In the United States, an annuity is a contractually executed investment product, with a relatively low risk, where the insured (usually, the individual) pays the lump-sum premium life insurance company at the start of the contract. The money shall be paid back to the insured in a fixed, additional amount, over the coming periods (determined by the insured). Insurance companies invest premiums; profit/return on investment of payment fund received by the insured and compensate insurance company. Conventional annuity contracts provide predictable and guaranteed future income streams (for example, for retirement) to death of the beneficiaries mentioned in the contract, or, until the date of termination in the future - whichever occurs first.
Video Annuity (American)
History
Although the annuity already exists in its present form for only a few decades, the idea of ​​paying a stream of income to a person or family originated from the Roman Empire. The Latin word
One of the earliest use of annuities in the United States was recorded by the Presbyterian Church in 1720. The aim was to provide a safe retirement to aged servants and their families, and then expand to help widows and orphans. In 1912, Pennsylvania Insurance Company was the first to start offering annuities to the general public in the United States. Some of the notable figures famous for their annuity use include: Benjamin Franklin helps the cities of Boston and Philadelphia; Babe Ruth avoids losses during the great depression, O. J. Simpson protects her income from lawsuits and creditors. Ben Bernanke in 2006 revealed that his main financial assets were two annuities.
Maps Annuity (American)
General
Annuity contracts in the United States are determined by the Internal Revenue Code and are governed by each state. Variable annuities feature life insurance and investment products. In the US, annuity insurance can only be issued by life insurance companies, although private annuity contracts can be arranged between donor to nonprofit to reduce taxes. Insurance companies are governed by the state, so contracts or options that may be available in some countries may not be available in other countries. However, their federal tax treatment is regulated by the Internal Revenue Code. Variable annuities are regulated by the Securities and Exchange Commission and sales of annuity variables are overseen by the Financial Industry Regulatory Authority (FINRA) (the largest non-government regulator for all securities firms doing business in the United States).
There are two possible phases for an annuity, one phase in which the customer deposits and raises money into the account (phase of delay), and another phase where the customer receives payment for some time period (annuity or income phase). During this last phase, the insurer makes a revenue payment that can be fixed for a certain period of time, such as five years, or continues until the "annuitant s" death mentioned in the contract. The award of a lifetime can have a death benefit guarantee over a period of time, such as ten years. An annuity contract with a phase delay always has an annuity phase and is called a deferred annuity. Annuity contracts can also be restructured so that they only have an annuity phase; Such contracts are called immediate annuities. Note this is not always the case.
Immediate annuity
The term "annuity", as used in financial theory, is most closely related to what is now called an immediate annuity. This is an insurance policy that, in exchange for a sum of money, guarantees that the publisher will make a series of payments. This payment can be a regular rate or increase in payments for a specific time period or to the end of one or two life, or even longer. It is also possible to structure payments under an immediate annuity so that they vary with the performance of certain investment sets, usually bonds and equity funds. Such contracts are called direct annuity variables. See also annuity of life, below.
The overall characteristic of a direct annuity is that it is a vehicle for distributing savings with deferred tax growth factors. The general use for immediate annuities is probably to provide retirement income. In the US, the tax treatment of an ineligible direct annuity is that each payment is a combination of principal return (which is not taxed) and income (taxed at the ordinary income level, not the rate of capital gain). Annuities are immediately funded as IRAs have no tax advantages, but usually the distribution meets the IRS RMD requirements and can fulfill the RMD requirement for other IRA accounts from the owner (see IRS Sec 1.401 (a) (9) -6.)
When the deferred annuity is animated, it works like a direct annuity from that point, but on a lower cost basis and thus more payments are taxed.
Annuity with certain period
This type of immediate annuity pays annuitant for a certain number of years (ie, a certain period of time) and is used to fund the need that will expire when the period is up (for example, it may be used to fund premiums for term life insurance policies). Thus, the person can live longer than the number of years to be paid by the annuity.
Live annuity
A lifetime or lifetime annuity is used to provide an annuitant lifetime income similar to a defined benefit or retirement plan.
Life annuities work like loans made by the buyer (the contract owner) to the issuing company (insurance), who repay the initial or principal (non-taxable) capital at interest and/or gain (taxable as ordinary income) to > annuitant whose life is based on an annuity. The time period assumed from the loan is based on the life expectancy of the annuitant. To ensure that income continues for life, insurance companies rely on a concept called cross subsidy or "big number legislation". Because the annuity population can be expected to have a life-span distribution around the average age of the population, those who die early will sacrifice income to support those who live longer whose money will be exhausted. So it is a form of long life insurance (see also below).
