THE COMPLEXITY OF ANNUITIES IS BAFFLING CONSUMERS

Transcription

1 THE COMPLEXITY OF ANNUITIES IS BAFFLING CONSUMERS Presented by: James J. Holtzman, CFP, CPA Wealth Advisor and Shareholder And Vincent T. Strangio, CFP, PPC TM, and Wealth Advisor Legend Financial Advisors, Inc. And EmergingWealth Investment Management Inc.

2 James J. Holtzman, CFP, CPA James J. Holtzman, CFP, CPA is a Wealth Advisor and Shareholder with Legend Financial Advisors, Inc. and EmergingWealth Investment Management, Inc. Jim has been selected two consecutive times by Medical Economics as one of The 150 Best Financial Advisors for Doctors in America. Jim serves as the firm s Income Tax and Education Funding and Planning Specialist. Jim s previous professional experience includes employment with various CPA and Financial Advisory organizations where he provided tax, accounting, auditing and financial consulting services to individuals and businesses. Jim s areas of concentration include income tax planning, estate planning, stock option exercise planning, insurance, retirement planning and Section 529 Plans. Jim is a member of the Pennsylvania and American Institute of Certified Public Accountants. He is also a graduate of the Pittsburgh Leadership Development Initiative, which provides young leaders with the tools necessary to affect positive change in the Pittsburgh region, and Pittsburgh Leadership Onboard Programs. Jim also serves on the LaRoche College Board of Governors, is a member of Pittsburgh Cares, and is a former member of the Finance Committee for the Pittsburgh Downtown Partnership. Jim has been quoted in The Wall Street Journal, The Wall Street Journal Online, MSN Money, CBS Marketwatch, Pittsburgh Post-Gazette, Bloomberg Wealth Manager, Financial Planning Magazine, Financial Advisor Magazine, National Underwriter, Smart Money, Investment News, Physician s Personal Advisory, and in Bottom Line Personal. Jim has been interviewed on CNNfn s Your Money and Business Unusual, as well as WPXI-TV s Our Region s Business television programs.

3 Vincent T. Strangio, CFP, PPC Vincent T. Strangio, CFP, PPC is a Wealth Advisor with Legend Financial Advisors, Inc. and EmergingWealth Investment Management, Inc. He is a Certified Financial Planner (CFP ) and a Professional Plan Consultant (PPC ). As a PPC, Vince is recognized for his commitment to education and service excellence in the qualified retirement plan industry. Vince has over 15 years experience in the financial services industry as a financial planner, external/hybrid/internal mutual fund wholesaler, operations manager and small business owner. He joined Legend Financial Advisors, Inc. after working at various major asset management companies gaining expertise in all investment products including mutual funds, Separately Managed Accounts, ETFs, UITs, variable annuities, life insurance, 401(k) products and Section 529 plans within all asset classes, including alternatives. Mr. Strangio s experience as a small business owner gives him excellent insight into the needs of business owner clients and an unrivaled sensitivity to their concerns, which has proven to be a huge asset when helping small businesses navigate the complex world of retirement plans. As a member of Legend s Investment Committee, Vince is actively involved with the firm s investment research process where he analyzes and develops creative investment portfolio strategies for clients. He is also the firm s specialist with regard to analyzing the potential risks and pitfalls with insurance and annuity products.

4 ANNUITY DEFINITIONS AND BASICS 1. Annuity: Insurance Contract Designed To Provide Income To An Individual For A Specified Period Of Time 2. Annuitant: Individual Who Receives Payment From Annuity 3. Annuitization: The Process Of Converting An Annuity Contract s Value Into An Income Stream 4. Contract Owner: Person Who Applies For And Purchases An Annuity. 5. Accumulation Units: Represents A Proportional Share Of The Net Assets Similar To Purchasing A Share In A Mutual Fund

5 ANNUITY DEFINITIONS AND BASICS (CONTINUED) 6. Four Parties To A Contract: a. Owner b. Annuitant c. Beneficiary d. Insurer 7. Owner And Annuitant Can Be The Same 8. Accumulation Period: Period Before The Annuity Starting Date When The Premiums Are Being Paid 9. Annuity Starting Date: When Periodic Payments Are To Begin

6 TYPES OF ANNUITIES Deferred Annuity: Payouts Are Deferred Until A Later Point Immediate Annuity: First Annuity Payout Is Due One Payment Interval After The Date That The Annuity Was Purchased

