or a specified number of units to be taken out systematically.

Question 6

How are SYSTEMATIC WITHDRAWALS taxed?

Answer 6

When systematic withdrawals are taken, they are taxed as though earnings in the annuity are withdrawn prior to principal. Once all earnings have been distributed, the principal is paid out.

Question 7

When may SYSTEMATIC WITHDRAWALS be taken?

Answer 7

Systematic withdrawal payments may be started and stopped at any time or as the annuity contract dictates. This is different from annuitization payments, which may not be stopped once started.

Question 8

Can annuitization payments be started and stopped at any time?

Answer 8

No. Annuitization payments may not be stopped once started.

Question 9

What happens to the yield when the annuitant takes regular payments?

Answer 9

Taking regular payments reduces the effective yield on the product. For example, if a contract is paying 3%, and earnings are removed each quarter or at the end of the contract year, the return on the product is effectively 0%. There is also no tax-deferral, since withdrawn earnings are taxed.

Question 10

For qualified or IRA annuities, the insurer may allow SYSTEMATIC WITHDRAWAL to be taken out based on the required minimum distribution required based on what?

Answer 10

For qualified or IRA annuities, the insurer may allow SYSTEMATIC WITHDRAWAL to be taken out based on the required minimum distribution required based on the policyholder’s life expectancy, or the joint life expectancies of the policyowner and certain eligible designated beneficiaries.

Question 11

What are the ANNUITIZATION PAYMENT OPTIONS?

Answer 11

There are several annuitization options including:
1. life income
2. life income with refund
3. joint and survivor
4. term certain annuities

Question 12

Explain taxation on annuitization payments:

Answer 12

Once annuitization payments begin, they cannot be stopped. The payments are taxed as part earnings and part principal until all earnings have been distributed.

Question 13

With a TERM CERTAIN product will there be earnings in each payout?

Answer 13

Yes. Witha a term certain product, there will be earnings in each payout.

Question 14

With a LIFE INCOME PRODUCT, is it possible that all earnings may be distributed and income still continue?

Answer 14

Yes. With a life income product, it is possible that all earnings may be distributed and income still continue, if the annuitant outlives the life expectancy presumption used to calculate the taxable portion of the payments.

Question 15

Explain life income annuities and joint and survivor and term certain annuities distribution rules:

Answer 15

Life income annuities and joint and survivor life annuities generally meet the required minimum distribution rules for qualified plans and IRAs for a plan owner with a spousal beneficiary. The distribution rules get more complex when other beneficiaries are named. Many insurance companies will calculate the minimum distribution amount for the annuitant, based on single or joint life expectancies.

A term certain annuity may also meet this requirement if the number of years is equal to or less than the life expectancy of the annuitant as found in the IRS tables, such as when a ten-year payout is required.

Question 16

How are Annuitized payments taxed?

Answer 16

Once annuitization payments begin, they cannot be stopped. The payments are taxed as part earnings and part principal until all earnings have been distributed.

With a TERM CERTAIN product, there will be earnings in each payout.

With a LIFE INCOME product, it is possible that all earnings may be distributed and income still continue, if the annuitant outlives the life expectancy presumption used to calculate the taxable portion of the payments.

Question 17

With a LIFE INCOME product (i.e., annuity) is it possible that all earnings be distributed and income still continue?

Answer 17

Yes. With a LIFE INCOME product, it is possible that all earnings may be distributed and income still continue, if the annuitant outlives the life expectancy presumption used to calculate the taxable portion of the payments.

Question 18

Do LIFE INCOME ANNUITIES and JOINT AND SURVIVOR LIFE ANNUITIES meet the required minimum distribution rules for qualified plans and IRAs for a plan owner with a spousal beneficiary?

Answer 18

Yes. LIFE INCOME ANNUITIES and JOINT AND SURVIVOR LIFE ANNUITIES generally meet the required minimum distribution rules for qualified plans and IRAs for a plan owner with a spousal beneficiary. The distribution rules get more complex when other beneficiaries are named. Many insurance companies will calculate the minimum distribution amount for the annuitant BASED ON SINGLE OR JOINT LIFE EXPECTANCIES.

A TERM CERTAIN ANNUITY may also meet this requirement if the number of years is equal to or less than the life expectancy of the annuitant as found in the IRS tables, such as when a ten-year payout is required.

Question 19

Does a TERM CERTAIN ANNUITY meet required minimum distribution rules for qualified plans and IRAs for a plan owner with a spousal beneficiary, if the number of years is equal to or less than the life expectancy of the annuitant as found in the IRS tables, such as when a ten-year payout is required.

Answer 19

Yes. A TERM CERTAIN ANNUITY meets required minimum distribution rules for qualified plans and IRAs for a plan owner with a spousal beneficiary, if the number of years is equal to or less than the life expectancy of the annuitant as found in the IRS tables, such as when a ten-year payout is required.

Question 20

Can nonqualified annuities be used to provide retirement income?

Can nonqualified annuities be used to provide retirement income?

Answer 20

Yes. Nonqualified annuities can be used to provide retirement income. These annuities do no have to meed required minimum distribution rules.however. The policyowner can choose to take random withdrawals when income is needed, keeping in mind that withdrawals prior to age 59 1/2 may include a 10% additional tax penalty.

Or, the policyowner can use SYSTEMATIC WITHDRAWALS to meet income needs and can stop the payments when he or she no longer needs the additional income. And, the policyowner can choose to annuitize the contract to provide lifetime income or income for a specified period.

Question 21

Regarding Nonqualfied annuity payments, if the policyowner does not need the income during his or her lifetime, can the annuity value be passed on to the beneficiary or beneficiaries named on the contract?

Answer 21

Yes. If the policyowner of a nonqualified annuity does not need the income during his or her lifetime, the annuity value may be passed onto the benefitiary(ies) named in the contract.

A spousal beneficiary may continue the contract upon the owner’s death, and if so, the ownership change is not a taxable transaction.

A nonspousal beneficiary must take the annuity proceeds no later than five years after the death of the policyowner. If the beneficiary does ot make an eletion to take the proceeds within or over the five-year period within 60 days after the death, the earnings in the contract are taxable in the year of the death. If the money is paid out over the five year period, the earnings are taxed when they are received.

Question 22

Explain the dynamics of an annuity as a gift to charity:

Answer 22

If an annuity owner wants to make a gift to a charity, a gift may be made in a variety of ways. Charitable institutions may be named as beneficiaries on the contract, so that at the policyholder’s death, the money will be passed onto them.

If an existing deferred annuity is gifted to a charity, it will have to be assigned to them or have a change of ownership. Changing ownership or assignment is a taxable transaction - the earnings in the annuity, even though not withdrawn, are taxable to the owner. And when a non-natural owner owns an annuity, the product loses its tax deferral statuts. If the ownership or assignment is irrevocable, the transactionmay qualify as a charitable contribution and may result in a nontaxable trasaction as a gift and if a gift of present interest may result in a current tax deducton. The policyowner should seek tax or legal advice if he or she would like to make a gift in this manner.

Question 23

Can annuity income payments be made to any payee?

Answer 23

Yes. Annuity income payments may be made to any payee. So, at annuitization, or upon opening a SPIA, the policyowner can name a charity as the payee of the annuity payments. If structured properly, such as through irrevocably naming the charity the annuity payee, the payments to the charity may qualify as gifts of present interest and may provide a taxable deduction to the owner.