Life annuities, ideally, can reduce the "problem" faced by someone when they do not know how long they will live, so they do not know the optimal speed to spend their savings. Life annuities with indexed payments to the Consumer Price Index may be an acceptable solution to this problem, but there is only a thin market for them in North America.
variant lifetime annuity
For additional costs (either by way of increased payments (premium) or decreased benefits), annuities or benefits allowances may be purchased on other lives such as spouse, family member or friend during the lifetime of an annuity wholly or partially guaranteed. For example, it is common to buy annuities that will continue to pay to the annuitant couple after death, during the spouse's life. Annuities paid to couples are called reversionary annuities or annuity survivorships. However, if the annuitant is in good health, it may be more profitable to choose a higher payment option on his life alone and purchase a life insurance policy that will pay income to survivors.
A pure life annuity can have severe consequences for the annuitant who dies before recovering his investment in the contract. Such situations, referred to as foreclosures, may be reduced by the addition of period-specific features in which an annuity issuer is required to make annuity payments for at least a certain number of years; if an annuitant outlives a certain period, the annuity payment continues until the annuitant's death, and if the annuitant dies before the expiration of a certain period, the estate annuitant or heir is entitled to the remaining payment. The tradeoff between pure life annuities and life-by-life-specific annuities is that annuity payments for the latter are smaller. A viable alternative to life-by-a-specific annuity is to purchase a single premium insurance policy that will cover the lost premium in the annuity.
Life defect annuities for smokers or those with certain diseases are also available from some insurance companies. Because life expectancy is reduced, annual payments to buyers are raised.
Lifetime annuities are priced based on the possibility of a safe annuitant to receive payments. Long life insurance is a form of annuity that precludes the commencement of payments until very late in life. A common long-term contract will be purchased on or before retirement but will not start paying until 20 years after retirement. If a candidate dies before payment begins there is no debt benefit. This drastically reduces the cost of annuity while still providing protection to the resources of someone who lives longer.
Pending annuity
The second use for the term annuity appeared in the 1970s. Such a contract is more accurately referred to as an annuity suspension and is primarily a means to collect savings in order to ultimately distribute it either by direct annuity or as a single payment.
All varieties of deferred annuity owned by an individual have one thing in common: any increase in the value of the account is not taxed until the profits are withdrawn. This is also known as deferred tax growth.
Deferred annuities that grow by interest rate income are called annuity of a fixed delay (FA). Deferred annuities that allow allocation for stock or bond funds and for which the value of the account is not guaranteed to remain above the initial amount invested is called the variable annuity (VA).
The new category of deferred annuities, called fixed index annuities (FIA) appeared in 1995 (originally called Equity-Indexed Equity). The indexed annuity may have either fixed or variable annuity features. Insurance companies usually guarantee a minimum refund for AMDAL. An investor can still lose money if he cancels (or submits) the policy early, before the "breakeven" period. The overly simplified expression of a typical FIA refund rate may be that it equals multiplied "levels of participation" multiplied by the performance of the target market index, excluding dividends. The interest rate or administration fee may apply.
Deferred annuities in the United States have the advantage that the taxation of all capital gains and ordinary income is deferred until withdrawn. Theoretically, deferred tax combinations allow more money to be employed while savings accumulate, leading to higher yields. The disadvantage, however, is that when the amount held under a deferred annuity is withdrawn or inherited, interest/gain is immediately taxed as ordinary income.
Features
Various features and guarantees have been developed by insurance companies to make annuity products more attractive. This includes death options and life benefits, additional credit options, account guarantees, spousal continuity benefits, reduced deferred sales costs (or delivery fees), and various combinations thereof. Any features or benefits added to the contract will usually be accompanied by an additional charge either directly (billed to the client) or indirectly (within the product).
Deferred annuities are usually divided into two different types:
- Annuities still offer some kind of guaranteed rate of return during the contract period. In general such contracts are often positioned to be somewhat like CD banks and offer competitive rates of return with CDs from the same time frame. Many fixed annuities, however, do not have a fixed rate of return during the contract period, but offer a guaranteed minimum rate and first year introductory rate. The rate after the first year is often the amount that can be set on the subject of the insurance company's policy, however, to a minimum amount (usually 3%). There are usually several provisions in the contract to allow the percentage of interest and/or principal withdrawal early and without penalty (usually interest earned in a period of 12 months or 10%), unlike most CDs. Fixed annuities usually become completely liquid depending on the delivery schedule or after the owner's death. Most of the equity index annuities are properly categorized as fixed annuities and their performance is typically associated with stock market indices (usually S & P 500 or Dow Jones Industrial Average). These products are guaranteed but not easily understood as standard fixed annuities because there is usually a method of hat, spread, margin, and crediting that can reduce returns. These products also do not pay the participating market index dividends; the trade-off is the contract holder can never earn less than 0% in the negative year.
