I see. I was thinking that because I get $14k back (7% of the principle)
within a month of purchasing the product, It was an Immediate annuity. But,
since its not considered an annuitization, it doesnt count. Because of the
contingent deferred decreasing sales charges of 7,7,7,6,5,4,3 percent, its
not until the eighth year that I can start taking withdrawals beyond the 7%
benefit payments without incurring charges, penalties, and recalculation of
the benefit amounts and payments.

So, yea, I guess it definitely is a deferred product for me.

- quote -

melt down). <<

Yes, thats exactly how it works, as I refer to above.

- quote -

Right.. Thats what the materials have all over them, and what I spelled out
above with the 7 decreasing sales charges.

- quote -


Right.. Thats what I was told.. complete access to my funds after year 7 if
I want.

As to what amount the charges are really applied to, ie, principle or accum
value, Id better find that out if I plan on withdrawing. But, Im only
planning on taking the benefit payments over the 7 yrs.

Paul Elliott

"Brent D. Gardner, ChFC" <bgardner20[at]cox.net> wrote in message
news:f13Kb.4610$zf.2929[at]okepread05...
- quote -

BMS wrote:
- quote -

Interesting concept, an SPIA purchased upon ENTERING
the facility, since it could NOT be purchased in advance.


Another concept would be the purchase on an SPIA BEFORE
need, along with a 10 pay LTC policy & a 10 year GUARANTEED
Deferred Annuity (preferably between 55 & 65). In ten years,
the LTC policy is P/U, and the deferred Annuity will REFUND the
GROSS premium outlay.
A "FREE" LTC contract for the cost of the earnings on the GROSS
outlay.......................
Cal Lester CLU


- quote -

- quote -

Being an "old" C/V Life person, having sold many LPU65
policies, I can not agree more. The concept of "living too long"
is very foreign to most.

Cal Lester CLU



- quote -

"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote
- quote -

Of course. :-)

- quote -

I am opposed to not taking into account the fairly large different life
expectancy of women compared to men.

Last I read, it was about six years.

Auto insurers (and I imagine life insurers) consider gender, so I don't think
anyone would be surprised to learn that so too do annuity plans. Though I see
Brent's post indicating Norris had something to say about life insurance, too.
More below.

- quote -

Why would you presume an objection based on mathematical and actuarial logic
translates to non-participation?

Non-particpation won't change anything.

A lawsuit is another matter.

Which brings me to Brent's post, which really answers the question at hand. I
will be looking further into the Norris decision he capsulized.

- quote -

I doubt it. Most people understand why auto insurance rates are lower for women
than men (on average). (Although I read a few years ago that women are starting
to catch up, rate-wise, to men, due to, well, the women have been become more
aggressive on the roads... )

- quote -

Yup. ;-)

"TB" <borekfm[at]pacbell.net> wrote in message
news:wM7Kb.5730$m32.126[at]newssvr27.news.prodigy.com...
- quote -

The tables actually read "Member's Age" and "Spouse's Age" so it does appear
to be gender neutral. The tables show a percentage of the original benefit
based on the intersection of those ages. I would think gender would matter
in a J&S payout, because the member continues to receive the full amount,
whereas the spouse gets a reduced amount (in the case of the 50% and 75%
benefit). In the case of the 66-2/3% payout the surviving spouse gets the
reduced amount, regardless of original status. And the original benefit is
based solely on length of service times the average of the three highest
consecutive years annual compensation, so gender is definitely not an issue
there.

I think Ed's analysis must be correct. I can just imagine the hue and cry if
female retirees got a smaller pension than their male counterparts, all else
being equal. It just seemed curious.

Elizabeth Richardson

Caroline wrote:

- quote -

What I'm saying is that there is always a selection of
factors that will (or won't) be taken into account when
determining these factors. Sometimes, for various reasons,
factors that *should* impact that decision are intentionally
not taken into account. In fact, because an infinite number
of factors likely do impact the calculation, there will be
some that will be left out.

