Skills without mastery are useless. Mastery is impossible without the right methods. SimpliGrok platform makes mastery effortless and fastest with proven, smart practice.
Skills without mastery are useless. Mastery is impossible without the right methods. SimpliGrok platform makes mastery effortless and fastest with proven, smart practice.
Annuities come in many varieties, each designed for specific financial goals and risk tolerances. Understanding the different types and their features is essential for matching clients with appropriate products.
One lump-sum payment:
- Single deposit: Entire premium paid at once
- Immediate growth: Begins accumulating immediately
- Common for: Retirement rollover, inheritance, lawsuit settlement
- No future payments: All money paid upfront
Types:
- Single Premium Immediate Annuity (SPIA): Payments start within 1 year
- Single Premium Deferred Annuity (SPDA): Accumulates first, pays later
Example:
Retire with $500,000 from 401(k)
Buy single premium immediate annuity
Receive $3,000/month for life starting next month
Multiple payments over time:
- Periodic deposits: Can pay regularly or sporadically
- Variable amounts: Amounts can change
- Build gradually: Accumulate over years
- Like savings plan: Systematic accumulation
Example:
Start at age 40
Pay $500-2,000/month (as affordable)
Continue until retirement at 65
Accumulate and annuitize at retirement
Income starts right away:
- First payment: Within 1 year (typically 30 days)
- No accumulation phase: Goes straight to payout
- Single premium: Always single premium
- Irreversible: Cannot get lump sum back once annuitized
Best for:
- Recent retirees
- Those needing immediate income
- Pension replacement
- Structured settlement recipients
Example:
Age 65, just retired
Pay $300,000 lump sum
Receive $1,800/month starting next month
Payments continue for life
Income starts in future:
- Accumulation phase: Years or decades of growth
- Tax-deferred: Earnings not taxed during accumulation
- Flexibility: Can withdraw, surrender, or annuitize later
- Most common: More popular than immediate
Best for:
- Long-term retirement planning
- Tax-deferred accumulation
- Those years from retirement
- Supplemental retirement savings
Example:
Age 45, buy deferred annuity
Pay $10,000/year for 20 years
Accumulates to ~$350,000 by age 65
Then annuitize or continue deferring
Guaranteed interest rate:
Example:
Fixed annuity:
Premium: $100,000
Guaranteed minimum: 2%
Current rate: 4% (first 3 years)
Worst case (min rate): $100,000 × (1.02)^10 = $121,899
Current rate scenario: $100,000 × (1.04)^10 = $148,024
Market-based returns:
Investment options:
- Stock funds: Large cap, small cap, international
- Bond funds: Government, corporate, high-yield
- Balanced funds: Mix of stocks and bonds
- Money market: Cash equivalents
- Specialty: Sector funds, real estate, commodities
Can allocate among subaccounts:
Example allocation:
40% - Large Cap Stock Fund
20% - International Stock Fund
25% - Bond Fund
10% - Small Cap Stock Fund
5% - Money Market Fund
Multiple fee layers:
- M&E (Mortality & Expense): 1.0-1.5% annually
- Administrative fee: $30-50/year or 0.15%
- Subaccount fees: 0.5-2.0% (like mutual fund expenses)
- Rider fees: 0.25-1.5% for optional benefits
- Total: Often 2.5-3.5% annually
Example:
Variable annuity:
Premium: $100,000
Good market year (10% return):
Gross return: $10,000
Less fees (2.5%): -$2,500
Net return: $7,500 (7.5%)
New value: $107,500
Bad market year (-10% return):
Gross loss: -$10,000
Less fees (2.5%): -$2,500
Net loss: -$12,500 (-12.5%)
New value: $87,500
Hybrid: links to market index with protection:
Floor:
- Minimum return: Typically 0% or 1%
- No market losses: Protected from negative returns
- Principal safe: Cannot lose original investment
Cap:
- Maximum return: Limit on gain (e.g., 7-12%)
- Insurer keeps excess: Gains above cap not credited
- Varies: Can change annually
Participation Rate:
- Percentage of index gain: E.g., 80% participation
- Example: If index up 10%, credited 8% (80% of 10%)
- Can be less than 100%: Or equal to 100%
Spread/Margin:
- Deduction from return: Percentage subtracted
- Example: 2% spread means index gain minus 2%
- Alternative to cap: Some use spread instead
Annual Point-to-Point:
Compare index value: Beginning vs. end of year
Calculate gain
Apply cap and participation rate
Credit to account
Monthly Averaging:
Average of 12 monthly index values
