I. Introduction

A. The need for savings and investment

1. Limits on society’s safety nets

2. Longer life spans

3. Persistent inflation

B. The appeal of annuities

1. Safety of principal

2. Tax benefits

C. The typical annuity buyer

1. Over age 50

2. Income $40,000 to $80,000

D. Defining annuity types

1. Immediate

2. Deferred

E. Defining terms

1. Owner

2. Annuitant

3. Beneficiary

II. Immediate Annuities—Characteristics

1. The "pure" annuity

2. Refund annuities

—Installment

—Cash refund

3. Joint and survivor annuities

4. Cost comparisons among types of annuities

III. Deferred Annuities

A. Immediate and deferred annuities—basic distinctions

B.    Characteristics of deferred annuities

1. Tax-deferred growth 

2. Flexibility 

3. Safety 

4. Liquidity/marketability

a. Liquidity inhibitors

b. Liquidity facilitators

C. Deferred fixed and variable annuities

D. Accumulation units vs. mutual fund shares

 E. Deferred annuities categorized by premium

1. Scheduled 

2. Single 

3. Flexible 

IV. Deferred Fixed Annuities

A. Interest rate considerations

 1. Portfolio rate 

2. New money rate 

3. Bonus rate 

4. Two-tier

B. Traditional vs. modern fixed deferred annuities

 1. One-year adjustable interest rate with 5-to-10-year surrender charge

 2. CD or certificate annuities

 3. Market value adjustment annuities

 4. Buy, hold, annuitize . . . past history

 C. Insurance company risks

 1. Credit (bond default) risk

 2. Rising interest rate risk

 3. Industry and business risk

 4. Single investment choice risk

 5. General vs. separate account risk

V. Deferred Variable Annuities 

A. Investment vehicle

 1. Accumulation units vs. mutual fund shares

 2. Investment options

 B. Advantages

 1. Flexibility

a. In most cases, the variable deferred annuity with a flexible premium option offers the greatest opportunity to adjust to changing needs.

b. A flexible premium variable annuity can even emulate a single premium fixed annuity.

2. Professional management

3. Investment diversification (general/separate accounts)

4. General accounts equal to mutual fund accounts

5. Convenience features—dollar-cost averaging

6. Income tax control

7. Safe haven account

8. Guaranteed death benefit

VI. Consumer Issues

A. Regulated by the Securities and Exchange Commission (SEC) and state insurance departments

B. Company safety

C. State guarantee associations

D. Expenses

1. The "spread"

2. Annual fees

3. Surrender charges

4. State premium taxes

5. Mortality and expense charges

6. Separate account expenses

7. Front-end charges and rolling back-end loads

8. Free corridor withdrawals

E. Checklist for evaluating an annuity purchase

1. The company

2. The investment

3. Track record

4. Guarantee period

5. Minimum guaranteed rate

6. Bail-out

7. Cost of a bail-out

8. Withdrawal privilege

9. Front-end charges

10. Surrender (back-end) charges

11. Waiver of surrender charges

12. Withdrawals not subject to surrender charges

13. Market value adjustment

14. Death benefit

15. Annual fees

16. Commissions

VII. Annuity Taxation: Applicable Laws

A. General

1. Fixed annuity

2. Variable immediate annuity

B. Tax Equity and Fiscal Responsibility Act (TEFRA)

C. Deficit Reduction Act (DEFRA)

1. Contract required to be paid out at death of either owner or annuitant

2. Spousal exemption

D. Tax Reform Act of 1986 (TRA ‘86)

1. Nonnatural person rule

2. Increase in penalty (to 10 percent) for premature withdrawal

E. Technical and Miscellaneous Revenue Act (TAMRA)—Aggregation rule

F. Pre-age 59 1/2 taxation and penalties

G. Avoiding pre-age 59 1/2 penalties

VIII. Special Taxation Issues

A. Qualified vs. non-qualified annuities

1. Where qualified annuities are found

2. The qualified plan advantage

3. The exclusion ratio

4. Minimum distribution rules

B. Taxation of annuity income

1. Social security benefits tax

2. Annuity income is all "ordinary"

3. Annuity "losses" do not reduce taxes

C. Transfer and ownership issues

1. 1035 exchanges

2. Transfers of ownership as taxable events

3. Gift strategies

D. Annuity taxation at death

1. Variables

a. whether income has commenced

b. whether spouse is beneficiary

c. whether owner and annuitant are the same

2. Probate fee avoided if there is a named beneficiary

3. Entire value of annuity considered for estate tax calculation

4. Step-up value in basis does not apply to annuity contracts

5. The net benefits of annuities can be reduced by income, estate, and even excise taxes at death, and thus are best used during the lives of the annuitants.

IX. Conclusion—The Dynamics of Annuities

—The tax qualified and nonqualified markets

—High-quality investment management

—Guaranteed monthly income

—Funding devices