If you are politically opposed to accepting a payout that is
worth more because you are female, can I presume you would
never participate in a traditional defined benefit pension
plan and that you will turn down social security at your
retirement age? Because both of those are annuities that
are promised based upon a payout for life starting at a
particular age, and therefore are "female biased" at least
as far as the value for the "same" benefit earned.

Now, reality is that most of the population are not
mathematical experts, and if you attempt to explain that you
are giving an actuarially equal benefiit if you paid a woman
less per payment with the same facts, you have a problem.
And that problem may be a political one (if the benefit is
public), it may be an employee relations problem (women
employees might feel cheated and go to another firm) or it
may be a marketing issue. So if there is a reason to have
the same payout no matter what the sex, that merely changes
how to compute the factors (including taking into account
the chance that men might be a smaller part of your
population taking you up on this payout than would otherwise
be the case).

That said, if you are selecting a payout option it is
important to know if sex is or isn't being factored in. As
a female, you would prefer that sex *not* be a factor in
computing the payout under the annuity if faced with the
choice of the payout or the lump sum and, all things being
equal, you'd prefer the monthly payout. However, a male
would have just the opposite bias--take the lump sum and
then find an annuity that *will* factor in my sex.

--
Ed Zollars, CPA
Phoenix, Arizona

One of the good things about these annuities, in many cases, they cover the
cost of care and the family is not using Medicaid. In an aggressive recovery
state such as Massachusetts, that can be great relieve.

"Brent D. Gardner, ChFC" <bgardner20[at]cox.net> wrote in message
news:CC4Kb.4634$zf.1199[at]okepread05...
- quote -

One place that I have seen annuities work into the LTC issue is using a
single premium immediate annuity, SPIA, to fund LTC. The annuity is used to
pay the facility. The family knows what the liability is, the home likes it
because it is a guaranteed cash flow, in fact I know of cases where the
finance people will fore go rate hikes because of the guarantee.

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:lu3Kb.6132$382.1923[at]newssvr29.news.prodigy.com...
- quote -

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:lu3Kb.6132$382.1923[at]newssvr29.news.prodigy.com...
- quote -

Scary, huh? Miracles of modern medicine -- our bodies outlive our minds. A
visit to any skilled care facility will harden a LTC salesperson in ways
that no other influence can, other than having to care for a family member
personally.

- quote -

Life insurance and annuities! Those two nasty products can work miracles.
=)

For example, new life insurance with accelerated benefits for LTC, critical
illness, and post-retirement disability. MoneyGuard, by First Penn (Lincoln
Financial Group), Wealth Guardian, by Standard Life of Texas (American
National), Asset Care, by Golden Rule (variable version on American United
Life paper). They have single premium, whole life and flexible premium life
products that can effectively hedge against the risk of skilled LTC without
having to ante up so much premium for health insurance based LTC insurance
policies. If a client has old life policies, and needs LTC insurance,
effecting a 1035 exchange into a bundled product reduces the need --
remember, some people will never need LTC. Underwriting is fairly liberal --
Standard Life issues through table 8 at standard.

Then there are higher payments from annuities for LTC, critical illness,
terminal illness, and post-retirement disability. Companies like Allianz are
the leading fixed and index linked carrier in part because of their creative
benefits they build in to their products. Their "idea" benefit pays 33% more
for inability to perform a couple of ADLs, and 66% more for inabilty to
peform a few more. No underwriting necessary, just medical
opinion/observation, just like a claim on a regular LTC policy.

