Annuity Info

Choose from the various topics on annuities below. 

Download Annuity Hotsheet    Download Annuity Quote Sheet          

  • Overview
  • Advantages
  • Flexible Premium Annuities
  • Single Premium Immediate Annuities (SPIA)
  • Annuity Sales Ideas
  • Saving Taxes on Social Security Benefits
Annuity Overview for Agents

Each year, BILLIONS of dollars in Annuities are sold by insurance companies because people are looking for safe, conservative options for part of their money. If you have a Life insurance license, you are generally able to offer these products (fixed annuities) to your clients.

The most popular fixed annuities being sold today are ones with "Multi Year Guarantees", also known by producers as " CD Annuities" (not a bank product). These products generally have a guaranteed current rate for 3 to 10 years, after which a "window" opens (similar to what a CD does at renewal) where withdrawals and transfers can occur with NO early surrender charges. They are more "customer friendly" and more easily explained to clients than the "trust me" types of annuities, where a high first year rate is offered and then the client is at the mercy of the company on renewal rates while still subject to early surrender charges.

The staff of Producers Connection, LLC helps agents to sell millions in Annuities every year, and we want to help you provide quality products to your clients. 


 

 

Call us today for more information on the concepts above. We are here to help you, and your clients!

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Notes regarding Rate Hotsheet:  Rates change often, and we generally update the hotsheet only once a month.  So, always call to confirm current rates, and to get product details.  Rates shown are believed to be accurate at the time of posting, but can change at any time.  Make sure date on hotsheet is for current month.

We are fully aware that there may be other products with somewhat higher rates than we show on our Hotsheet, especially those with high "first year only" bonuses.  When comparing product interest rates, be sure that you compare the "average return" over a period of time, not just the first year rate.  You may find that a product with a much higher first year rate will actually average about the same yearly return as others available.  We like to present products with few, if any, "gimmicks" so that they are easier to explain to clients, and the client knows what they are getting.  We have many products available, and will try to suit the needs of you and your clients.  So call and let's discuss your case today!

 


  • Important:  Annuities are insurance contracts, not bank products, and therefore are not covered by FDIC insurance. Annuity guarantees come from the issuing company, and the claims-paying ability of that company. Most states also have some type of guarantee fund, supported by insurance company taxes, to also back annuity and life insurance values.  However, you are not generally allowed to use the existence of such a guarantee fund to induce people to buy an annuity. This discussion is not meant to be an "all inclusive" review of annuities, so be sure you educate yourself.  Annuities should be sold for long-term purposes, and agents should use care in assessing the "suitability" of products for their clients. We don't give tax or legal advice, so have the client check with their advisors before a purchase is made.  INFORMATION ON THIS WEBSITE IS FOR AGENT USE ONLY, AND IS BASED ON OUR UNDERSTANDING OF CURRENT GUIDELINES.  Hyperlinks are displayed in various places on our site, for the convenience of our visitors.  When you click on links provided, you may be leaving control of our website.

Annuity Advantages

Annuities are contracts issued to policyholders by insurance companies that provide for accumulation of interest on premiums, and also for the distribution of the values over a period of time. They are used most often for long-term savings purposes, such as for retirement. Fixed annuities generally have a guaranteed "floor" interest rate for the life of the contract, plus a "currently declared" rate which is usually higher. The insurance company also offers several options for clients to access their funds, either through partial withdrawals, or through one of a multitude of settlement options.

One of the most unique advantages of an annuity is its ability to generate an income that can't be outlived. There are 2 phases of a deferred annuity, the accumulation phase and the distribution phase.  Life Insurance companies are experts at determining life expectancies, and they can base their immediate annuity payouts on such factors during the distribution phase. If you happen to live longer than the average person, your income would still continue for the rest of your life under one of the "life contingencies" (life only, life and period certain, etc). This type of guaranteed income can be very important to people who are no longer working. Other distribution options include payouts for a "certain period only" (ie. 10 years, 20 years), and payouts of a "certain amount" (ie. $500 a month for a period).