7 TYPES OF ANNUITIES (CONTINUED) Investment Type: 1. Fixed Annuity: a. Provide A Guaranteed Rate Of Return Over The Length Of The Annuity 2. Variable Annuity: a. Provide Investment Options Tied To Investment Performance 3. Equity Indexed Annuity: a. Offers Rate of Return Based On Benchmark. b. Cap On The Amount Of Benchmark Return

8 ANNUITY EXPENSES

9 EXPENSES 1. Mortality And Expenses: a. Found Only In Variable Annuities b. Deducted From Contract Values c. Cost Of Insurance Company Guarantees In The Product 2. Administrative Charges: a. Operating Costs Of Insurance Company 3. Distribution Charges: a. Promotion And Distribution Costs 4. Front End Load: a. Upfront Charge That Is Paid To The Broker

10 EXPENSES (CONTINUED) 5. Riders a. Additional Features 6. Premium Taxes a. Some States Charge Taxes On Premiums Related To Variable Annuities 7. Annual Contract Fee 8. Investment Management Fees 9. Surrender Charges a. Penalty For Early Withdrawal

11 SURRENDER CHARGE SCHEDULE YEAR OF CONTRACT SURRENDER CHARGE % % % % % % % % % %

12 THE IMPACT OF COSTS ON VARIABLE ANNUITIES (The Cost Of Owning A Variable Annuity Over And Above A Mutual Fund s Cost) Fee Range Mortality and Expense Charge* 1.25% To 2.00 % Guaranteed Death Benefit**.15 % To.35 % Guaranteed Earning Increase Death Benefit**.10 % To.40 % Guaranteed Minimum Income Benefit**.50 % To.75 % Guaranteed Minimum Withdrawal Benefit**.40 % To.65 % Guaranteed Lifetime Withdrawal Benefit**.50 % To.60 % Guaranteed Minimum Accumulation Benefit**.25 % To.75 % Total (Does Not Include Annual Contract Fee Of $30.00 to $75.00) 3.15 % To 5.50 % *Source of Information Morningstar, Inc. **Source of Information Investopedia.com

13 PREMIUM PAYMENTS 1. Single Premium a. Further Premiums Are Not Typically Allowed b. Can Be Immediate Or Deferred Annuities 2. Fixed Level a. Payments Can Be Made At Different Intervals 3. Flexible Premium a. Usually Have A Minimum Or Maximum Payment Allowed b. Deferred Annuities

14 ANNUITY INCOME AND ESTATE TAXATION

15 ANNUITY INCOME TAXATION (CONTINUED) General Issues a. After-Tax Contributions If Non-Qualified Annuity b. Before-Tax Contributions If Qualified Annuity c. Income Tax Deferred Earnings

16 ANNUITY INCOME TAXATION After Death: 1. Death Benefit Gains Are Income Taxable To The Beneficiary 2. Non-Spouse Beneficiary Required Minimum Distribution Calculation If Annuity Is Maintained

17 ANNUITY INCOME TAXATION (CONTINUED) Before Death 1. Distribution Consists Of Return Of Premium And Not Taxable 2. Taxable Income Is Calculated By Using Exclusion Ratio a. Fixed Annuity Annuitization i. Exclusion Ratio Is The Ratio The Investment In The Contract Has To The Expected Return Under The Contract b. Variable Annuity Annuitization i. The Excludable Amount Of Each Annuity Payment Is Calculated By Dividing Your Investment By The Period Over Which You Will Receive The Annuity

18 FIXED ANNUITY EXCLUSION RATIO CALCULATION Step #1: Calculate Expected Income Annuity Purchase $25, Annual Payout $2, Life Expectancy - Years 20 Expected Income $40, Step #2: Calculate Exclusion Ratio Annuity Purchase $25, = 62.50% Divide By: Expected Income $40, Step #3: Calculate Exclusion Amount Annual Payout $2, Step #2: Calculate Exclusion Ratio 62.50% Amount Of Payment Not Taxed $1,250.00

19 ANNUITY INCOME TAXATION (CONTINUED) Withdrawals 1. Taxation Is Based Upon When The Annuity Was Purchased 2. Post-Tax Equity And Fiscal Responsibility Act Of 1982 (TEFRA) Annuities Purchased After August 13, 1982 a. Earnings Out First And Are Fully Taxable b. Principal Out Last And Not Taxable 3. Pre-TEFRA Annuities Purchased Before August 14, 1982 a. Principal Out First And Not Taxable b. Earnings Out Last And Are Fully Taxable