Medically underwritten immediate annuities, from companies like GE
Financial., Mutual of Omaha, et al., can be estate savers for those who
didn't get everything in order before they are too sick or too old to buy
other kinds of coverage. This is the ONLY kind of insurance I know of that
one applies for at the point of claim. Instead of hoping the doc writes an
APS saying you're not that sick, you want them to say "Yeah, he's got one
foot in, and they are already throwing dirt on him!" A lot of opportunities
here, and not just in LTC planning. Many large estates are owned by older
people, often with health issues. They may want or need more life insurance
for estate planning, but are short on cash flow to pay a premium. Premium
financing can help, but a few problems have cropped up recently with that
approach. An impaired risk SPIA can help an advisor "find the premium" when
the client wants to solve the problem. I first learned of this from a book
by Barry Kaye - Die Rich and Tax Free. He's written a sequel, Die Rich 2,
and The Investment Alternative. If you don't like insurance, you'll cringe,
but his concepts DO work in real life. One of the first big cases I did on
my own was an idea direct from his book. I did it and didn't know what it
was called at the time (annuity mazimization). Now, I do them all the time.
Mortality swaps -- get one company to issue impaired risk life annuity, and
another company to issue a competitive life insurance policy (read:
arbitrage) -- is an idea that is worth knowing about.

- quote -

Standard Life of Indiana has several annuities with special contract
language that makes them suitable for medicaid planning. I'm sure the
government doesn't like them, but they are using standard insurance laws and
the flexibility of contract language, to make them work. I would not be
surprised if one day they change the laws to quash these, but maybe not.
This is an area that I'm admittedly weak in, even though I have studied it
some.

Creditor/predator protection planning is another area where these No
Surrender Value annuity contracts have appeal (think doctor!).

The first annuities didn't have surrender values, so the concept is actually
VERY OLD. I've got some old, leather bound rate books from the 1920s -- they
show things like "If you pay X much per month, we promise to pay you Y at
age 65, Z at age 70, and Q at age 75."

I happen to be one of those who thinks that we need to bring back the old
endowment contracts, because everyone needs something solid in their
portfolio -- something guaranteed -- a foundation, if you will. One of the
issues I see is that so many people change jobs so often, they lose 10-15
years of eligibility in a defined contribution plans, and to many cash them
once or twice while young, so a lot of people are going to end up broke,
even though they had all these wonderful benefit plans. I'm in the
generation that is not likely to have a defined benefit plan (which is why
I'm doing one for myself). I have clients who went through financial
difficulty -- business failures, divorce, spendthrift spouses and children,
bad investments, plain old thievery -- and if not for the DB pension at the
big company, they'd be living on Social Security alone.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

Excellent material. Well researched, and very well written.

Cal Lester CLU

Brent D. Gardner, ChFC wrote:
- quote -

"Paul E" <elliott.paul[at]att.net> wrote in message
news:Pf0Kb.597371$0v4.23523577[at]bgtnsc04-news.ops.worldnet.att.net...
- quote -

What you have is a Deferred Annuity. Until an annuity is annuitized (also
know as a settlement option), or exchanged for a single premium immediate
annuity, it is deferred.

Hartford has an Immediate Variable Annuity (IVA), and it is one of the
better ones. For people who want to compare fixed versus variable
annuitization, Hartford has the unique capability of illustrating historical
hypotheticals, while many newer entrants into the VA business can't go back
20+ years like Hartford can.

- quote -

Withdrawals that exceed the benefit amount the rider guarantees probably
reduce future benefits proportionally (at least, that's the trend, since the
melt down). Some old contracts weren't written in anticipation of a
protracted bear market. More on this in a moment.

A surrender charge is the term for a fixed contract. Variable contracts call
them Contingent Deferred Sales Charges (CDSC). Effectively, they are the
same thing. Sometimes, I'm guilty of using too much jargon, but I try to be
as specfiic as I can, so that I don't confuse myself. The result is I
sometimes confuse others!

The CDSC is how the company recovers their acquisition costs, if you
surrender early. It says in the prospectus that they pay 7% Gross Dealer
Concession (read: gross sales commission) to the broker/dealer. Your broker
gets a part of that, subject to his employement agreement, or contract. Most
wirehouse brokers get 40-60%, independents get upwards of 90-100%. There are
usually several compensation choices with these contracts, and what I'm
saying here is generic, not specific to Hartford -- A, B and C -- A is all
up front, no trail, or super small trail, B is lower up front, bigger trail,
and C is even smaller up front, with biggest trail (a trail is an asset
based compensation in years 2+).