Compare to previous year average
Smooths volatility
Example:
Indexed annuity:
Premium: $100,000
Floor: 0%
Cap: 10%
Participation: 100%
Index: S&P 500
Year 1 - S&P up 15%:
Credited: 10% (capped at 10%)
Value: $110,000
Year 2 - S&P down 8%:
Credited: 0% (floor protects)
Value: $110,000 (no loss)
Year 3 - S&P up 5%:
Credited: 5% (below cap)
Value: $115,500
Payments for life, nothing to survivors:
- Highest payment: Maximum monthly income
- No survivor benefit: Payments stop at death
- Best for: Single person, no heirs, maximum income need
- Risk: Lose if die early
Life payments with minimum guarantee:
- Guaranteed minimum: E.g., 10, 15, or 20 years
- Life payments: Continue beyond guarantee period if alive
- Survivor benefit: Heirs get remaining payments if die early
- Lower than straight life: Payment reduced for guarantee
Example:
Life with 20-year certain:
Payment: $2,000/month
Die after 5 years:
Beneficiary gets: $2,000/month for 15 more years
Live 30 years:
Receive: $2,000/month for all 30 years
Covers two lives (usually spouses):
- Continues to survivor: Payments don't stop when first dies
- 100% joint and survivor: Full payment continues
- 50% or 66.7%: Reduced payment to survivor
- Lower than single life: Two lives = lower payment
Example:
100% Joint and Survivor:
Initial payment: $2,500/month
First spouse dies: $2,500/month continues to survivor
50% Joint and Survivor:
Initial payment: $2,800/month
First spouse dies: $1,400/month to survivor (50%)
Fixed number of years, no life contingency:
- Specific term: 10, 15, 20 years
- Guaranteed period: Exactly that many years
- Stops after period: No life payments
- Lowest payment: No life contingency means lower actuarial value
- Transferable: Can be left to heirs if die
Payments for life but not exceeding certain period:
- Until earlier of: Death or end of period
- Example: Life with 20-year maximum
- Rare: Not commonly used
Before annuitization:
- Account value: Beneficiary receives accumulated value
- Return of premium: Some guarantee at least premiums paid
- Enhanced benefits: Optional riders for higher death benefit
Depends on payout option:
- Straight life: Nothing if no period certain
- Period certain: Remaining guaranteed payments
- Joint and survivor: Continues to survivor
Optional enhancements:
Return of Premium (ROP):
- Minimum: At least premiums paid back
- Even if value lower: Guarantees no loss to beneficiary
Highest Value:
- Maximum reached: Greater of current value or highest anniversary value
- Locks in gains: Protects against market downturns
Enhanced Death Benefit:
- Premium plus earnings: Guaranteed growth rate (e.g., 5%)
- Minimum benefit: Death benefit grows at set rate
- Additional cost: Requires additional fee
Typical 7-10 year declining:
Year Charge 1 10% 2 9% 3 8% 4 7% 5 6% 6 5% 7 4% 8 3% 9 2% 10 1% 11+ 0%Penalty-free access:
- Typical: 10% of account value per year
- No surrender charge: On amounts within limit
- Cumulative: Some allow unused amounts to carry forward
- Earnings first: Withdrawals treated as earnings (taxable) until recover basis
Systematic withdrawals:
- Regular distributions: Monthly, quarterly, annual
- Fixed amount or percentage: Your choice
- Remains flexible: Not annuitized
- Can stop/start: Change amounts
Guarantees minimum annuitization value:
- Income floor: Minimum income if annuitize
- Growth guarantee: E.g., 5% compounded for 10 years
- Must annuitize: To access guarantee
- Fee: 0.5-1.0% annually
Guaranteed return of premium through withdrawals:
- Annual withdrawals: E.g., 5% of premium per year
- Guaranteed for life: Even if account value depleted
- Don't have to annuitize: Can take systematic withdrawals
- Fee: 0.5-1.25% annually
Lifetime withdrawal guarantee:
- Income for life: Guaranteed withdrawal percentage
- Regardless of performance: Even if account goes to zero
- Step-ups: Some increase if market performs well
- Most popular rider: Common addition
- Fee: 0.75-1.5% annually
Example:
Premium: $500,000
GLWB: 5% annual withdrawal for life starting age 65
Guaranteed: $25,000/year for life
Even if account depleted after 10 years
Payments continue for life
If market performs well:
Account value grows
Withdrawals continue
Remaining value passes to heirs at death
Annuities come in many varieties, each designed for specific financial goals and risk tolerances. Understanding the different types and their features is essential for matching clients with appropriate products.