Another important advantage of an annuity is the tax deferred status on interest earned and credited. Because of their helpful long-term savings features, and the benefits to society of people saving for retirement, current law allows "deferral" of taxes on interest until money is withdrawn. So, as long as you leave your interest earnings in your annuity, you pay no income tax on them. YOU have more control as to when you pay taxes on the interest earned!  This allows "interest to be earned on top of interest" that otherwise would have been lost to yearly tax liability.

Charges & penalties: The government expects you to use annuities for long term retirement-type purposes, so it has established guidelines for early withdrawals from annuities that are similar to IRAs and other retirement plans (10% penalty for withdrawals before age 59 1/2).  In addition, since the insurance company generally charges NO annual admin fees on fixed annuities, they charge an "early surrender charge" of some type if the money is not left to end of term (3 yrs, 5 yrs, etc). This is so they can invest the annuity values in longer-term financial instruments to get better returns. There are situations where these early charges on withdrawals may be waived, such as after a period of guaranteed interest (the "window"), or during a nursing home stay, during a terminal illness, and so on. Most plans also allow yearly access to part of the values without early penalty, such as a withdrawal of accumulated interest, or perhaps 10% of the total value each year. Remember, CDs also have "early surrender charges" if you surrender them before their maturity dates, and these charges renew along with the CD.  Think about it... if an annuity, or other similar vehicle, allowed people to put money in and pull it out anytime they wanted, the money would have to be invested very conservatively, with "liquidity" being the main concern, thereby reducing the potential return.  A typical regular savings account today is earning under 1% because the money has to be available to the customer anytime they want it.  That is not the market for annuities. 

Be sure your client understands potential effects that early surrenders can have on their values.  People need to have liquid, short term money available before they start investing in longer term vehicles like annuities.  We expect all of the agents contracted through us to adhere to strict ethical conduct when talking to clients about financial products. 

Annuity death benefits:  Annuity owners can name a beneficiary in their contract just as they do in a life insurancy policy.  Values payable to such would generally not be subject to probate, and privacy would therefore be better, and settlement legal fees would generally be less.  The tax-deferred interest would usually be taxable after death, and the beneficiary usually would pay that from annuity values.  If the annuity was being used as an IRA or other similar retirement account, a spouse can generally roll-over the values to an IRA in their own names, continuing the tax deferral.  New laws are taking effect now that will allow "non-spouse" beneficiaries to do that too, in what is being called an "inherited IRA".  More information on that is coming available, so call us for more information.

Depending on the contract, some plans pay the full value at death to beneficiary, and others may pay the "surrender value", which would be the accumulated value less any applicable early surrender charges.  This latter type of plan usually pays a higher interest rate because of this possible reduced benefit.  So, with that type it would generally be best for the beneficiary to wait to withdraw funds until the surrender charge period is over or waived.  That is another reason why people should have other funds available before considering purchase of a deferred annuity. 

Before recommending any product to your client, be sure that you and they understand all features of the plan, including any surrender penalties.

Flexible Premium Annuities

For people who want to make ongoing premium payments to their plan, there is the Flexible Premium Deferred Annuity (FPDA)..... similar provisions to the SPDAs, but additional premium payments may be made any time you like, subject to minimum/maximum amounts and current interest. These flex plans are often used for IRA accounts, or to supplement other retirement plans. In a "tax qualified" plan, like an IRA, tax deferral is available in any approved vehicle (savings acct., CD, mutual fund, etc.), so the tax deferral is not the reason people would choose an annuity as their IRA product. More likely, it would be because of the guaranteed minimum lifetime return, the guaranteed distribution options at retirement, and a competitive current interest rate.

Call us when you have someone who needs to start an IRA, or if they want to look at rollover options for existing IRAs. There are millions of dollars in IRAs today getting less than market rates, and people just are not aware that they can perhaps get a better rate with SAFETY. They can transfer the money to an annuity IRA, and benefit from possible higher returns, great distribution options, and/or both.  As always, suitability of any change in your client's plan should be your primary concern.