20 ANNUITY INCOME TAXATION (CONTINUED) Selling A Non-Qualified Annuity At A Loss Is Miscellaneous Itemized Deduction

21 ANNUITY INCOME TAXATION (CONTINUED) Practical Issues 1. Total Premium Payment Might Refer To The Amount Of A Section 1035 Exchange And Not The Cost Basis 2. Written Confirmation From Insurance Company Of Cost Basis

22 TAXABLE DISTRIBUTIONS 1. Tax Penalty Is 10.0% Of The Taxable Distribution Before Age 59 ½ 2. Exceptions To The Tax Penalty a. Payment Made On Or After The Contract Owner Is Age 59 ½ b. Disability c. Payment Made To A Contract Before August 14, 1982 d. After Contract Owner s Death e. Payment Made Under Immediate Annuity Contract f. Payments Made From An Employer-Purchased Annuity Upon The Termination Of A Qualified Plan g. Substantially Equal Periodic Payments For Life Expectancy

23 ESTATE TAXATION Value Included In Federal Gross Estate 1. Death Before Annuity Starting Date: Entire Value Of Annuity Is Included 2. Death After Annuity Starting Date: Present Value Of Future Annuity Payments (Commuted Value) Example: If Life Annuity Is Chosen, Then No Value Included If Any Benefits Are Paid To A Beneficiary, Then There Will Be Some Value Included

24 FIXED ANNUITIES

25 FIXED ANNUITIES 1. Insurer Bears The Risk Of Loss Of Principal, Not The Contract Owner 2. Owner Is Unsecured Creditor 3. 2 Guarantees a. Principal Is Protected b. Minimum Stated Interest Rate 4. Guaranteed Interest Rate: Number Of Years 5. Current Interest Rate 6. Deferred Or Immediate

26 FIXED ANNUITIES (CONTINUED) 1. Introductory Interest Rate 2. Fixed Lifetime Payouts Usually Do Not Increase For Inflation 3. A Low Interest Rate Environment Impacts The Interest Rates That Can Be Offered

27 FIXED ANNUITIES (CONTINUED) 1. Traditional Declared-Rate Annuities a. Insurer Establishes A First-Year And Renewal Interest Rate b. Current Rate Is Different From Guaranteed Rate c. Bailout Rate: If Renewal Interest Rate Below The Specified Bailout Rate, A Contract Owner May Surrender Contract Without Surrender Charges. 2. Bonus Annuities a. First-Year Interest-Crediting Rate Is Greater Than The Current Rate b. Bonuses Can Range From 1.00% To 5.00% c. Sometimes The Insured Is Not Allowed To Make Withdrawals During A Specific Period d. Annuitization Can Be Required To Earn Bonus

28 FIXED ANNUITIES (CONTINUED) 3. Multi-Year Guarantee Annuities: a. Current Interest Rate Is Guaranteed For Two To Ten Years b. Usually Limited Liquidity With Surrender Charges c. Automatically Renewed After Multi-Year Period 4. Market Value Adjustment: a. Adjustment In Value Based Upon Prevailing Interest Rates (Think Interest Rate Risk) b. Allow You To Lock In Interest Rate For Several Terms: Typically One To 10 Years c. After Each Term, Insurance Company Will Present A New Interest Rate d. Adjustment Applies If Contact Owner Surrenders Contract Before The End Of Its Term e. Negative Market Value Adjustment In A Rising Interest Rate Environment

29 IMMEDIATE FIXED INCOME ANNUITIES 1. Investors Give A Lump-Sum Payment To An Insurance Company And In Return Get A Predictable Income Stream Starting Immediately 2. No Access To Assets Once Income Starts 3. Guarantees Are By The Insurance Company So Insurance Company Strength Is Very Important 4. Security Of Regular Payments, Regardless Of Market Fluctuations 5. No Protection Against Inflation (Inflation Riders May Be Purchased For Additional Cost)

30 DEFERRED FIXED INCOME ANNUITIES 1. Buying A Pension Or Longevity Insurance : Investors Give A Lump-Sum Payment To An Insurance Company And In Return Get A Predictable Income Stream Starting At Least 13 Months In The Future 2. By Delaying Income, Investors Can Purchase A Bigger Benefit Compared To An Immediate Income Annuity 3. No Access To Assets Once Purchased 4. Guarantees Are By The Insurance Company So Insurance Company Strength Is Very Important 5. Security Of Regular Payments Beginning On A Future Date You Select 6. No Protection Against Inflation (Inflation Riders May Be Purchased For Additional Cost)

