1. What is an Annuity?

An annuity is an income stream – a regular periodic payment for life or another defined period. It converts an accumulated sum of money into a series of payments over number of years or a lifetime.

	Each payment consists partly of principal which the annuity owner contributed in the form of premiums, and partly of interest earned on the yet-to-be distributed principal.
	An annuity’s principal function is to liquidate an estate by periodic payment of money out of a contract to the owner.
	The accumulation period is that time during which funds are being paid into the annuity, in the form of premiums by the contract holder, and interest is earned on those premiums. The payout or annuity period refers to the point at which the annuity ceases to be as accumulation vehicle and begins to generate benefit payments on a regular basis. Typically payments begin at age 65. However, variations can be made to the start date.
	Beneficiaries can be designated to receive payments during certain payment options selections.

2. What is the difference between a life annuity and a time certain or period certain annuity?

If the payments are contingent upon a life or lives, the annuity is known as a life annuity. If the payments are for a certain number of years without regard to life contingency, the annuity is a term certain or period certain annuity.

3. What is the difference between an immediate annuity and a deferred annuity?

An immediate annuity is designed to make its first benefit payment at one payment interval from the date or purchase. An immediate annuity is really nothing more than a distribution vehicle – a way to convert a sum of money into a stream of income. A deferred annuity is designed to provide income payments beginning as some specified future date.

4. How are payments made?

Period or term certain payments are not based on life contingency. Instead it guarantees payments for a certain period of time, such as 10, 15 or 20 years, whether or not the annuitant is living. At the end of the specified period payments cease. In the event the annuitant dies before the end of the specified period, the beneficiary becomes the recipient of the income until the end of the term.

Straight life- only option represents the purest form of life annuitization. It provides a series of guaranteed payments for as long as the annuitant lives; when death occurs, payments cease. If at the annuitant’s death there is any principal remaining that has not been paid out, it is forfeited. On the other hand, the annuitant cannot outlive the payments. Of all the payment options based on a life contingency, the straight life option produces the largest payment per $1.00 of principal.

5. What is a joint – life option?

This typically applies to a husband and wife. A joint and full survivor payout provides for the same monthly payment as long as long as either of the two people are living. It is only at the death of the second individual that payment ceases. The alternative to this is the joint and -half survivor option, which provides regular income payments to two people while they are both living and, upon the death of the first, continues payments of half the original amount to the survivor until his or her death.

6. What is the difference between a fixed annuity, an equity annuity and variable annuity?

A fixed annuity earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Once the guarantee period is over, a new interest rate is set for the next period. It also provides a guaranteed fixed benefit amount to the annuitant, expressed in terms of dollars per payment period.

An equity – indexed annuity (EIA) is fixed annuity that offers all the advantage of traditional fixed annuities plus inflation protection because it invests in the stock market. It is subject to the up and down savings of the stock market.

A variable annuity shifts much of the investment risk from the insurer to the contract holder because there is no certainty – and no guarantee – as to its return. With a variable annuity it is the contract holder who determines how his or her premium will be invested. The return on a variable annuity will depend on how well these underlying investments programs perform. The disadvantage of a variable annuity is that its lack of guarantees has the owner open to the ups and downs of market risks. Because a variable annuity is considered a “security”, it can only be sold by agents who have a securities license as well as a life insurance license.

7. What is a surrender charge?

This is a charge applicable during early years of the contract’s accumulation phase in the event the contract holder surrenders or cashes in his or her annuity before the insurer has had the opportunity to recover the cost of obtaining the business and issuing the contract.

8. What are withdrawal privileges?

It is the ability to withdraw a limited amount of fund without having to pay a surrender change. A typical withdrawal provision allows the contract holder to withdraw up to 10% of the annuity fund each year. Individual income tax ramifications may apply.

9. What fees and taxes apply to annuities?

Most fixed annuities are sold as back-end loaded contracts, meaning no fees are assessed at the time of this product’s purchase. The insurer makes its money – on the “spread” between the interest it earns on invested premiums and the amount that it credits to an annuity.

During the accumulation period, interest credited or earned on an annuity is not currently taxable to the contract holder. As long as the funds remain in the annuity, they preserve their tax – deferred status. However, if the contract holder accesses those funds prior to the contract’s maturity – if he or she takes a withdrawal or loan or complete surrender- it may be a taxable event.

When an annuity matures and its fund is annualized into a series of periodic payments, a different tax sale applies. Each payment consists partly of principal and partly of interest earnings.