- Variable annuities allow money to be invested in "separate account" insurance companies (sometimes referred to as "sub-accounts" and in any case functionally similar to mutual funds) by way of tax deferral. Its primary use is to allow investors to engage in tax-deferred investment for pensions in an amount greater than that allowed by individual pensions or 401 (k) plans. In addition, many variable annuity contracts offer guaranteed minimum rate of return (both for future withdrawal and/or in case of death of the owner), even if the underlying account investment underperforms poorly. This can appeal to people who are not comfortable investing in unsecured capital markets. Of course, an investor will pay any allowances given by the annuity variable, since the insurer should charge a premium to cover the insurance coverage of the benefit. Variable annuities are governed by each country (as an insurance product) and by the Securities and Exchange Commission (as securities under federal securities laws). The SEC requires that all costs under a variable annuity be described in great detail in the prospectus offered to each customer of the variable annuity. Of course, the prospect should review this cost carefully, just like the person who will buy the mutual fund stock. People selling annuity variables are usually regulated by FINRA, whose rules of conduct require careful analysis of the suitability of variable annuities (and other securities products) to those they recommend. These products are often criticized for being sold to the wrong people, who could have made better investments in more suitable alternatives, since the commissions paid under these products are often relatively high compared to other investment products.
There are several types of performance guarantees, and people may often choose their ÃÆ' la carte, at higher risk costs for a more risky guarantee for insurance companies. The first type is the minimum death guarantee (GMDB), which is acceptable only if the owner of the annuity contract, or the annuitant is closed, dies.
GMDB comes in various flavors, in order to increase risk on insurance companies:
- Return of premium (guarantee that you will not get negative return)
- Premium roll-ups at a certain level (guarantee that you will achieve a minimum rate of return, greater than 0)
- Maximum day value (check the value of your account on anniversary, and guarantee you will get at least as much as the highest after death)
- Greater than the maximum warning value or special scrolling
Insurance companies provide greater insurance coverage for survival benefits, which tend to be elective. Unlike death allowances, which are generally not met by contract holders, life benefits pose significant risks for insurance companies because contract holders are likely to use these benefits when they are most valuable. Annuities with a life-support guarantee (GLB) tend to have high costs commensurate with the additional risk borne by the issuing firm.
Some examples of GLB, in no particular order:
- The minimum guaranteed revenue gain (GMIB, a guarantee that someone will get a minimum revenue stream on an annuitization at some point in the future)
- Maximum guaranteed accumulation (GMAB, assurance that the value of the account will be at a certain amount at some point in the future)
- The minimum guaranteed withdrawal benefit (GMWB, similar warranties with revenue benefits, but those that do not require annuitizing)
- Guarantees for the benefit of lifetime income (a guarantee similar to the withdrawal benefit, where withdrawals begin and continue until the cash value becomes zero, withdrawals stop when the zero cash value and then annuitization occurs on the guaranteed amount of the amount for unspecified amount of payment until annuitization date.)
Recently, the insurer developed an asset transfer program that operates at the contract level or level of funds. In the past, the percentage of the value of client accounts will be transferred to the low-risk funds that are determined when the contract has a poor investment performance. At the fund level, certain investment options have volatility targets built into the fund (usually around 10%) and will rebalance to maintain those targets. In both cases, they are said to help buffer the performance of bad investments until markets perform better (where they will transition back to normal allocations to catch up). However, there are criticisms of these programs including, but not limited to, often mandating these programs to clients, limiting the flexibility of investments, and not capturing market progress fast enough because of the underlying design of those programs.
Be cautious about using GLB riders in unqualified contracts because most products in today's annuity market create 100% of taxable income whereas revenues generated from direct annuities in unqualified contracts will be partly returned to principal and therefore not taxable.
Criticism of pending annuities
Some annuities do not have deferred deferred charges and do not pay commissions for financial professionals, although financial professionals may charge for their advice. This contract is called a "no-load" variable annuity product and is usually available from cost-based or direct financial planners from a no-load mutual fund company. Of course the various charges are still charged on this contract, but they are less than those sold by assigned brokers. It is important that prospective buyers of annuities, mutual funds, duty-free municipal bonds, commodity futures, interest rate swaps, in short, any financial instrument understand the cost of the product and the cost of financial planners may be charged.