If you surrender early, the company loses money, without a CDSC. Round
figures, most competitive VAs pay around 100 basis points in compensation,
per year of surrender charge, plus or minus 1% total. For example, a
contract with a 7 year surrender period, with an M&E of 1.25%, can pay the
distributor 7% commission up front, and the 25 basis points will pay for the
death benefits. As long as they manage their own sub-accounts, or own the
management companies, they are profitable. Some companies don't manage
money, so they have to squeeze somewhere -- either higher M&E, longer
surrender period, or lower broker compensation.

After the CDSC has expired, your contract is 100% liquid, generally
speaking. One caveat: Some contracts have a CDSC that is based on the issue
date, others base it on the premiums paid date. What this means is that if
you add premium in year 2 with a contract with an issue date CDSC, the
surrender period is shorter for that premium paid in year 2. Most contracts,
especially in the VA market, have a separate CDSC for each premium paid.
Without computers, this would be a bear to calclate by hand.

To further complicate things, the CDSC may be be applied to the premium, or
to the accumlation value, if higher. For example, $100,000 premium, grows to
$110,000 in year 2, then full surrender, with 7% surrender charge:

Contract A -- CDSC = $7,000 (7% of premium)
Contract B -- CDSC = $7,700 (7% of the higher of accumulation value or
premium)

Some contracts allow a free withdrawal per year, which may be cumulative, or
non-cumulative.

Contract C -- CDSC = $6,930

In year 3, if the VA had grown to $120,000, then surrender, still with 7%
CDSC:

Contract C -- CDSC = $7,560 (non-cumulative 10% liquidity per year)
Contract D -- CDSC = $6,720 (10% liquid per year, cumulative = 20% in year
3)

Okay, here's some scary stuff: Poorly written contract language on older
VAs.

Remember, lawyers are human, and even the brightest people make mistakes.

For example, an old VA with a standard death benefit (well call is a
"premium death benefit" because the death benefit is based on premium, even
though there are optional riders that are a "premium" over standard -- which
gets all confusing). Death benefit was premium, less withdrawals, dollar for
dollar.

Here's a real life example -- $900,000 premium, at market peak, shrinks to
$500,000 (IRA). Client rolls $499,000 into new VA, leaving the contract
minimum of $1,000. Death benefit is now $401,000, and insurance company is
collecting 1.3% M&E, or $13 pear year, but wait....there's no M&E on the
fixed account, so we move the money there. Now the company isn't collecing
squat, except their margin on the fixed account, which is negative, since
the contract has a guaranteed minimum interest rate of 3%. Then we convert
the IRA to a Roth IRA. This exposes $1,000 to income tax.

Think about it....pay tax on $1,000...surrender charge of ~$29,000...and get
$400,000 income tax free death benefit for life (plus, give up the use of
the $1,000 left in the old contract).

Now, the insurance company is the hook for $400,000 and they aren't
collecting much.

Most people didn't expect the bear market, much less double digit negative
returns for three consecutive years. The really ironic issue is that the
regulators think this transaction is bad, because the client paid a CDSC.
Furthermore, the $900,000 came from a VA with a $400,000 premium, so there
was no real death benefit. If they had stayed, they'd have nothing to show
for the run up. Having made a move, the have $401,000 of income tax free
death benefits for around $32,000. At their age, a $400,000 single premium
life contract would cost over $200,000. Now, try explaining this one to an
auditor. Most of them can't spell death benefits, so this is beyond their
comprehension.

Today, contracts have death benefits that are premium, less withdrawals,
proportional to the amount withdrawn, and NOT dollar for dollar. Some
lessons are learned the hard way, and at potentially great cost. It takes a
long time for $1,000 to grow to $401,000.

