Loan Provisions

In document Selling Annuities to Seniors (Page 53-61)

Annuity owners can get money against the funds in their account if they ever need a loan. Usually, this loan provision allows the annuitant to borrow a pre-set percentage of the accumulated value. Like every other loan, this has associated

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costs and interest rates that must be clarified to the annuitant before they take out the loan. If a loan taken against the value of an annuity is not repaid to the insurance company, the insurance provider can deduct the cost of the loan and any other associated fees when the annuity matures.

The loan provision is most useful for those seniors who wish to borrow against their capital ownership.

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Quiz 4

1. If the primary focus of a senior while he or she is investing in annuities is the growth and the retirement income generated from the annuity, the most important thing for him or her while selecting an annuity would be: (Lesson 4: Common Provisions)

A. The interest rate.

B. The death benefit.

C. The beneficiary.

D. The premium payments.

2. If Senior A is investing in an annuity that has a bonus rate, you would explain to him that the bonus rate lasts for: (Lesson 4: Common Provisions)

A. The duration of the accumulation phase.

B. The life of the annuitant.

C. The life of the annuity.

D. A limited time only.

3. Person M, who is a minor, is only allowed to enter a contract of annuity if they:

(Lesson 4: Common Provisions) A. Are at least 14 years old.

B. Have parental authorization.

C. Have other long-term investments like CDs or Bonds.

D. Have sufficient funds to maintain themselves while their money is in an annuity.

4. What are the two methods of crediting an account with earned interest in a fixed annuity? (Lesson 4: Fixed Annuities Crediting Methods)

I. Portfolio rates II. New Money rates III. Treasure rates IV. Bonus rates

A. I, II, III, & IV B. I, II, III only C. III & IV only D. I & II only

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5. With a qualified IRA, a person must make withdrawals at age ____ or they will be subjected to IRS penalties. (Lesson 4: Common Provisions)

A. 60 B. 70½ C. 80 D. 90½

6. Which of the following situations would NOT allow a senior to claim an exemption and avoid withdrawal penalties? (Lesson 4: Crisis Waivers)

A. Senior J has developed a long term disability.

B. Senior J has been diagnosed with a terminal illness.

C. Senior J is confined to a nursing home after developing Alzheimer’s.

D. Senior J’s daughter passes away and he must make a last-minute flight.

7. The maximum amount of a premium payment which can be made at once is the sum of ___ annual premium payments. (Lesson 4: Premium Payments)

A. 3 B. 5 C. 10 D. 15

8. What type of index annuity interest crediting strategy resets the interest rate on the annuity anniversary date? (Lesson 4: Primary Interest Crediting Strategies)

A. Annual point to point B. Monthly averaging C. High water mark D. Combination method

9. What is the main consideration of annuity sellers when establishing the participation rate of an index-linked annuity? (Lesson 4: Participation Rate)

A. Market trends

B. Investor risk tolerance C. Current interest rates D. Total value of the annuity

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10. The disclosure statement for annuities connected to Surrender Charges should be presented in at least a ______ point type. (Lesson 4: Surrender Charges)

A. Bold 10 B. Bold 12 C. Bold 14 D. Bold 16

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Quiz 4 Answers

1. (A) Interest rates are the medium used to calculate growth and payments of an annuity, as interest is technically defined as a compensation or money earned by taking the risk of investments. The interest rate is the variable that will affect the income generated by the annuity; the death benefit and beneficiary will not effect the income generated. While the premium payments will have some effect on the growth and income, they normally do not effect the annuity as much as the

interest rate.

2. (D) Quite often, annuities come with a bonus rate for the first year of the contact; the bonus rate serves to attract buyers and in some cases compensate them where they have made a transfer of funds. However, in these cases it is important for the agent or the seller to explain to seniors that the bonus rate will last only for a limited period.

3.(B) Minors are only allowed to enter contracts of annuity with parental consent.

Their contracts can not be considered void solely because of their age. Contracts that result in a personal liability of the minor require the assumption of that

liability by the parents. This assumption requires a special form designed by the Commissioner that informs the parent that the liability will be assumed by them until the minor reaches age 18.