Note:  For a simple product for IRAs (Traditional or Roth), click on the following link to visit the website of The Standard, and their Flex Premium Deferred Annuity product.  See the current rate, a product spec sheet, download an agent guide, and more:  Product Info

Single Premium Immediate Annuities (SPIA)

Another type of annuity that is widely used is the SPIA. In this case, clients contract with the insurance company for a series of regular income payments. They deposit a lump sum of money which buys a guaranteed monthly, or annual, income based on their choice of settlement options, such as:

Lifetime income - payments continue as long as owner/annuitant lives (this option generally creates the most income, but should be considered carefully)

Certain & Life - payments continue as long as owner/annuitant lives, and to a beneficiary if they don't live a certain period (10, 15, 20 yrs. etc)

Period certain - for a period selected by the client (10, 20 yrs. etc.), the company will pay the maximum amount depending on interest assumed for that period of time only.

Amount certain - the company will pay a certain amount selected by the client for as long as the money and interest lasts.

And there are a few more payout options as well (including "joint" options where a spouse or other may also be named), but those above are the most often used. SPIAs can guarantee income for a lifetime to people who are afraid of outliving their assets, and that can be very comforting. They can also be setup to pay certain living expenses, such as insurance premiums for Long Term Care or Life Insurance.

Generally, on non-qualified money (meaning non-IRA-Pension money), a SPIA's income will generage a large amount of tax-free income, because a large part of each payment is considered "return of premium paid". If $100,000 is the premium deposited, and that pays out $150,000 over the desired period of time, then the "exclusion factor" (the part considered tax-free) is 66% ($100,000 divided by $150,000). That means that about 2/3 of the monthly benefit paid out was "return of premium", and not considered "profit", and therefore not taxable.  Only the $50,000 "profit", representing about 1/3 of the monthly payout, would be considered taxable, and the company would send the client a 1099 each year for their tax records.

In combination with an SPDA, a SPIA can create guaranteed, tax-advantaged income for a selected period while the deferred annuity grows back to the value of the original deposit (see "Split Annuity" sales idea below). This concept can compare very favorably to a client who has a CD, and withdraws just the interest each year.

Impaired Risk SPIAs - Because the SPIA payouts are based primarily on life expectancy, the health of the annuitant could affect the payout if the insurance company will actually "underwrite" the risk. So, a 70 year old who has the life expectancy of an 80 year old could benefit from a SPIA even more. We have companies that will underwrite the health of your prospect, which could mean improved payouts for the client. Call us for more information!

Annuity Sales Ideas

CD Alternative (asset transfer)

Perhaps the simplest annuity sales concept is that of an "asset transfer", which simply means your client "moves" some of his/her money from one asset to another for the expectation of a higher return and/or tax deferral. In the right situation, an annuity can be a great alternative to a CD or other similar investment, as part of an overall program. Just compare the features and benefits of both products, and let the clients decide if part of their money should be moved.

Here is an example of such a comparison:

 

CD

Annuity

Compare deposit of

$100,000

$100,000

Current interest rate*

1.00%

3.00%

Generating yearly % of

$1,000

$3,000

Is interest taxable when left alone ? (non-qual $)

Yes

No

Is there a guaranteed minimum % for life?

No

Yes

Considered a safe, conservative vehicle?

Yes

Yes

Avoid probate costs at death?

No

Yes

Lifetime guaranteed income option?

No

Yes

Liquidity

Good

Good

* If explained properly, you can show the advantages and disadvantages of both products above, and many people will see the benefit in placing some of their money in an annuity. Current rates above are for illustration only, and may not represent current figures. Obviously, as rates change over time, the relative competitiveness of these returns will also change. CD rates tend to change more quickly than annuity rates, which can be a plus in "downward trend" time period. When CD rates are falling fast, annuity rates tend to stay up for a longer period.  Also, the annuity features can outweigh temporary rate advantages that a CD may have at a particular time.  Remember:  if your client is under age 59 1/2 when a withdrawal from an annuity is made, it could be subject to 10% IRS penalty.  Annuities are not bank products, and therefore not covered by FDIC.  Fixed annuities are guaranteed by the issuing company and their claims-paying ability.  Product suitability should be your main concern in all sales situations.  Comparison above is for illustration only, and may not reflect actual current conditions.