Now you know why I think M&E is dirt cheap. =)

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote in message
news:kw0Kb.280417$Ec1.9628142[at]bgtnsc05-news.ops.worldnet.att.net...
- quote -

PERS -- does this stand for Public Employee Retirement System? I'm guessing
it does.

Your question is an excellent one, and I had to actually look something up.
The first word that came to mind was Norris...Norris...Norris

Norris Decision!

Sometimes, how I remember stuff is kind of silly. I do a lot of nonqualified
benefit plans, informally funded with life insurance, and I know that we
issue all the policies using unisex rates. Why? The Norris Decision.

Now, I know this applies to other benefits, but I'm not an expert on
everything, so I did a quick search.

Here's what I was looking for and I'm too lazy to type this out, so I cut
and paste:

Sex-Neutral Annuity Tables. At any given age, a woman has a longer life
expectancy than does a man. Because the cost of providing an annuity depends
on the beneficiary's life expectancy, it was common through 1983 for defined
benefit pension plans to take gender differences in life expectancy into
account and to provide smaller annuities to women than to men. The
assumption was that women, living longer on average, were likely to collect
benefits for more years, thus obtaining the same total benefit on average.
This is no longer legal.

The U.S. Supreme Court ruled, in Arizona Governing Committee for
Tax-Deferred Annuity & Compensation Plans v. Norris (463 U.S. 1073 (1983)),
that a pension plan cannot require equal levels of contributions from men
and women while providing smaller monthly benefits to women. Starting in
1983, employers and employee plans issuing annuities have been using
sex-neutral life expectancy tables to determine what benefits to pay. Plans
dating back before 1983 may use sex-based tables in converting into
annuities payments made before the Norris decision.

The web site where I found this:

http://www.hr-esource.com/index.asp?...Chapter_2.html

I love the internet.

One thing about these laws that makes me shake my head -- their unintended
results. Unisex rates are sometimes worse than gender specfic. For example,
some life companies male rates for unisex on life insurance subject to the
Norris Decision (male rates are higher than female), and calculate annuity
as female for unisex, which provides lower payments for guys.

What does this mean? The Norris Decision made life insurance more expensive
for certain women, and annuity payouts lower for most men. Not all companies
do this, because it depends on the target market for a product, etc. For
example, if you blend your mortality, but your insureds, or annuitiants,
aren't equal, the company can get screwed -- so they often err on the side
of conservatism, which isn't always a good deal for each individual.

Sometimes, anti-discrimination laws actually create whole new classes of
people who are discriminated against. =)

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

Caroline wrote:
- quote -


Where on earth did that come from? They're talking about a pension plan
- a table in a brochure for ER's husband's PERS pension.

Elizabeth - does the table really ignore gender? If the J+S payout is
based on member + spouse, assumedly you have one of each (except perhaps
in Massachusetts). So unless the age difference is significant the
illustrations should be fairly accurate regardless of who's who.
Granted, that leaves a lot of people with inaccurate illustrations;
maybe the point is just to show a few examples?

-Tad

"Ed Zollars, CPA" <ezollar[at]mindspring.com> wrote
- quote -

Can you clarify this statement?

Are you saying it's perfectly fine to ignore the gender of a person when
considering an appropriate annuity?

Or are you saying it's not fine, but some professionals will do it for the sake
of political correctness?

- quote -

I'm a little confused. Why do you have all the <grins> here?

I wouldn't find it amusing to learn that some sort of a financial planner had
set me, as a hypothetical married woman, up with more of an annual payout than
was warranted by my actuarials. In the worst case, such a decision leads to
poverty in one's elderly years. Indeed, IIRC there are many more elderly poor
women in the U.S.than elderly poor men.

