Payouts and Advanced Options | Annuities | Achievable Life & Health

The available annuity payout options are as follows:

Life Income (Straight): The straight annuity payout option is the riskiest option, but has the highest monthly payment. The payments are guaranteed for life and cease at the death of the annuitant.
Period Certain: The period certain payout option is more conservative than the straight option and results in a lower monthly payment. With a period certain payout option, monthly payments are guaranteed for the life of the annuitant and if the annuitant dies during the period certain, payments are guaranteed to the designated beneficiary for the remainder of the period certain.
Refund: The refund payout option is the most conservative and accordingly has the lowest payments. Should the annuitant die prior to receiving annuity payments at least equal to the cash value of the contract on the day of annuitization, the balance will be paid to the annuitant’s designated beneficiary.
Joint Life: The joint life annuity payout option covers two or more people, commonly spouses. The contract will pay monthly as long as one of the annuitants is living. Depending on the contract, the payment may remain steady or may be reduced at the death of the first annuitant.

Available annuity payout options

Taxation of annuity payments differs from withdrawals during the accumulation stage. The 10% penalty does not apply to an annuity contract that has been annuitized, regardless of the annuitant’s age. When an annuitant receives an annuity payment, the tax liability is in direct proportion to the percentage of the payment attributable to growth. The monthly payment for a fixed annuity will not change but the payment can change for variable annuities, reflecting the investment experience of the principal.

The IRS accommodates for portability of funds in life insurance and annuity contracts. Internal Revenue Code 1035 allows the transfer of funds from one product to another or from one company to another. Under 1035 exchange rules, tax on accumulated earnings will be deferred for the following transfers:

Life insurance policy into another Life insurance policy
Life insurance policy into an annuity
Annuity into another annuity

Sidenote

Know this...

It is not possible under rule 1035 to transfer an annuity into life insurance

Internal Revenue Code 1035 rules

Equity Indexed Annuities

Equity indexed annuities are fixed annuities that offer a guarantee against loss of principal if held to term. With an equity indexed annuity, interest credited is linked to the upward movement of a designated index, such as the Standard and Poor’s 500 (S&P 500). If the index moves upward, the interest rate is based on some portion of the increase. If the index moves downward, the equity indexed annuity does not lose value.

Market Value Adjusted Annuities

Another fixed annuity product with a market driven aspect is the market value adjusted annuity. Rather than having the interest rate linked to an index, as with an equity indexed annuity, a market value adjusted annuity’s interest rate remains fixed. The market value adjustment feature applies only if the contract is surrendered before the contract period expires.

If a market value adjusted annuity owner surrenders the contract early, a surrender charge and a market value adjustment will apply. If interest rates decreased during the contract period, the adjustment will be positive and may add to the surrender value of the contract. However, if interest rates increased over the period, the adjustment will be negative and may increase the contract’s surrender charge.

Sidenote

Know this...

Marketing material of market value adjusted annuities must plainly state that the adjustment may be positive or negative.

Lesson Summary

IRS rules allow portability of funds between life insurance and annuity contracts under Code 1035, deferring tax on transfers between similar products or companies.

Equity indexed annuities offer principal protection and interest linked to an index’s upward movement without downside risk.
Market value adjusted annuities have fixed interest rates but include a market value adjustment feature upon early surrender, impacting surrender values based on interest rate fluctuations.

Available annuity payout options include Life Income, Period Certain, Refund, and Joint Life, each offering varying levels of risk and benefits.

Chapter Vocabulary

Definitions

Equity Indexed Annuity: A fixed annuity that earns interest or provides benefits that are linked to an external reference or equity index, subject to a minimum guarantee.
Fixed Annuity: An annuity that guarantees a specific rate of return. In the case of a deferred annuity, a minimum rate of interest is guaranteed during the savings phase. During the payment phase, a fixed amount of income, paid on a regular schedule, is guaranteed.
Index Annuity: An interest bearing fixed annuity tied to an equity index, such as the Dow Jones Industrial Average or S & P 500.
Joint-Life Annuity: Payout option that continues to pay so long as at least one (of two or more) annuitants is alive.
Market-Value Adjusted Annuity: An annuity whose accumulated value is subject to a market value adjustment on surrender. The market value adjustment may be positive or negative depending on the movement of interest rates since the inception of the contract.
1035 Exchange: A nontaxable exchange of life insurance policies or annuities, as provided under section 1035 of the Internal Revenue Code.