Variable annuities are controversial because many believe the additional costs (ie, costs above and beyond those charged for similar retail funds that do not offer any major protection or warranties) can reduce the rate of return compared to what can be done by investors investing directly in investments similar beyond the variable annuity. The big selling point for a variable annuity is the assurance that many people have, such as the assurance that the customer will not lose the principle. Critics say that this guarantee is not necessary because in the long run the market is always positive, while others say that with the uncertainty of financial markets many investors will not invest without a guarantee. Past returns do not guarantee future performance, of course, and different investors have different risk tolerances, different investment horizons, different family situations, and so on. The sale of any security product must involve careful analysis of the suitability of the product to a particular individual.
Taxation
In the U.S. Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax deferred, ie, not subject to current income taxes, for annuities held by individuals. Deferred tax status of a deferred annuity has led to their general use in the United States. Under the US tax code, the benefits of an annuity contract do not always have to be taken in the form of annuitization payments, and many annuity contracts are purchased primarily for tax benefits rather than receiving a steady stream of income. If an annuity is used in an eligible pension plan or an IRA funding vehicle, then 100% annuity payments are taxed as current income after distribution (since the taxpayer has no tax base in any of the money in the annuity). It should be noted that this is the same tax treatment of direct participation in eligible pension plans (such as 401K), again, due to the fact that the taxpayer has no tax base in any of the money in the plan. If an annuity contract is purchased with dollars after tax, then the holder of the contract after the annuitization recovers the pro-rata base in the base ratio divided by the expected value, in accordance with the tax rules of Section 1.72-5. (This is often referred to as an exclusion ratio.) Once the taxpayer has recovered all of his bases, then 100% of the payments thereafter are subject to the usual income tax.
Since Jobs and the Growth Tax Relief Reconciliation Act of 2003, the use of variable annuities as a tax shelter has greatly diminished, due to the growth of mutual funds and now most dividend funds are taxed with long-term capital gain levels. This taxation, in contrast to the taxation of all variable annuity growths at the income level, means that in many cases, variable annuities should not be used for tax shelters unless a very long holding period (eg, more than 20 years).
Insurance company risk risk and state guarantee association
An investor should consider the financial strength of an insurance company that writes an annuity contract. The major vulnerability has occurred at least 62 times since the striking downfall of the Executive Life Insurance Company in 1991. [1]
Standard insurance companies are governed by state law. However, the law is generally similar in most states. The annuity contract is protected against insurance insolvency up to a certain dollar limit, often $ 100,000, but as high as $ 500,000 in New York [2], New Jersey [3], and Washington state [4]. California is the only country with a limit of less than 100%; the limit is 80% to $ 300,000. This protection is not insurance and is not provided by government agencies. This is provided by an entity called the state guarantees association. When an insolvency occurs, the warranty association will act to protect the annuity holders, and decide what to do on a case-by-case basis. Sometimes the contract will be taken over and fulfilled by the solvent insurance company.
The state guarantor association is not a government agency, but countries usually require insurance companies to have it as a licensed condition for doing business. The guarantor association of fifty states is a member of the national umbrella association, the Life Insurance National Organization and the Guarantee Association (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for each state organization, and links to the actual text of the governing country law.
The difference between the protection of the guarantee association and the protection of bank accounts by the FDIC, the credit union account by the NCUA, and the brokerage account by SIPC, is that it is difficult for consumers to learn about this protection. Typically, state legislation prohibits insurance agents and companies from using guarantor associations in advertisements and agents prohibited by law from using this website or the existence of warranty associations as an impulse to buy insurance (eg, [5]). Presumably, this is a response to concerns by a stronger insurance company about the moral dangers.
Compensation for advisors or salespeople
Deferred annuities, including fixed, indexed and variable fixed, typically pay advisory or seller 1 percent to 10 percent of the amount invested as a commission, with possible trace options 25 basis points up to 1 percent. Sometimes an advisor can choose his payment option, which may be 7 or 10 percent up front, or 5 percent up front with a 25 basis point footprint, or 1 percent to 3 percent up front with 1 percent footprint. The most common trace commissions in variable annuities while fixed annuities and fixed annuities are indexed usually pay upfront commissions.
Some companies allow investors to choose an annuity sharing class, which determines the commissioner's schedule of salespeople. The main variables are advance commissions and trace commissions.
The Fixed and Indexed Annuity Commission is paid to the agent by the insurance company that the agent represents. Commission is not paid by the client (annuitant).
The "unencumbered" annuity variable is available directly-to-consumer from some unrelated mutual fund companies. "No load" means the product does not have a sales commission or surrender fee.
References
External links
- National Insurance Commissioner Association
- National Association for Fixed Annuities
Source of the article : Wikipedia
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