Elizabeth Richardson wrote:

- quote -

Well, it affects the computation of factors, but so long as
it's applied consistently it won't affect the validity of
the overall actuarial calculations to use a "gender neutral"
set of tables. And ignoring it may eliminate some
politically difficult situations <grin> , such as why a woman
and man of the same age with the same defined contribution
account balance would end up with different single life
payouts--with the man getting more per month.

Now, statistically I know it's because the man will, on
average, die sooner. However because there's no certainly
that a specific 65 year old male will die earlier than a
specific 65 year old female--and there will be cases where
the woman dies earlier--that may not matter much to the
beneficiaries--or at least to the female one who is getting
less money next month <grin> .

--
Ed Zollars, CPA
Phoenix, Arizona

Brent D. Gardner, ChFC wrote:


- quote -

Brent, that's a very useful post. To build on your comment above...I'd
like to hear your thoughts on something that I think will evolve into a
major topic among boomers - planning for and paying for
Alzheimer's/dementia care. It's one of the first things that comes to
mind when I think about "running out of money before running out of time."

I was able to attend a seminar at NIH a few weeks ago and the numbers
are staggering. First, there's little progress so far with treatment,
and with progress in things like heart disease, more and more
individuals are going to live long enough to suffer this type of
disability. The expected pool is something like 13-16 million
individuals within the next few decades. The disease spans somewhere
from 5-10 years, as much as 15-20, with full-time care often required
for at least half that period. Out of necessity it's typically provided
at home, but that can't always be an option.

It raises the question of how to pay for that care, and how to plan for
that contingency. From a planning perspective, the primary options are
self-insuring, purchasing Long-term care insurance, or planned poverty
(Medicaid). Each of these has its issues.

WRT to annuities...how do you see them fitting into LTC planning?
Medi-cal (CA's Medicaid) has some rules protecting annuities that don't
have cash surrender values; have you seen this kind of thing as a
selling point yet? Have you seen products or companies that fold these
concerns together somehow?

-Tad

Brent, this is really timely stuff for me.. thanks. Would my Hartford VA be
called an Immediate or Deferred annuity? Also, my yearly 7% payments are
termed 'Benefit Payments', figured as 7% on the 'Benefit Amount', both of
which can step up every 5 years, as it showed in the example I sent. The
Benefit Amount is the amount of the 'Contract Value', figured every 5 years,
however, it will never be less than 7% of the initial principle.

Also, it says that withdrawals beyond 10% per year will have an effect of
possibly reducing this guaranteed payment arrangement. Also, the program
lists a series of Declining contingent Sales Charge percenatages of
7,7,7,6,5,4,3 for the first 7 years only. Whats this for, and, is it the
same as Surrender charges, which I would guess, occur if withdrawing more
than 10% during this period? What about after? Ie, after 7 years, arent
you entitled to all of your money if you want?

Paul E


"Brent D. Gardner, ChFC" <bgardner20[at]cox.net> wrote in message
news%ZJb.4479$zf.3767[at]okepread05...
- quote -

In exchange for the premium, the insurance company promises to
- quote -

Good stuff, Brent. Since you mention pension plans I'll insert a question
here that has cropped up in my personal planning. My husband's PERS pension
refers to the age of the member and the age of the member's spouse in
determining J&S benefits. In no place does it appear to differentiate
between male and female members in the published annuity tables (examples
only, admittedly). Why does it seemingly disregard the gender issue, as I'm
sure this must affect the actuarial payouts?

Elizabeth Richardson

Annuitization -- In some misinformed circles, this is a four-letter word.
That's unfortunate.

In many ways, an annuity is the exact opposite of life insurance. Life
insurance is insurance against the risk of dying too soon, but an annuity is
insurance against living too long, or outliving ones money.

Sounds funny, though, doesn't it? What's wrong with living too long?
Nothing, really, if you're healthy, physically and mentally, but it can be
no fun at all if you're broke and are too old to earn a living.