One lump-sum payment:
- Single deposit: Entire premium paid at once
- Immediate growth: Begins accumulating immediately
- Common for: Retirement rollover, inheritance, lawsuit settlement
- No future payments: All money paid upfront
Types:
- Single Premium Immediate Annuity (SPIA): Payments start within 1 year
- Single Premium Deferred Annuity (SPDA): Accumulates first, pays later
Example:
Retire with $500,000 from 401(k)
Buy single premium immediate annuity
Receive $3,000/month for life starting next month
Multiple payments over time:
- Periodic deposits: Can pay regularly or sporadically
- Variable amounts: Amounts can change
- Build gradually: Accumulate over years
- Like savings plan: Systematic accumulation
Example:
Start at age 40
Pay $500-2,000/month (as affordable)
Continue until retirement at 65
Accumulate and annuitize at retirement
Income starts right away:
- First payment: Within 1 year (typically 30 days)
- No accumulation phase: Goes straight to payout
- Single premium: Always single premium
- Irreversible: Cannot get lump sum back once annuitized
Best for:
- Recent retirees
- Those needing immediate income
- Pension replacement
- Structured settlement recipients
Example:
Age 65, just retired
Pay $300,000 lump sum
Receive $1,800/month starting next month
Payments continue for life
Income starts in future:
- Accumulation phase: Years or decades of growth
- Tax-deferred: Earnings not taxed during accumulation
- Flexibility: Can withdraw, surrender, or annuitize later
- Most common: More popular than immediate
Best for:
- Long-term retirement planning
- Tax-deferred accumulation
- Those years from retirement
- Supplemental retirement savings
Example:
Age 45, buy deferred annuity
Pay $10,000/year for 20 years
Accumulates to ~$350,000 by age 65
Then annuitize or continue deferring
Guaranteed interest rate:
Example:
Fixed annuity:
Premium: $100,000
Guaranteed minimum: 2%
Current rate: 4% (first 3 years)
Worst case (min rate): $100,000 × (1.02)^10 = $121,899
Current rate scenario: $100,000 × (1.04)^10 = $148,024
Market-based returns:
Investment options:
- Stock funds: Large cap, small cap, international
- Bond funds: Government, corporate, high-yield
- Balanced funds: Mix of stocks and bonds
- Money market: Cash equivalents
- Specialty: Sector funds, real estate, commodities
Can allocate among subaccounts:
Example allocation:
40% - Large Cap Stock Fund
20% - International Stock Fund
25% - Bond Fund
10% - Small Cap Stock Fund
5% - Money Market Fund
Multiple fee layers:
- M&E (Mortality & Expense): 1.0-1.5% annually
- Administrative fee: $30-50/year or 0.15%
- Subaccount fees: 0.5-2.0% (like mutual fund expenses)
- Rider fees: 0.25-1.5% for optional benefits
- Total: Often 2.5-3.5% annually
Example:
Variable annuity:
Premium: $100,000
Good market year (10% return):
Gross return: $10,000
Less fees (2.5%): -$2,500
Net return: $7,500 (7.5%)
New value: $107,500
Bad market year (-10% return):
Gross loss: -$10,000
Less fees (2.5%): -$2,500
Net loss: -$12,500 (-12.5%)
New value: $87,500
Hybrid: links to market index with protection:
Floor:
- Minimum return: Typically 0% or 1%
- No market losses: Protected from negative returns
- Principal safe: Cannot lose original investment
Cap:
- Maximum return: Limit on gain (e.g., 7-12%)
- Insurer keeps excess: Gains above cap not credited
- Varies: Can change annually
Participation Rate:
- Percentage of index gain: E.g., 80% participation
- Example: If index up 10%, credited 8% (80% of 10%)
- Can be less than 100%: Or equal to 100%
Spread/Margin:
- Deduction from return: Percentage subtracted
- Example: 2% spread means index gain minus 2%
- Alternative to cap: Some use spread instead
Annual Point-to-Point:
Compare index value: Beginning vs. end of year
Calculate gain
Apply cap and participation rate
Credit to account
Monthly Averaging:
Average of 12 monthly index values
Compare to previous year average
Smooths volatility
Example:
Indexed annuity:
Premium: $100,000
Floor: 0%
Cap: 10%
Participation: 100%
Index: S&P 500
Year 1 - S&P up 15%:
