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    Annuity Training
    Annuity Training
    Annuity Training
    Ebook197 pages3 hours

    Annuity Training

    By Michael Lustig

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    About this ebook

    Annuity Training provides an in-depth examination of annuities with an emphasis on the classification and contract provisions and the types of annuity plans available and their benefits. This textbook provides a wealth of information regarding annuities, including history, types and classification and the taxation of annuities. Annuity Training is a good source of information both for those new to annuities as well as a great review for those who are the more experienced in the field.

    LanguageEnglish
    PublisherMichael Lustig
    Release dateAug 18, 2011
    ISBN9781933891750
    Annuity Training
    Author

    Michael Lustig

    Michael Lustig is a graduate of the University of San Diego, California and a former Professor at California State University at Pomona and Immaculate Heart College (Los Angeles). He has been a California Real Estate Broker and the Owner and President of Real Estate License Services, a California real estate and insurance licence school, since 1978, offering state-approved license courses in 47 states and the District of Columbia. He is the author of 35 books on real estate and insurance topics.

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      Book preview

      Annuity Training - Michael Lustig

      ANNUITY TRAINING

      Prepared by Michael Lustig

      Contributing Editor: Denise Iona

      Distributed by:

      CAL-STATE EXAMS, INC / C.E. CREDITS

      5059 Newport Ave. #209

      San Diego, CA 92107

      Phone Toll-Free 1-800-877-5445

      Smashwords Edition

      © Copyright 2009 by REAL ESTATE LICENSE SERVICES, INC. Copyright registered. All rights reserved. All contents protected by laws of copyright. No part of this book may be reprinted, reproduced, transmitted, stored in a retrieval system, placed in a computer or on the Internet, or otherwise utilized, in any form or by any means electronic, mechanical or otherwise, including photocopying or recording, now existing or hereinafter invented, including the Internet, nor may any part of this book be used for teaching without the prior written permission from the copyright holder. CAL-STATE EXAMS is a division of REAL ESTATE LICENSE SERVICES, INC., holder of the registered copyright.

      Contents

      CHAPTER ONE: THE HISTORICAL DEVELOPMENT OF ANNUITY CONTRACTS

      THE EVOLUTION OF ANNUITY PRODUCTS AND PRACTICES

      ANNUITY PRODUCTS - ANNUITY PRODUCTS AND PRACTICES—LEGISLATION - ANNUITY PRODUCTS AND PRACTICES—IMPACT ON CONSUMERS - MARKET OVERVIEW

      WRITTEN ASSIGNMENT 1

      CHAPTER TWO: ANNUITY TYPES AND CLASSIFICATIONS

      ANNUITIES AS INVESTMENTS

      ANNUITY CONTRACT PHASES - THE PROCESS OF ANNUITIZATION

      ANNUITY TYPE ACCORDING TO PREMIUMS PAID

      IMMEDIATE ANNUITIES - DEFERRED ANNUITIES

      ANNUITY TYPE ACCORDING TO PAYOUT

      IMMEDIATE ANNUITIES—SINGLE PREMIUM - DEFERRED ANNUITIES—SINGLE PREMIUM - DEFERRED ANNUITIES—FIXED PREMIUMS - DEFERRED ANNUITIES—FLEXIBLE PREMIUMS

      ANNUITY TYPE ACCORDING TO INVESTMENT OPTIONS

      FIXED ANNUITIES - VARIABLE ANNUITIES - EQUITY INDEXED ANNUITIES

      WRITTEN ASSIGNMENT 2

      CHAPTER THREE: THE PARTIES TO AN ANNUITY

      PARTIES TO THE CONTRACT

      THE RIGHTS AND OBLIGATIONS OF THE CONTRACT OWNER

      ENTITIES ELIGIBLE FOR OWNERSHIP - RIGHTS AND OBLIGATIONS OF THE CONTRACT OWNER - OWNER DRIVEN VS. ANNUITANT DRIVEN CONTRACTS