The risk of running out of money before running out of time is the most
overlooked problem many retired people face. An annuity can solve this
problem, but, unfortunately, the lay press confused and confounded the
public, as well as provided support to some of the most myopic financial
advisors, by denigrating annuities of all types, at every turn. I still see
people repeat mythology and urban legend on this, and other, forums, when
the subject of annuities, and annuitization, comes up. The PRIMARY benefit
of the annuity contract is an income that CANNOT be outlived.

Hence, the name of the book -- Guaranteed Income For Life -- that I
mentioned in another post.

What is annuitization?

An annuity, in its most pure form, is a periodic payment for a specified
period of time, or for life, or many combinations thereof. We call this
annuitization, which is the process of liquidating a capital sum, and to
differentiate the concept from the deferred annuity.

Specifically, I'm talking about an Immediate Annuity contract (policy). An
Immediate Annuity is a contract that is purchased with a single premium
(lump sum). In exchange for the premium, the insurance company promises to
make periodic payments to the contract owner for a specified period of time,
or for life, or for some combination thereof. Annuitization is also a
settlement option for most pension plans, nearly all deferred annuities, as
well as a standard nonforfeiture option on most cash value life insurance
policies. Most state lotteries are advertised using the sum of an annuity
payment over many years -- the lump sum awarded is often much smaller.

Below are some examples. Illustrated annuity rates are based on the 1983(a)
Individual Annuity Mortality Table at 3.50% Interest and a 0.00%
Administrative Sales Charge. Actual rates will be based on interest rates in
effect on the day when the premium is received.

Life Annuity -- A life annuity provides payments to you that will begin on
the annuity starting date and continue during your lifetime.

Life Annuity, with Period Certain -- A life annuity with period certain
provides payments to you that begin on the annuity starting date and
continue during your lifetime. This type of annuity also provides that
payments will be made for a guaranteed period of time. If you should die
prior to the end of this guarantee period, your named beneficiary will
receive the remaining annuity payments.

For example: A male, age 65, can pay a single premium of $100,000, and in
return, receive per year:

$7,401 -- Life Annuity
$7,390 -- Life Annuity, with 10 year Period Certain
$6,293 -- Life Annuity, with 20 year Period Certain

A female, age 65, will receive the following, per year, using the same
$100,000 single premium:

$6,557 -- Life Annuity
$6,668 -- Life Annuity, with 10 year Period Certain
$6,042 -- Life Annuity, with 20 year Period Certain

Why do women receive lower payments? Because they live longer, on average.

Joint and Survivor Annuity -- A joint and survivor annuity will provide
payments to you and your joint annuitant beginning on the annuity starting
date. These payments will continue while both you, and your joint annuitant
live. At the death of the first annuitant, these payments will continue to
the Survivor at the same level, or at a reduced level.

A male and female couple, both age 65, will receive the following payments,
again, using the same $100,000 single premium:

$5,831 Payable Annually for Life with $5,831 continued to the Survivor (100%
survivor option)
$6,457 Payable Annually for Life with $4,520 continued to the Survivor (70%
survivor option)
$6,954 Payable Annually for Life with $3,477 continued to the Survivor (50%
survivor option)

Because annuity payments are based partly on life expectancy, older
annuitants receive higher payments than younger annuitants. Here are some
more examples, using the same type of contract:

Male -- Life Annuity, with 10 year Period Certain
Age 65 -- $7,390
Age 70 -- $8,340
Age 75 -- $9,363
Age 80 -- $10,298
Age 85 -- $11,854

Female -- Life Annuity, with 10 year Period Certain
Age 65 -- $6,668
Age 70 -- $7,575
Age 75 -- $8,673
Age 80 -- $9,823
Age 85 -- $11,854

FAQ -- Frequently Asked Questions

What happens to my principal? -- There is no principal, or account, with an
Immediate Annuity. The principal is paid as a premium to purchase a
contract, usually in the form of a single premium, although there are
flexible premium products. When the premium is paid, that money becomes the
property of the insurance company, in exchange for the contract they
issued -- the immediate annuity.