31 STATE GUARANTEE FUNDS 1. State Insurance Commissioner Monitors Financial Health Of Insurance Companies. 2. Insurance Coverage If Insurance Company Goes Under 3. Transfer Insurance Policies To Another Insurance Carrier. 1. Then, The Guarantee Fund Takes Over 4. Guarantee Fund Consists Of Insurance Companies That Operate In A State. 5. The Insurance Companies Pay Premiums Which Provides The Insurance Coverage

32 STATE GUARANTEE FUNDS (CONTINUED) 5. National Organization Of Life And Health Insurance Guarantee Associations Website Provides Information By State 6. In Most States, Coverage Is Handled On A Per Person, Per Insurance Company Basis 7. Some States Have A Maximum Insurance Coverage For All Types Of Policies. a. Common Protection Limits: $100,000.00, $200,000.00, $300,000.00, $500, Per Contract Owner

33 VARIABLE ANNUITIES

34 VARIABLE ANNUITY Basic Features a. Contract Owners Bear The Risk Of Loss And Not The Insurer b. Subaccount Definition: Similar To Mutual Fund

35 VARIABLE ANNUITY (CONTINUED) 1. Investment Risk: Usually Not A Lot Of Diversification Offered 2. Taxes: Ordinary Income Taxes On Withdrawalss 3. High Fees When Compared To Open-End Mutual Funds

36 VARIABLE ANNUITIES (CONTINUED) Contract Owners Can Allocate Premiums To Separate Account Or Fixed Account 1. Separate Account a. Separated From Insurance Company s Other Assets b. Insurance Company Creditors Cannot Access c. Subaccounts With Different Investment Styles 2. Fixed Account: Resembles A Fixed Annuity a. Insurer Guarantees Principal And Stated Minimum Interest Rate

37 GUARANTEED BENEFITS

38 VARIABLE ANNUITY (CONTINUED) Guaranteed Minimum Withdrawal Benefits (GMWB) 1. Can Protect Annuity Against Downside Market Risk 2. Insurance Company Allows Annuitant To Withdraw A Percentage Of Value Each Year Until Initial Investment Is Recovered 3. Annual Withdrawal Percentage Can Vary 4. Potential Limited Investment Options Example 1. Initial Investment: $200, Current Annuity Value: $150, Guaranteed Minimum Withdrawal Percentage Chosen: 10.0% 4. Amount Allowed To Withdraw Each Year Until $200, Is Recovered: $15, ($150, X 10.0%)

39 VARIABLE ANNUITY (CONTINUED) GUARANTEED LIFETIME WITHDRAWAL BENEFITS (GLWB) 1. Allows contract owners to withdraw, at a minimum, a fixed percentage of the total premiums each year 2. Payments are guaranteed for life. Annuitization is not required 3. Some contracts will allow you to lock in accumulated investment gains 4. If the contract owner dies before his or her entire principal has been recovered through withdrawals, the balance is payable to a beneficiary 5. Guarantee might not start until five to 10 years before retirement 6. May Limit Investment Options 6. Usually has an annual maximum 7. Typically not inflation-adjusted Example Amount invested: $200, GLWB: allows 4.00% annual withdrawal Contract value after 10 years: $150, GLWB: $8, ($200, x 4.00%)

40 VARIABLE ANNUITY (CONTINUED) Guaranteed Minimum Income Benefit (GMIB) 1. Insurance Company Guarantees A Fixed Income At The Time Of Annuitization Regardless Of Performance Of Subaccounts 2. Benefit Base: Separate From Actual Value. 1. It Is The Amount Of Your Investment Plus The Rate Of Return Quoted 3. Holding Period: Minimum Amount Of Years That You Have To Hold The Contract Before Exercising The Benefit 4. Choose A Payout Period If The Insurance Company Permits 5. Can Select A Specified Time After Purchase Of Contract: 10 Years Is Common 6. May Limit Investment Options Example: 1. Amount Invested: $200, GMIB Guarantees The Benefit Base To Be The Greater Of a. Actual Value: $150, b. 3.00% Interest Compounded Annually For 10 Years: $201, c. Highest Contract Anniversary Value Of The Annuity: $175,000.00

