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Life insurance products, for supplement
retirement income. |
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Generates a stream of guaranteed income for
life. |
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Withdrawals |
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Monthly income |
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Lump sums |
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Random |
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Premiums |
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General Account |
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Guaranteed payout based on what was paid in |
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Is not a security |
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insurance license |
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Significant risk |
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inflation |
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Premium |
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Invested in separate accounts (stocks,bonds,etc) |
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Guarantees income based on account performance |
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Investor takes risk |
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Security |
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Prospectus, Insurance license, security
registered rep. |
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Regulated similarly |
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Two major Differences |
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Distributions |
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Mutual Funds (Dividends and capital gains) |
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Variable annuities (tax-deferred) |
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Mutual funds-
no guaranteed income return |
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Single premium deferred annuity |
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Lump sum |
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Periodic payment deferred annuity |
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Over time |
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Immediate annuity |
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Lump sum |
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Withdrawals |
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Annuitization |
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Actuarial department of the insurance company
determines initial value of annuity units. |
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Assumed Interest Rates (AIR) |
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Monthly income varies due to (AIR) |
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Greater than AIR |
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Equal to AIR |
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Less than AIR |
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Life income (Risky) |
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Pay for life |
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No beneficiary |
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Life annuity with period certain |
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Guarantees minimum payments over a certain
period of years |
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Beneficiary receives payment for time left |
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Joint life with last survivor annuity |
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Guarantees payment over two lives |
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Husbands and wives |
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Contributions |
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are invested with after-tax dollars |
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Cost basis |
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Earnings taxed |
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Early withdrawal (10%, ordinary income) |
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Annuity owner’s cost basis divided by annuitants
life expectancy |
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Lump sum or Random withdrawals |
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Last in, First out (LIFO) |
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Earnings withdrawn first (taxed) |
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Cost basis (no taxation) |
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Contract |
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Insurance Company |
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Individual |
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Focus on separate accounts that fund the death
benefits (securities) – Act 1933 |
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Premium (Gross) |
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Administrative fee |
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Sales Load |
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State Premium taxes |
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Separate Account (net premium) |
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Mortality risk fee (cost of insurance) |
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Expense risk fee |
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Investment management fee |
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Death benefits are calculated annually (AIR) |
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Cash value is calculated monthly |
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Unit values are calculated daily |
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75% of the cash value must be available for a
policy loan after three years. |
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The insurer is never required to loan 100
percent of the cash value. Full
cash value is obtained by “surrendering” the policy to the insurer. |
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If due to poor separate account performance the
loan exceeds the policy cash value, the policyowner must make payment to
the insurer within 31 days. |
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If the insured dies with a loan outstanding, the
death benefit is reduced by the amount of the loan. |
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Right to exchange a VLI for a traditional
fixed-benefit WLI contract. At least 24 months. |
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No need of evidence of insurability. |
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Contract holders receive one vote per $100 of
cash value funded by the separate account. |
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DC Annuities |
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Net investment income (dividends and interest
paid to the separate account) are not taxed to policyholder. As well as a
loan on the cash value. |
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If surrendered policy proceeds = premiums, are
tax free (considered cost basis) Earnings after cost basis are taxable as
income to policyholder. |
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Death benefits to the beneficiary are tax exempt
though they are includable is the estate of the deceased policyholder for
federal estate tax purposes. |
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1035 Exchange Provision allows variable annuity and variable
life policyholders to exchange policies without tax liability. Fixed to
variable or life insurance to annuities. |
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Qualified |
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Nonqualified |
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Primary difference is if the contributions are
tax deductible. |
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Both allow tax-deferred growth on earnings
attributable to plan contributions. |
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Notes