Intermediate Questions

• What are the different types of annuities?

There are two broad classes of annuities and numerous sub classes of each class. The two broad classes are (1) immediate annuities and (2) deferred annuities. Some of the sub classes include fixed deferred, variable, and equity-indexed annuities.

• What are immediate annuities?

An immediate annuity is one where the benefit payments begin very quickly, usually within one year of the time it is purchased. The immediate annuity is usually purchased with a single premium.

• What are deferred annuities?

With a deferred annuity you pay a premium to the insurance company which issues a contract promising to pay interest or gains made on the deposit while deferring the income and the taxes until you actually withdraw the money or begin receiving an income. There are three major types of deferred annuities: (1) Fixed Deferred annuities; (2) Equity-Indexed annuities and (3) Variable Annuities

• Explain fixed deferred annuities.

A Fixed Deferred Annuity is a contract between you and the insurance company which pays a guaranteed current interest rate. The interest rate may be guaranteed for one or more years and earns compound interest. The interest earnings compound on a tax-deferred basis. Fixed deferred annuities are offered either on a single premium basis, i.e., you give the insurance company a lump sum premium payment, (typically $5,000 or more); or on a flexible premium basis, i.e., you pay a lower re-occurring premium payment on a monthly, quarterly, or annual basis. In addition to tax deferral, fixed deferred annuities offer safety for your premium. Fixed deferred annuities offer a current interest rate which may never be less than a lifetime minimum guaranteed interest rate (typically 3%). The current interest rate is declared and guaranteed by the insurance company. Thus, your premium in a fixed deferred annuity is not subject to market risk associated with volatile financial markets. Fixed deferred annuities have penalties for early withdrawal called surrender charges or withdrawal charges. These charges typically decline over the length of the surrender charge period.

• Explain variable annuities.

Like a mutual fund wrapped in an annuity wrapper, a variable annuity is a contract between you and the insurance company which allows you to invest your funds in a wide range of investment or funding options, including stocks, bonds, money markets, and other fixed rate instruments. Most variable annuity plans offer a number of investment option sub accounts which are structured as either mutual funds or as segregated investment accounts that are managed by professional investment managers. Like a fixed rate deferred annuity, any gains in the annuity credited to the account are tax deferred, i.e., not taxable until the funds are withdrawn. Unlike a fixed deferred annuity, your funds are not guaranteed and depending on the funding account you choose, may be subject to market risk, including risk of principal. Some variable annuity plans offer a fixed interest rate account option that guarantees both principal and interest on amounts invested in that option. Variable annuities are usually offered on a flexible premium or payment basis rather than a single premium or lump sum payment basis. Variable annuities, like fixed deferred annuities, typically have penalties for early withdrawal called surrender charges or withdrawal charges. These charges typically decline over the length of the surrender charge period (typically five to ten years). In addition, like fixed deferred annuities, most variable annuities allow you take up to 10% of your account value each year without incurring a surrender or withdrawal charge. In addition to surrender or withdrawal charges, most variable annuities have certain loading and management fees, such as administrative fees. The issuing insurance company usually charges an administrative fee and a mortality risk fee totaling 1.00% to 2.00% of assets, with a typical fee usually about 1.25-1.50%. Many companies also charge a flat dollar amount which varies from $20.00 to $50.00 per year (a contract fee). Investments in the various sub accounts are typically subject to a fee for the operation and management of the sub account (account fees), and these fees are typically a percentage of assets ranging from .15% to 1.50% of assets under management in the account.

• Explain equity-indexed annuities.

In the past few years, a new breed of deferred annuity has become very popular: the equity-indexed annuity. Like other fixed-rate annuities, the equity-indexed annuity offers safety of premium, tax deferral, and a minimum interest rate guarantee. Unlike other fixed deferred annuities where the insurance company declares an interest rate for one or more years, with an equity-indexed annuity, the interest earnings are determined based upon the growth in an accepted equity index, such as the S&P 500 Index. There are many different formulas available to calculate the index growth, including calculating averages in index changes or simply calculating point-to-point changes in the index. Most of the current equity-indexed annuities use growth in the S&P 500 Index to determine the crediting rates. However, there are certain equity-indexed annuities which use the Dow Jones Industrial Average, the Russell 2000 or other indexes instead of the S&P 500 Index. In addition to tax deferral, equity-indexed annuities also offer safety of your premium. Equity-indexed annuity contracts offer a current interest rate linked to increases of an index or a minimum guaranteed interest rate (typically 3%). The minimum guaranteed interest rate is guaranteed regardless of what the Index does. The formula used to calculate the current interest rate is guaranteed by the insurance company. Thus, your premium in an equity-indexed annuity is not subject to index volatility. Like fixed deferred annuities, equity-indexed annuities also have penalties for early withdrawal called surrender charges or withdrawal charges. These charges typically decline over the length of the surrender charge period (typically five to ten years).

	Lincoln Financial Group
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	BlueCross BlueShield
Blue Cross and Blue Shield of Texas is the only statewide customer-owned health insurer in Texas.

	The Hartford
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