41 VARIABLE ANNUITY (CONTINUED) Guaranteed Minimum Accumulation Benefit (GMAB) 1. Will Only Be Activated If The Market Value Of The Annuity Is Less Than The Guaranteed Minimum Accumulated Value 2. Guarantees A Minimum Contract Value (Usually, The Owner s Invested Principal Even If Market Performance Results In A Lesser Value) After A Set Period Of Time. (10 Years Is Common) 3. May Limit Investment Options 4. Can t Make Withdrawals During The Accumulation Period 5. Sometimes, A Percentage Of Interest Is Guaranteed In Addition To Principal Example: Invested Amount: $200, Actual Value: $150, Guaranteed Minimum Accumulated Value Before Annuitization: $200,000.00

42 VARIABLE ANNUITY (CONTINUED) Payout Phase 1. Amount Of Each Variable Annuity Periodic Payment Is Not Guaranteed 2. Payments Fluctuate Based Upon Performance 3. Some Insurers Permit Annuitant To Direct Investments But Some Do Not

43 NO-LOAD VARIABLE ANNUITY 1. Also Known As Investment Only Variable Annuity 2. Investor Is Not Charged A Commission Fee 3. Sold Directly To Investors 4. Will Still Have Mortality And Expense (M&E) Fees (Usually Lower Than Loaded Annuities) 5. Sub-Account Investment Management Fees Will Still Apply 6. Typically No Surrender Charges 7. Attractive Solution For Completing Section 1035 Poor Investment Options 8. Normally Not As Many Riders To Choose From

44 EQUITY INDEXED ANNUITIES

45 EQUITY-INDEXED ANNUITIES Various Features 1. Can Be Tied To An Interest Index Or Equity Index 2. Complex Vehicles 3. Some Products Do Not Include Dividends In The Return Calculation 4. Surrender Charges 5. Insurer Does Not Have To Guarantee Return Equal To Index. Sometimes, It Can Be Plus Or Minus An Amount Compared To The Index 6. Started To Be Offered In The Early 1990s

46 EQUITY-INDEXED ANNUITIES: INDEXING FEATURES 1. Participation Rates a. Determines How Much Of The Gain In The Index Will Be Credited To The Annuity Example Participation Rate: 80.0% Total Return Of Index: 10.0% Total Return After Applying Participation Rate 8.0% (80.0%x10.0%) b. A Higher Participation Rate Might Be Offered With A Reduction Of Other Features, Such As A Decrease In The Indexing Method 2. Spread/Margin/Asset Fee a. Percentage Will Be Subtracted From Any Gain In The Index Linked To The Annuity Example Index Gain: 10.0% Percent Spread/Margin/Asset Fee: 3.5% Gain: 6.5%

47 EQUITY-INDEXED ANNUITIES: INDEXING FEATURES (CONTINUED) 3. Interest Rate Caps a. Maximum Rate Of Interest The Annuity Will Earn. b. Can Apply To Each Year Or For The Entire Term Of The Contract Example Index Gain: 10.0% Cap Rate: 8.0% Gain: 8.0% 4. Interest Rate Floor a. Sets The Minimum Index-Linked Interest Rate That You Can Earn. b. The Floor Is Generally Zero. c. Example: 0.00% Floor Means No Loss Even If The Index Is Negative

48 EQUITY-INDEXED ANNUITIES INDEXING METHODS 1. Annual Reset Point-To-Point a. Compares The Change In The Index From The Start Of The Year To The End Of The Year. If The Index Declines, You Typically Do Not Lose Money. b. Calculation Can Be Done For Each Year That The Contract Exists c. The Index Level At The End Of First Year Usually Becomes The Base For The Next Year d. Rate Of Return Needs To Be Applied To A Participation Rate Example S&P 500 Price At The Beginning Of The Year: 1,000 S&P 500 Price At The End Of The Year: 1,100 Percentage Increase In The S&P 500 For The Year: 10.0% Participation Rate: 70.0% Final Level Of Interest Credited: 7.00% (10.0% X 70.0%)