      THE RIGHTS AND OBLIGATIONS OF THE ANNUITANT

      THE RIGHTS AND OBLIGATIONS OF THE INSURANCE COMPANY

      SPECIAL CONSIDERATIONS FOR SENIOR INVESTORS - OBLIGATIONS ASSOCIATED WITH QUALIFIED AND NONQUALIFIED ANNUITIES - INSURER RATING SERVICES - INSURER ADVERTISING RESPONSIBILITIES

      THE RIGHTS AND OBLIGATIONS OF INSURANCE PRODUCERS

      LIQUIDATION DISCLOSURE - DISPLAYING LICENSE NUMBERS - REPLACEMENT - FREE LOOK

      THE RIGHTS AND OPTIONS AVAILABLE TO BENEFICIARIES

      A SURVIVING SPOUSE AS BENEFICIARY - BENEFICIARY OTHER THAN A SURVIVING SPOUSE

      WRITTEN ASSIGNMENT 3

      CHAPTER FOUR: ANNUITY CONTRACT PROVISIONS

      CONTRACT PROVISIONS AFFECTING CONSUMERS

      INTEREST RATES AND COMPENSATION - ISSUE AGES - MAXIMUM AGES FOR BENEFITS TO BEGIN - CRISIS WAIVERS - SETTLEMENT OPTIONS - SURRENDER CHARGES - POLICY ADMINISTRATION CHARGES AND FEES - WITHDRAWAL PRIVILEGE OPTIONS - ANNUITIZATION OPTIONS

      CONTRACT PROVISIONS TYPICALLY COMMON TO FIXED ANNUITIES

      DEATH BENEFIT - CHARGES AND FEES - INTEREST RATE STRATEGIES - CREDITING METHODS - MINIMUM GUARANTEED INTEREST RATES

      CONTRACT PROVISIONS COMMON TO VARIABLE ANNUITIES

      VARIABLE OPTIONS - FIXED OPTIONS - CHARGES AND FEES - DOLLAR COST AVERAGING - DEATH BENEFIT GUARANTEES - LIVING BENEFIT GUARANTEES

      CONTRACT PROVISIONS COMMON TO EQUITY INDEXED ANNUITIES

      PRIMARY INTEREST CREDITING STRATEGIES - SPREADS - INTEREST RATE CAP - PARTICIPATION RATES - MINIMUM GUARANTEED INTEREST RATE - IMPACT OF PREMATURE SURRENDER CHARGES - CHARGES AND FEES

      AVAILABLE RIDERS

      LIFE INSURANCE RIDER - LONG-TERM CARE BENEFIT RIDER

      LOAN PROVISIONS

      WRITTEN ASSIGNMENT 4

      CHAPTER FIVE: TAXATION OF ANNUITIES

      INTRODUCTION

      IRS PENALTY TAX

      QUALIFIED ANNUITIES - NONQUALIFIED ANNUITIES

      PAYMENT OF PREMIUMS

      PARTIAL WITHDRAWALS

      LOANS AND ASSIGNMENTS

      IRS SECTION 1035 EXCHANGES

      THE GIFT OF AN ANNUITY

      THE SALE OF AN ANNUITY

      THE DEATH OF AN ANNUITY OWNER

      DEATH BEFORE ANNUITIZATION BEGINS - DEATH AFTER ANNUITIZATION BEGINS

      DEATH OF THE ANNUITANT

      ANNUITY BENEFITS DISTRIBUTIONS

      QUALIFIED ANNUITIES - NONQUALIFIED ANNUITIES

      ESTATE TAX EFFECTS ON THE BENEFICIARY

      CONTRACT IN THE ACCUMULATION PHASE AT OWNER’S DEATH - CONTRACT IN THE ANNUITIZATION PHASE AT OWNER’S DEATH - A CHARITABLE ORGANIZATION AS BENEFICIARY - THE MARITAL DEDUCTION - INCIDENTS OF OWNERSHIP