4. (D) The interest earned on fixed annuities is credited back to the annuity account for re-investment. There are two methods of crediting an account with earned interest: portfolio rates, where the account is credited with an enhanced interest rate calculated from the performance of the portfolio owned by the insurance company; and new money rates, when a premium is paid towards the annuity, and the insurer declares an interest rate for that ‘new money.’ This interest rate can apply for the short term or for the duration of the annuity itself.

5. (B) The maximum age a person can be without taking any withdrawals from their IRA is 70½; after that age, they will have to face IRS penalties if he or she does not make withdrawals.

6. (D) Nursing home confinement, diagnosis of a terminal illness, involuntary unemployment and long-term disability are circumstances that allow for a person to take an exemption and make withdrawals without penalties. This is provided for with a crisis waiver. Emergency or last-minute travel expenses are not considered an exceptional case.

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7. (C) A contract for annuities normally has a clause to the effect that although premiums for annuities can be paid in advance, the maximum premium payment in one go is the sum of 10 annual premium payments.

8. (A) With the annual point to point system, the interest rate is reset at the beginning of each annuity anniversary year. The annually resetting point to point method is more useful where the market is unpredictable or volatile. Monthly averaging would be calculated by looking at how the index performed in the past year. This method is considered most suitable for a limited-time investment in a volatile index. High water mark is calculated by looking at the highest point achieved by the index in the term. A combination method combines the properties of the point to point and annual reset methods.

9. (C) When the investor purchases an index-linked annuity, he or she has the option to declare what portion of the funds will be placed in the variable account and what portion will be placed in the fixed account. Although market trends and the direction of the index will play a role in setting the participation rate, it is not the primary concern for the insurance company. The current interest rates are the main gauge with which the annuity seller will determine the participation rates.

10. (B) The surrender charges and related penalties must be printed in bold 12 point font on the annuity contract cover page. Additionally, surrender value and penalties for surrender must be mentioned in the annual statement sent to seniors.

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Lesson 5: Income Tax on Qualified and Non-Qualified Annuities

One of the most positive aspects about investment in annuities is that the

earnings on the account are not taxed until they are withdrawn. Annuity earnings are tax-deferred but they are not tax-free; given enough time, all annuities will be taxed eventually and the way in which such taxation takes place is outlined in this lesson.

Tax Deferred Growth

The money which accumulates in an annuity grows on a tax-deferred basis, which gives the investors the advantage of having their money grow faster due to compounding. A comparative growth chart for a $100,000 tax-deferred and taxable investment is shown below; both investments have an 8.5% interest rate and assume a 28% income tax bracket.

Years 1 5 10 20

Taxable Investment ($) 106,120 134,580 181,120 328,050 Tax-deferred investment ($) 108,500 150,370 226,100 511,200 However, this growth chart can be misleading if the person is not told about his/her break-even tax bracket. If he/she wishes to withdraw funds from the annuity after five years, he/she would have to be in a 31% income tax bracket to break-even with a taxed investment. After ten years, the break even bracket would be 35%, while after twenty years, they would need to be in a 44% income tax bracket to break-even. If a senior does not think that he/she will be in such brackets once he/she withdraws from his/her annuity, then an annuity may not be the best choice for them to begin with.


Premiums for qualified annuities are paid with pre-tax dollars, therefore, they are not taxed until the annuitant begins to withdraw money from the annuity. Since non-qualified annuities are purchased with post-tax dollars, only the earnings in the non-qualified annuity are taxed, depending on the exclusion ratio applied to the annuity. The accumulation period is the time from when the first payment into the annuity is made to when the first annuity payment is made. Payments into an annuity during the accumulation period are not taken out of the purchaser's current income for tax purposes, as payments into a standard pension plan or 401(k) are.

Thus, the investor should normally exhaust all the standard retirement plans available before turning to an annuity. However, just as for other retirement investment vehicles, earnings during the accumulation period are not taxed until the funds are distributed. The investor in a variable annuity does not have the

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option of withdrawing income from the account, so all is reinvested and accumulates tax-free.

In document Selling Annuities to Seniors (Page 53-61)

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