49 EQUITY-INDEXED ANNUITIES INDEXING METHODS (CONTINUED) 2. Averaging Annual Reset a. Starting Point Is The Start Of The Contract Year b. Ending Point Is The Average Of The Index Closing Levels During The Year c. Index Closing Levels Can Be Averaged For Each Day, Month Or Quarter d. Return Needs To Be Applied To A Participation Rate Example S&P 500 Price At The Beginning Of The Year: 1,000 S&P 500 Average Closing Level: 1,050 S&P 500 Price At The End Of The Year: 1,100 Percentage Increase In The S&P 500 For The Year: 5.0% Participation Rate: 70.0% Final Level Of Interest Credited: 3.50% (5.0% X 70.0%)

50 EQUITY-INDEXED ANNUITIES INDEXING METHODS (CONTINUED) 3. High Water Look-Back a. Use The Beginning Of The Index Term Period b. The Highest Anniversary Index Level During The Index Term Period Becomes The Ending Point For The Calculation c. Percentage Increase Is Calculated And Multiplied By The Participation Rate. Example S&P 500 Beginning Index Level: 1,000 S&P 500 Ending Index Level: 1,100 S&P 500 Highest Index Level During The Year: 1,200 Return Of The S&P 500: 20.0% Participation Rate: 70.0% Total Return: 14.0% (70.0% X 20.0%)

51 EQUITY-INDEXED ANNUITIES INDEXING METHODS (CONTINUED) 4. Low Water Look-Back a. Uses The Lowest Value Of The Index On Each Of The Policy Anniversaries Before Maturity As The Level Of The Index At Issue b. Interest Is Calculated By The Difference Of The Index Value At The End Of Term And The Lowest Index Value Example S&P 500 Beginning Index Level: 1,000 S&P 500 Lowest Index Level: 900 S&P 500 Ending Index Level: 1,100 S&P 500 Highest Index Level During The Year: 1,200 Return Of The S&P 500 From Lowest To Ending Level: 22.22% Participation Rate: 70.0% Total Return: 15.55% (70.0% X 22.22%)

52 EQUITY-INDEXED ANNUITY: INDEXING FEATURE CONCERNS 1. Insurance Company Can Change The Terms During The Contract 2. Terms That Can Change: 1. Participation Rate 2. Cap Rate 3. Spread/Asset/Margin Fees 3. Contracts Are Very Difficult To Analyze And Compare To Other Contracts 4. May Use Price Index Which Does Not Include Dividends

53 SECTION 1035 EXCHANGES

54 SECTION 1035 EXCHANGES 1. Surrendering An Annuity Contract Is A Taxable Event 2. When One Annuity Is Exchanged For Another, The Transfer Is Non-taxable 3. Exchange Must Occur Between Insurance Companies 4. Owner Cannot Receive A Check 5. New Surrender Charge Schedule 6. Commissions Paid On The Annuity Being Exchanged To

55 SECTION 1035 EXCHANGES (CONTINUED) 6. Keep Track Of The Adjusted Cost Basis From The Old Annuity 7. Owner And Annuitant Must Be The Same As The Old Contract 8. Two Or More Contracts Can Be Exchange For One Contract 9. Provide The New Insurance Company With A Copy Of The Old Contract

56 SECTION 1035 EXCHANGES (CONTINUED) Reason To Consider Section 1035 Exchange 1. Reduce Premiums 2. Increase Coverage 3. If The Current Policy Is Using 1980 Mortality Table As Opposed To Current Mortality Table Created In 2000, 1. Current Mortality Table Has Cost Reductions Due To Increase In Life Expectancy 4. Diversified Investment Options In New Contract 5. Flexible Settlement Options 6. Better Rider Options 7. Enhanced Payout Options

57 SECTION 1035 EXCHANGES FROM WHOLE LIFE INSURANCE POLICIES Reasons To Consider Section 1035 Exchange To An Annuity 1. Life Insurance Is No Longer Needed 2. Would Like To Reduce Expenses 3. Would Like To Continue Tax-deferred Growth 4. Would Like More Or Better Investment Options For Policy Cash Value 5. Avoids Taxation Of Any Gains Inside The Life Insurance Policy 6. Better Rider Options 7. Enhanced Payout Options

58 SECTION 1035 EXCHANGES FROM WHOLE LIFE INSURANCE POLICIES Reasons NOT To Consider Section 1035 Exchange To An Annuity 1. Cannot Convert Back An Annuity To Life Insurance 2. If Life Insurance Is Still Needed Or Health Has Deteriorated 3. New Life Insurance Policy Would Be More Expensive Than Current Policy