      WRITTEN ASSIGNMENT 5

      CHAPTER SIX: QUALIFIED PLANS AND ANNUITIES

      ERISA

      ERISA REQUIREMENTS - ENSURING COMPLIANCE - FIDUCIARY PROVISIONS OF ERISA

      THE ANNUITY MARKET AND BUYER DEMOGRAPHICS

      ANNUITIES AND RETIREMENT PLANNING

      WRITTEN ASSIGNMENT 6

      CHAPTER SEVEN: THE PRIMARY USES OF ANNUITIES

      TAX DEFERRED COMPOUNDING

      TAXABLE VS. TAX DEFERRED VS. TAX FREE RETURNS - COMPARISON OF RETURNS - THE LONG-TERM EFFECTS OF TAX DEFERRED COMPOUNDING

      INCOME DISTRIBUTIONS

      THE SPLIT ANNUITY - VARIOUS SETTLEMENT OPTIONS AND ADVANTAGES AND DISADVANTAGES - SUMMARY OF ANNUITIZATION OPTIONS - TAX RAMIFICATIONS OF ANNUITIZATION OPTIONS

      ANNUITY ADVANTAGES AND DISADVANTAGES

      ADVANTAGES AND DISADVANTAGES FOR THOSE UNDER 60 YEARS OLD - ADVANTAGES AND DISADVANTAGES FOR THOSE 60 YEARS AND OLDER - INVESTMENT ALTERNATIVES TO ANNUITIES

      WRITTEN ASSIGNMENT 7

      CHAPTER EIGHT: THE SENIOR MARKET

      THE SENIOR MARKET

      RISK AND THE SENIOR CLIENT - WHY SENIORS ARE AT RISK

      PRE-RETIREMENT vs. POST-RETIREMENT PLANNING

      PRE-RETIREMENT PLANNING - POST-RETIREMENT PLANNING

      FINANCIAL CONCERNS

      SOCIAL SECURITY - RETIREMENT PLAN DISTRIBUTIONS - INVESTING RETIREMENT ASSETS

      INSURANCE CONCERNS

      HEALTH INSURANCE - LIFE INSURANCE - LONG-TERM CARE INSURANCE - AUTO INSURANCE - ESTATE PLANNING

      SELLING TO THE SENIOR MARKET

      PRODUCT COMPLEXITY - THE ISSUE OF BUYER COMPETENCE - LEGAL CAPACITY TO CONTRACT - UNIQUE ETHICS AND COMPLIANCE ISSUES

      WRITTEN ASSIGNMENT 8

      CHAPTER NINE: RESERVING ISSUES WITH ANNUITY CONTRACTS

      COMPARISON WITH LIFE INSURANCE

      LIMITS THAT COMPANIES MAY PLACE ON ANNUITY SALES

      THE IMPACT ON CONSUMERS

      THE IMPACT OF LOW INTEREST RATES

      IMPACT ON CONSUMERS - IMPACT ON ISSUERS

      CHAPTER TEN: CONSUMER ATTITUDES TOWARDS RETIREMENT

      ANXIETY BROUGHT ON BY INCREASED LIFE EXPECTANCIES

      ANNUITIES COMPARED TO OTHER FINANCIAL PLANNING VEHICLES

      CERTIFICATES OF DEPOSIT (CDS) - MONEY MARKET ACCOUNTS - SAVINGS ACCOUNTS - MUTUAL FUNDS - STOCKS - BONDS - COMMODITIES - OPTIONS - LIMITED PARTNERSHIPS - PROMISSORY NOTES - REAL ESTATE INVESTMENT TRUSTS (REITS) - VIATICAL SETTLEMENTS - LIFE SETTLEMENTS - UNITED STATES GOVERNMENT SECURITIES

      WRITTEN ASSIGNMENT 9 & 10

      ANSWERS FOR CHAPTER QUIZZES

      CHAPTER ONE: THE HISTORICAL DEVELOPMENT OF ANNUITY CONTRACTS

      THE EVOLUTION OF ANNUITY PRODUCTS AND PRACTICES

      Annuities are financial contracts. These products, although very sophisticated instruments today, are said to have originated centuries ago in early Rome.