What if I want my money back? -- Most states have a free-look period, from
10 to 30 days. After that, most contracts do not allow for refunds. The
reason for this is that the company invests the money for the long term, and
short term liquidity would hurt other policy holders, as well as the
solvency of the company. In order to offer competitive payments, a company
cannot be liberal in this area. That said, some companies ARE offering
"commuted values" which are not unlike a surrender value. Essentially, they
offer the present value of expected future payments, minus some
administrative costs and, of course, the profit they expected to make over
the life of the contract, which is only fair. An alternative to this is to
SELL the contract. A third party may purchase the contract for cash, and the
sale price may very well be higher than a commuted value offered by the
issuing company.

How are payments taxed? -- There are two types of Immediate Annuity
contracts -- Qualified and Non-Qualified (NQ). A Qualified contract is an
Individual Retirement Annuity, or IRA, and payments are taxed just like any
other IRA (or Roth IRA). A NQ annuity is subject to taxation under Internal
Revenue Code (IRC) Section 72, specifically, the exclusion ratios. What this
means to the policy owner is that each payment is made of two parts -- part
principal (basis) and part interest. As such, the return of principal is
income tax-free, until 100% of premiums are recovered. The interest part is
taxable as ordinary income in the year it is received. For example, the
exclusion ratio for a male, age 65, life with 10 year period certain, is
0.527, or 52.7%. This means that 52.7% of each annual payment is EXCLUDED
from income tax, until all basis has been recovered.

What about inflation? -- This is a valid concern. Generally, annuity
payments are level. But, the insurance industry has been making improvements
to help make the contracts more appealing, and to address this concern. For
example, some annuities have periodic increases based on the Consumer Price
Index (CPI), or just a fixed increase elected at issue. The initial payment
is usually a little lower than the standard level payment plan. A few
forward thinking companies have index linked and variable versions of the
Immediate Annuity, which is a whole other discussion, but I will say that
they are pretty neat. Again, generally, to obtain some inflation protection,
one must give up something in the early years. If you live a really long
time, a variable or index linked annuity *may* outperform the fixed payment
contract. If you die too soon...well...you get the idea.

WORTH NOTING --

There are several studies available on the internet that compare and
contrast annuitization versus systematic liquidation of a lump sum. Some
good ones are on the NAVA site:

http://www.navanet.org/

Conning Corporation has written some incredible works on various annuity
subjects:

http://www.conning.com/

While the best information is rarely free, a competent financial advisor is
going to have many of these handy.

For some free info, the Trinity Study is worth reading:

http://www.aaii.com/promo/mstar/feature.shtml

A few years ago, a mutual fund manager with a legendary reputation said an
investor could "safely" liquidate 7% of their portfolio per year, and never
run out of money. Most financial advisors would probably take issue with
that statement, were it made today. As the Trinity Study shows, there are no
guarantees, and only withdrawal rates in the 3% to 4% range consistently
lasted 30 years. As an advisor who works with some seasoned citizens,
including a handful of centenarians, I'm wary of plans that have high
probability of the client outliving their assets. I've seen the good, bad
and the ugly at the end of the rainbow, which has made me more conservative.

For the conservative senior, an immediate annuity can provide an effective
hedge against the risk of outliving ones money, even in this low interest
rate environment, and the best financial advisors aren't going to shy away
from the annuity, where it is most suitable, no matter what Forbes and
Kiplingers say. It is also an effective spendthrift protection tool --
something often overlooked by advisors. For example, an owner can elect an
irrevocable annuitized payout to a named beneficiary for proceeds from both
a life insurance policy and a deferred annuity, forcing a spendthrift
surviving spouse, or spendthrift children, to live with periodic income
rather than a dangerous lump sum. I've seen the good, bad, and VERY ugly,
when it comes to how most people handle large lump sums, so this is an issue
I believe is prudent to address.

I'm going to put together some more on these issues in the future. Until
then...

Questions? Comments?

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.