Credited: 10% (capped at 10%)
Value: $110,000
Year 2 - S&P down 8%:
Credited: 0% (floor protects)
Value: $110,000 (no loss)
Year 3 - S&P up 5%:
Credited: 5% (below cap)
Value: $115,500
Payments for life, nothing to survivors:
- Highest payment: Maximum monthly income
- No survivor benefit: Payments stop at death
- Best for: Single person, no heirs, maximum income need
- Risk: Lose if die early
Life payments with minimum guarantee:
- Guaranteed minimum: E.g., 10, 15, or 20 years
- Life payments: Continue beyond guarantee period if alive
- Survivor benefit: Heirs get remaining payments if die early
- Lower than straight life: Payment reduced for guarantee
Example:
Life with 20-year certain:
Payment: $2,000/month
Die after 5 years:
Beneficiary gets: $2,000/month for 15 more years
Live 30 years:
Receive: $2,000/month for all 30 years
Covers two lives (usually spouses):
- Continues to survivor: Payments don't stop when first dies
- 100% joint and survivor: Full payment continues
- 50% or 66.7%: Reduced payment to survivor
- Lower than single life: Two lives = lower payment
Example:
100% Joint and Survivor:
Initial payment: $2,500/month
First spouse dies: $2,500/month continues to survivor
50% Joint and Survivor:
Initial payment: $2,800/month
First spouse dies: $1,400/month to survivor (50%)
Fixed number of years, no life contingency:
- Specific term: 10, 15, 20 years
- Guaranteed period: Exactly that many years
- Stops after period: No life payments
- Lowest payment: No life contingency means lower actuarial value
- Transferable: Can be left to heirs if die
Payments for life but not exceeding certain period:
- Until earlier of: Death or end of period
- Example: Life with 20-year maximum
- Rare: Not commonly used
Before annuitization:
- Account value: Beneficiary receives accumulated value
- Return of premium: Some guarantee at least premiums paid
- Enhanced benefits: Optional riders for higher death benefit
Depends on payout option:
- Straight life: Nothing if no period certain
- Period certain: Remaining guaranteed payments
- Joint and survivor: Continues to survivor
Optional enhancements:
Return of Premium (ROP):
- Minimum: At least premiums paid back
- Even if value lower: Guarantees no loss to beneficiary
Highest Value:
- Maximum reached: Greater of current value or highest anniversary value
- Locks in gains: Protects against market downturns
Enhanced Death Benefit:
- Premium plus earnings: Guaranteed growth rate (e.g., 5%)
- Minimum benefit: Death benefit grows at set rate
- Additional cost: Requires additional fee
Typical 7-10 year declining:
Year Charge 1 10% 2 9% 3 8% 4 7% 5 6% 6 5% 7 4% 8 3% 9 2% 10 1% 11+ 0%Penalty-free access:
- Typical: 10% of account value per year
- No surrender charge: On amounts within limit
- Cumulative: Some allow unused amounts to carry forward
- Earnings first: Withdrawals treated as earnings (taxable) until recover basis
Systematic withdrawals:
- Regular distributions: Monthly, quarterly, annual
- Fixed amount or percentage: Your choice
- Remains flexible: Not annuitized
- Can stop/start: Change amounts
Guarantees minimum annuitization value:
- Income floor: Minimum income if annuitize
- Growth guarantee: E.g., 5% compounded for 10 years
- Must annuitize: To access guarantee
- Fee: 0.5-1.0% annually
Guaranteed return of premium through withdrawals:
- Annual withdrawals: E.g., 5% of premium per year
- Guaranteed for life: Even if account value depleted
- Don't have to annuitize: Can take systematic withdrawals
- Fee: 0.5-1.25% annually
Lifetime withdrawal guarantee:
- Income for life: Guaranteed withdrawal percentage
- Regardless of performance: Even if account goes to zero
- Step-ups: Some increase if market performs well
- Most popular rider: Common addition
- Fee: 0.75-1.5% annually
Example:
Premium: $500,000
GLWB: 5% annual withdrawal for life starting age 65
Guaranteed: $25,000/year for life
Even if account depleted after 10 years
Payments continue for life
If market performs well:
Account value grows
Withdrawals continue
Remaining value passes to heirs at death