      ANNUITY PRODUCTS

      Early Roman Financial Contracts

      The issue of uncertainty about longevity of life is an not a new one. It is something that even the early Romans pondered. Longevity has a monetary component in that families and loved ones must continue to be provided for. Others want the assurance of a continuing stream of income for themselves into their final years. Therefore, it is not surprising that financial contracts similar to annuities and known as annuae(pl.) were undertaken centuries ago. Under these arrangements, an up front lump sum payment was made to the annua in exchange for payments made annually, usually for life but sometimes for a fixed term. The term annuity is derived from the Latin annuus, which means annual.

      Tontines

      During the seventeenth century, investment vehicles called tontines were used similarly to the early annuae. In France in 1653, a Neapolitan banker named Lorenzo de Tonti developed a method for raising money called the tontine. A tontine combined the features of a group annuity, group life insurance, and a lottery. If not having invented the scheme, Tonti certainly made them popular.

      Tontines were essentially vehicles to raise funds for war. Combat with neighboring countries to acquire land were constantly being undertaken, and tontines provided the revenue to pay for these costly battles. The governments created tontines which promised future payments when their citizens purchased shares at present.

      The concept was simple. Each investor paid a sum into the government tontine. The funds were invested, or used to wage war, and each investor received dividends from the spoils. As investors died, shares were divided between the surviving investors. The pool of funds for the remaining shareholders grew. The payout was increased each year to survivors since they received amounts that would otherwise have gone to those who died. This progression and division of wealth continued until only one investor remained.

      Initially, the last surviving investor received only dividends and the principal went to the state at his death. In later designs, the principal would pass to the last survivor. Other schemes allowed nominating someone, often a child, to receive the dividends or shares. Shareholders could assign their shares to others by deed or will.

      Tontines began to create trouble for their issuing governments partly due to increased longevity of participants. The first tontine holders were men and women of all ages. As the tontines’ popularity increased, investors figured out how to make the most of the system. Adults began to purchase shares for young children, and returns proved to be too costly for the government.

      Another factor contributing to the downfall of the tontine was the system’s incentive to kill off others in the tontine, thereby increasing one’s own share. Clearly there was no insurable interest. Tontines are generally outlawed today.

      The First Annuities

      The first American life insurance company was founded in 1759 in Philadelphia providing pensions for retired Presbyterian ministers and their dependants. The Corporation for Relief of Poor and Distressed Presbyterian Ministers and Distressed Widows and Children of Presbyterian Ministers was begun by the Presbyterian Church, providing survivorship annuities for ministers’ families. The ministers contributed to the fund in exchange for lifetime payouts. In 1812, the Pennsylvania Company for Insurance on Lives and Granting Annuities became the first company in the United States to offer annuities to the general public.

      Modern Annuities

      During and after the Great Depression, there were understandable concerns about the overall health of the nation’s financial markets, and insurance companies were seen as sound institutions able to meet the future payouts that annuities promised. As a result, many individuals began purchasing annuity contracts from insurers. Also during this time, group annuities became widely held investment vehicles for corporate pension plans. Contributing to the popularity of annuities was, having taken lessons from the Depression, planning for one’s own retirement.

      Compared to today’s range of complex and multi-featured investment products, the first modern annuity contracts were actually quite simple. They offered a fixed rate of return and the guarantee of principal. At the time of withdrawal, a fixed income for life or payments over an established number of years were virtually the only choices. Features such as free look periods variable investments were unheard of.

      Of course, over the years, guaranteed death benefits, long-term care riders, living income benefits, waivers, and other options and features made the product flexible and more popular. As annuities evolved, many

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