59 DEATH BENEFITS

60 DEATH BENEFITS 1. If Death Occurs Before The Annuity Starting Date, 1. The Death Benefit Is Typically Equal To The Greater Of The Net Premiums Paid Or Contract s Accumulated Cash Value 2. Riders Can Be Purchased To Increase The Death Benefit 3. Once The Annuity Is Annuitized, The Death Benefit Expires 4. Insurance Companies May Set An Age When Death Benefit Expires 5. Income Taxes Will Be Paid By Beneficiary Unless It Is The Surviving Spouse 6. Death Benefit Can Be Capped: Example: 3 X Premiums 7. Death Benefits Are Not Always Automatically Included In A Contract

61 DEATH BENEFITS (CONTINUED) Examples Of Riders: 1. Return Of Premium 2. Basic Death Benefit: Beneficiary Will Receive Original Investment, No Matter What The Current Value Is Example: a. Purchase Amount: $200, b. Value Of Contract At Death: $75, c. Amount Received By Beneficiary: $200, Enhanced Death Benefit: Pays Highest Recorded Value In The Contract s History Example: a. Purchase Amount: $200, b. In 10 Years, Contract Is Worth $300, c. In 5 More Years, The Contract Is Worth $225, And Owner Passes Away, d. Beneficiary Will Receive $300,

62 Examples Of Riders: DEATH BENEFITS (CONTINUED) 4. Optional Earnings Enhancement Benefit: Contract Value Plus A Percentage Of Earnings Or Value a. Range Of 15% To 50% Of The Contract Gain b. 40% Is Common Until Age 70 When The Amount Usually Reduces To 20% To 25% c. Purpose Is To Pay Beneficiary An Additional Amount To Cover Income Taxes. Additional Amount Is Also Income Taxed d. No Gain Equals No Additional Benefit e. Can Be A Ceiling On How Much Will Be Paid Example: Purchase Amount: $100, Value At The Time Of Death: $150, Gain Of Contract At Death: $50, Optional Earnings Enhancement Benefit: Contract Value Plus 40.0% Of Earnings: $50, X 40.0% = $20, Total Death Benefit: $170, = $150, $20,000.00

63 DEATH BENEFITS (CONTINUED) Examples Of Riders: 5. Stepped-Up Death Benefit: a. Guarantees The Account Value As Of A Particular Anniversary Date Example: Every Five Years 6. Rising Floor: a. Guarantees A Minimum Return On Premium Deposits,

64 ANNUITIES AND LONG-TERM CARE INSURANCE

65 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE 1. The Pension Protection Act Of Permits Non-Taxable Distributions From An Annuity With A Long- Term Care Rider 2. To Pay For Long-Term Car Coverage Or Services For Contracts Purchased After January 1, 1997 Or Later 2. Benefits Paid Cannot Be In Excess The Cost Of Care Provided 1. Or The Daily Benefit Rate Provided By HIPAA For Taxation Purposes 3. On January 1, 2010, 1. Distributions From Annuities - Tax-Free To Pay For Long-Term Care 4. An Annuity Can Be Exchanged Tax-Free To Purchase A Stand-Alone Long- Term Care Insurance Policy Or 1. To Purchase An Annuity With A Long-Term Care Rider By Completing A Section 1035 Exchange. 5. A Life Insurance Policy Can Be Used To Purchase An Annuity With A Long- Term Rider By A Section 1035 Exchange.

66 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE (CONTINUED) What To Consider Before Doing An Exchange 1. Are You Losing Death Benefit 2. Surrenders Charges 3. Are You Forgoing Any Riders 4. The Annuity You Are Exchanging For Will No Longer Provide The Original Income Stream You Anticipated 5. Most Hybrid Policies Do Not Offer Long-Term Care Coverage Beyond Three Years 6. No Federal Income Tax Deduction For The Premiums Paid Unlike With A Stand-Alone Long-Term Care Insurance Policy

67 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE (CONTINUED) Rider 1. New Law Does Not Apply To Annuities Owned Insider An IRA 2. A Distribution Used To Pay For Long-Term Care Is Not Taxable But It Does Reduce Cost Basis For Any Future Taxable Distributions 3. Underwriting: Some Companies Are Not As Strict Compared To Purchasing A Stand-Alone Long-Term Care Insurance Policy 4. Once The Policy Is Fully Funded, No Additional Premium Payments Are Required 5. Rate Of Return Is Normally Less Than Purchasing An Annuity Without Long-Term Care Insurance Rider 6. Normally Don t Qualify As Part Of Any State Partnership Plans Which Allow You To Protect Some Of Your Assets Before You Qualify For Medicaid

