Table Of Contents. Dedication...iii Acknowledgements...v About the Author...vii

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1 Table Of Contents Dedication...iii Acknowledgements...v About the Author...vii CHAPTER 1: The Definition of an Annuity...1 What Is An Annuity?...3 What Is A Nonqualified Annuity?...5 The Annuity s Unique Feature...5 Who Purchases Annuities?...6 The Time Line of an Annuity...9 The Accumulation Phase...9 The Annuitization Phase...10 Who Sells Annuities...11 Other Types of Annuities...11 CHAPTER 2: The Parties to an Annuity...13 The Owner...14 Owners Other Than Natural Persons...15 Entity Owning Annuity As Agent for Natural Person...16 The Annuitant...17 The Beneficiary...19 The Insurance Company...21 CHAPTER 3: Standard Annuity Contract Provisions...25 Bailout Provisions and Rates...26 Charges and Fees...27 Fixed Annuities...27 Variable Annuities...28 Dollar Cost Averaging...28 Interest Rates...29 Fixed Annuities...29 Variable Annuities...31 Issue Ages...32 Market Value Adjustments...32 Maximum Ages for Benefits to Begin...33 Nonqualified Annuities...33 Other Annuities...34 Nursing Home Waiver...34 Premium Payments...35 ix

2 Settlement Options...35 Life Annuity...36 Life With Period Certain Guarantee...37 Refund Life Annuity...38 Joint and Survivor Life Annuity...38 Fixed Period Annuity...39 Fixed Amount Annuity...40 Interest Income...40 Surrender Charges...40 Withdrawals...43 Partial surrender...43 Full Surrender % Per Year Withdrawal...44 Systematic Withdrawal Option...45 Loans...45 CHAPTER 4: The Various Types of Annuities...47 Single Premium Annuities...47 Flexible Premium Annuities...51 Fixed Annuities...52 Equity-Indexed Annuities...53 Variable Annuities...54 Annuitant and Owner Driven Annuity Contracts...54 Immediate Annuities...56 Deferred Annuities...57 Charitable Gift Annuities...58 Private Annuities...60 CHAPTER 5: Fixed Annuities...63 Introduction What is a Fixed Annuity?...63 Advantages and Disadvantages...64 Typical Fixed Annuity Contract Features...66 Rates of Interest on a Fixed Annuity...66 Interest Rate Bonus Features...67 Interest Rate Crediting Methods...68 Charges and Fees...70 Surrender Charges...71 Market Value Adjustment...72 Suitability for Fixed Annuities...73 Who Can Sell Fixed Annuities?...73 x

3 CHAPTER 6: Variable Annuities...75 Introduction What is a Variable Annuity?...75 Advantages and Disadvantages...75 Variable Annuity Fees...77 Assumption of the Investment Risk...78 The Investment Options...79 The Variable Accounts...79 The Guaranteed Account...81 Transfers Among Investment Accounts...83 Automatic Rebalancing...85 Benefit Payments From Variable Annuities...85 Fixed Annuity Benefit Payout...86 Variable Annuity Benefit Payout...86 Variable Annuity Death Benefit...88 Variable Annuity Death Benefit Guarantees...89 Compliance Considerations...91 Who Can Sell Variable Annuities?...92 CHAPTER 7: Equity-Indexed Annuities...93 Introduction What is an Equity-Indexed Annuity?...94 Advantages and Disadvantages...95 How Does the Indexing Work?...97 Typical EIA Contract Features Cap Rate Death Benefit Fees and Expenses Indexing Methods Maximum Issue Ages Minimum Guaranteed Interest Rate Minimum Premiums Partial Withdrawal Provisions Participation Rate Policy Loans Policy Term Settlement Options Surrender Charges Surrender Provisions Vesting Schedules How is an EIA Used? Who Can Sell EIAs? xi

4 CHAPTER 8: The Uses of Annuities Retirement Planning Accumulation Planning for Retirement Distribution Planning for Retirement Other Retirement Planning Vehicles Individual Retirement Arrangements Qualified Retirement Plans Tax Sheltered Annuities Split Annuity Arrangement Annuities and Medicare Charitable Planning Gift of an Annuity Charitable Gift Annuity Charitable Trusts Charitable Remainder Trusts Charitable Lead Trusts Pooled Income Funds College Funding Business Planning Retirement Planning Nonqualified Deferred Compensation Plans Sale of a Business Bonus Plan Alternatives to Annuities Bank Savings Account Certificates of Deposit Mutual Funds CHAPTER 9: Income Taxation of Annuities Premiums Cash Value Build-up Natural Persons Nonnatural Persons Loans and Assignments Partial Withdrawals Contract Surrender Charges % Premature Distribution Penalty Tax Substantially Equal Periodic Payment Exception Taxation of Withdrawals Taxation of Loss on Annuity Surrender Multiple Annuity Contracts xii

5 Effect of a Tax Free Exchange Complete Surrender of the Annuity Exchanges Section Gift of an Annuity Sale of an Annuity The Seller The Purchaser Taxation of Annuity Benefit Payments the Basic Rule The Exclusion Ratio The Investment in the Contract The Expected Return The Annuity Tables Taxation of Variable Annuity Benefit Payments Death of the Annuity Owner Death of the Annuitant CHAPTER 10: Estate Taxation of Annuities What is the Estate Tax? How is the Estate Tax Calculated? Deductions From the Estate Tax Annuity Contracts Owned at Death In the Accumulation Phase In the Annuitization Phase Owner and Annuitant Are Not the Same Person Annuity Contracts Purchased as Gifts Private Annuities CHAPTER 11: Gift Taxation of Annuities What is the Gift Tax? How is the Gift Tax Calculated? The Annual Exclusion The Unified Credit Deductions From the Gift Tax What Constitutes a Gift Gift of an Annuity Contract Purchase of a Joint and Survivor Annuity Assignment of an Annuity Contract Payment of an Annuity Premium Naming an Irrevocable Beneficiary How is the Gift of an Annuity Valued? xiii

6 APPENDIX A: Actuarial Tables Table I Table II Table IIA Table III Table V Table VI Table VIA Table VII APPENDIX B: Examples of Exclusion Ratio Calculations Single Life Annuity Refund or Period Certain Guarantee Joint and Survivor Annuity (Same Income to Survivor as to Both Annuitants Before Any Death) Joint and Survivor Annuity (Income to Survivor Differs from Income Before First Death) APPENDIX C: Internal Revenue Code Sections Section Section Section Section APPENDIX D: Sample Annuity Applications Sample Fixed Annuity Application Sample Variable Annuity Application INDEX SUPPLEMENT September xiv