2022 AFBA Financial Planning Guide

$100,000

approach is called a Single Premium Immediate Annuity while the second method is called a Deferred Annuity. A Single Premium Immediate Annuity is opened with a single deposit. The lump sum deposit will generate a monthly income for a period of time chosen by you. This type of annuity would be suitable for an individual at or near retirement or to support a surviving spouse and dependent children. Deferred Annuities are classified into two groups: Single Premium Deferred or Flexible Premium Deferred. a. Single Premium Deferred. A lump sum of money is deposited with an insurance company, which offers tax- deferred growth potential. Surviving spouses may use the proceeds from a life insurance policy to establish this type of annuity. b. Flexible Premium Deferred. Money is systematically deposited into an annuity on a monthly, quarterly, or annual basis. This type of annuity is most suited for an individual who does not have a large lump sum of money to initially deposit in an annuity. You may have greater flexibility if you divide your annuity into smaller contracts. Instead of buying one $200,000 annuity, you could purchase two $100,000 contracts. Then, if your circumstances have changed when it’s time to receive your income payments, you could delay the receipt of one payment and receive a higher amount at a later point in time. Distribution of Annuity Proceeds. When you elect to start receiving the funds in your annuity, there are several annuitization options to choose from, including: a. Straight Life Annuity. Under this approach you receive a specific amount of income on a regular basis for the rest of your life. However, all payments stop upon your death. There are no refunds of either undistributed payments or investment earnings to your surviving family members. The advantage of Straight Life is that it provides the largest annuity payment to the annuitant. b. Life Annuity with Period Certain. This means that the insurance company will guarantee a specific payment for a specified time period or your life, whichever is longer . Consequently, if you die before the minimum specified period has elapsed, then payments will continue to the designated beneficiary. c. Period Certain. Period certain does not provide a lifetime payment to you. Rather it provides a periodic

Scenario: On the first day of each year $2,000 is deposited into an annuity earning 8% interest. The graph shows the dollar amount invested and the total value of the annuity.

$80,000

$98,846

$60,000

$58,649

$40,000

$31,291

$40,000

$20,000

$30,000

$10,000 $12,671

$20,000

5 Years

10 Years

15 Years

20 Years

Investment

Tax-deferred Intrest Earned plus Investment

specific return and therefore cannot risk losing your money in speculative investments. This type of annuity is generally purchased by individuals who want the security of a known amount of annuity income each month. b. Variable Annuity. The money you deposit into a variable annuity is invested in a variety of stock, bond, and money market portfolios which are called “investment portfolios” or “subaccounts.” You participate in both the greater potential gain and the greater potential risk associated with market fluctuation. There is no guaranteed predetermined amount of monthly payout, but rather a payout which fluctuates depending on the portfolio’s performance. To offset this risk, many variable annuities offer (for an additional fee) Optional Living Benefits that can provide you with a guaranteed minimum level of protection regardless of market conditions or the performance of your subaccounts. c. Indexed Annuity. The money earned in an Indexed Annuity is based upon the performance of a specific market benchmark such as the S&P 500. In some cases these annuities may limit the portion of market return you receive. However, they may also provide a minimum return if the market’s performance is unsatisfactory. Start Date for Receiving Payments. Annuity owners generally have the option of receiving their monthly benefits immediately upon purchasing their annuity or deferring the receipt of their benefits for a period of time. The first

CHAPTER 14: ANNUITIES

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