68 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE (CONTINUED) Example: $100, Annuity With $300, In Long-Term Care Benefits Monthly Long-Term Care Benefit: $4, Decrease Annuity Value To $96, Decrease Long-Term Care Benefit To $296,000.00

69 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE (CONTINUED) Long-Term Care Features 1. Amount Of Coverage, Ex. 200% Of Face Value Of Annuity 2. Inflation 3. Benefit Period 4. Qualify Once You Have The Inability To Perform Two Of Six Activities Of Daily Living (Eating, Bathing, Dressing, Toileting, Transferring And Continence)

70 ANNUITIES USED TO PAY FOR LONG-TERM CARE COVERAGE (CONTINUED) Is It Worth It To Purchase An Annuity With Long-Term Care Rider 1. Serving Two Different Needs With One Policy Might Not Serve Either Need Well 2. If The Features Of The Annuity Product Are Not Beneficial (i.e. Review The Interest Rate Earning Potential), Then Buying A Combination Policy Might Not Be Worth It 3. Limited Amount Of Policy Can Go Toward Covering Long-Term Care Costs. There Might Better Value Purchasing A Stand-alone Policy 4. Features Of Stand-Alone Long-Term Care Insurance Policies Might Be Better 5. Compare Stand-Alone Long-Term Care Insurance Policy Quote With A Combination Annuity With Long-Term Care Insurance Rider 6. Normally Need At Least $50, To Purchase Annuity With Long-Term Care Insurance Rider

71 PAYOUT OPTIONS

72 TYPES OF PAYOUT OPTIONS 1. Income For A Guaranteed Period a. Guaranteed To Receive Payment For A Certain Period Of Time b. If Annuitant Passes Away, The Beneficiary Continues To Receive For The Set Period 2. Lifetime Payouts a. Heirs Do Not Receive Anything 3. Income For Life With Guaranteed Period Certain Benefit a. Combination Of Life Annuity And A Period Certain Annuity b. Guaranteed Payout For Life That Includes A Period Certain Phase c. If You Die Before Period Certain Phase, Beneficiary Will Continue To Receive Payment For The Remainder Of The Period

73 TYPES OF PAYOUT OPTIONS (CONTINUED) 4. Lump Sum 5. Life With Refund a. Refund Of Principal The Annuity Owner Paid If The Owner Dies Before Receiving Payments That Equal Or Exceed This Amount 6. Joint Life Annuity a. All Benefits Stop After First Of Two Annuitants Dies 7. Joint And Survivor a. Joint And Survivor Annuity b. Income Continues Until Survivor Dies c. Most Popular Arrangements Provide Different Percentages Amounts To Survivor i % ii. 75.0% iii. 66 2/3% iv. 50.0%

74 SETTLEMENT OPTIONS

75 EXAMPLES OF SETTLEMENT OPTIONS UPON DEATH 1. Election Of Continuance By Surviving Spouse a. Usually Continues Under The Exact Same Terms b. Systematic Payments Can Usually Be Continued, Discontinued, Or Started 2. Life Expectancy Deferral 3. 5-Year Deferral Options 4. Income Plan Selection a. Income For A Fixed Period b. Income For Life With A Period Certain c. Joint Life Income d. Life Income 5. Lump Sum To Spouse a. Check Paid b. Spousal Transfer To An IRA In Their Name c Exchange To A Nonqualified Annuity In Their Name

76 EXAMPLES OF SETTLEMENT OPTIONS UPON DEATH (CONTINUED) 6. Lump Sum To Non-Spouse a. Check Paid b. Trustee To Trustee Transfer To An IRA c Exchange To An Inherited Nonqualified Annuity 7. Verify That Insurance Company That You Want To Transfer To Will Accept Section 1035 Exchange 8. Continue Income Tax Deferral 9. Beneficiary Will Have A Required Minimum Distribution To Take Annually Based Upon Their Life Expectancy

77

78 CONTACT INFORMATION EmergingWealth Investment Management, Inc Corporate Drive, Suite 360 Pittsburgh, PA Phone: (412) Legend Financial Advisors, Inc Corporate Drive, Suite 350 Pittsburgh, PA Phone: (412)