Idea:  Assuming that your client likes the idea of not having all their eggs in one basket, a comparison such as above can help them see the value in having some money in annuities. You might try saying something like this:

"We all need more than one bucket of money to feel safe and secure with our money over our lifetimes. For example, we need a bucket filled with emergency fund money, and that should be in a very liquid, easy to get to account, like a savings or money market at the bank. Once that is filled with enough to provide about 3 to 6 months living expenses, any overage should go into a "longer term bucket", like a CD. You give up a little liquidity, but you get a little more return, too. After you feel comfortable with the amount in those buckets for emergencies and short term needs, then you should start thinking of another bucket for longer term needs. That's where an "annuity bucket" could really improve your situation. In a crisis, you would go to bucket #1 first, then the second if needed, then the third (annuity) if needed. Buckets number 2 and 3 offer better returns, and still have some liquidity, though not as much as the low interest bucket #1. Buying an annuity is simply buying another asset, like moving money from one pocket to another, or one bucket to another."

You can draw these "buckets" on a legal pad right in front of the client. Or, you may want to use a power point "bucket presentation" that we make available to producers.  Call for more info.

Combo or Split Annuity Concept

Some people with CDs withdraw and use all their interest earned on them each year, so when CD and Annuity rates are similar, tax-deferral in an annuity may not initially mean much to them. But, you can still show them how annuities can help increase current income many times by explaining the "Combo/Split Annuity Concept".

This is simply taking a lump sum of money, and splitting it into a Deferred annuity, AND an Immediate annuity. The Immediate annuity (SPIA) pays the client a monthly, guaranteed income for a set number of years while the Deferred annuity is steadily growing back to the original total deposit, also on a guaranteed basis. Below is an example:

Total of $100,000 into "Combo" Annuity idea

SPIA

SPDA

"Split" $100,000 this way

$34,043.00

$65,957.00

SPIA creates guar. mo. income for 10 yrs

$329.78

***

Tax-free* part of monthly payment (appx 86%)

$283.61

***

Total guar. SPIA income over 10 yrs. ($330 x 120)

$39,600.00

***

SPDA guar. value at end of 10 yrs.

***

$100,000.00

     
     

* Over a 10 year period in this particular case, the $283.61 amount is basically considered "return of premium", and not taxable (15% tax bracket assumed).  Figures based on June 2007 factors available from one of our carriers. Rates change often, so call for details. We don't give tax or legal advice.  Always keep in mind the suitability of products for your clients.

Compare the above income to what a CD would create today (after tax), and you will see how a "Split Annuity" could help your client with current income on a guaranteed basis. Even if a CD were paying the same rate as the annuity, 100% of the CD interest is taxable because it is ALL considered income, whether you pull it out or not (if "non-qualified" money). Shorter term annuities (5 - 6 years) are also available, and will still work well this way. The higher the tax bracket of the annuitant, the better this concept works compared to taxable alternatives.

Saving Taxes on Social Security Benefits
If you have clients who currently receive Social Security retirement benefits, or soon will, you need to be aware of some provisions in the tax law. These provisions can make part of the S.S. benefit taxable IF the total "provisional income" of the recipient is over certain levels.  Example for married filing jointly:
 
  • $32,000 a year income makes 50% of S.S. benefits over the threshold taxable,
  • $44,000 a year income makes 85% of S.S. benefits over the threshold taxable.
Interest earned on almost all investments, including CDs, is included in the provisional income calculation, along with almost all other income, including pension, salaries, dividends, money markets, and 50% of yearly S.S. benefit, etc.  Even if the interest is left alone in the CD or other account, it is included in the calculation of "provisional income".  Even so-called "tax exempt interest" (municipal bonds, etc) has to be added in. 

One exception to this rule is interest on annuities when left inside the annuity. This interest is not taxable until client decides to withdraw it, so it is not includable unless client If you want to be a hero, help your clients in this situation to move enough money from their current accounts to annuities, thereby keeping their total assets intact but lowering their includable income for this calculation.
 
Tell your clients who are drawing SS benefits to check out page 28 of their 1040 Form at tax time.  That's where they have to do the calculations. 

Call us if you have questions, this is a BIG reason to consider annuities for your clients on Social Security.

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