Understanding Annuities:
A Lesson in Fixed Interest and Indexed Annuities
Did you know that an annuity can be used to systematically accumulate money for retirement
purposes, as well as to guarantee a retirement income that you cannot outlive?
Prepared for: General Information
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Table of Contents
Page
Your Earning Power
2
Annuity Objectives
3
What Is an Annuity?
3
Deferred Annuities vs.
Immediate Annuities
4
Installment Premium Annuities
vs. Single Premium Annuities
4 - 5
Fixed Interest Annuities vs.
Stewart Ogilby
Indexed Annuities
5
Hudson Private Wealth Management, LLC
677 N. Washington Blvd., Suite #43
A Closer Look at Fixed Interest
Sarasota, FL 34236
Annuities
6
Office: (941) 952-5843
A Hybrid Annuity…Equity -
http://finsecurity.com/wisebird
7
Fixed Annuity Suitability
8
April 10, 2014
Annuity Comparisons
9
Annuity Income Phase
10
Annuity Income Options
11
Non-Qualified Annuity Taxation
12
Fixed Annuity Advantages and
Disadvantages
13
Fixed Annuity Checklist
14
Important Information
15
Your Earning Power
Earning Power:
Your earning power – your
ability to earn an income is
your most valuable asset.
Your Income
Other Income
Few people realize that a 30-year-old
couple will earn 3.5 million dollars by
Investment Income
Spouse’s Income
age 65 if their total family income
averages $100,000 for their entire
careers, without any raises.
How Much Will You Earn in a Lifetime?
Years
Your Future Earning Power If Your Family Income Averages:
to Age
65
$50,000
$100,000
$250,000
$500,000
40
$2,000,000
$4,000,000
$10,000,000
$20,000,000
35
1,750,000
3,500,000
8,750,000
17,500,000
30
1,500,000
3,000,000
7,500,000
15,000,000
25
1,250,000
2,500,000
6,250,000
12,500,000
20
1,000,000
2,000,000
5,000,000
10,000,000
15
750,000
1,500,000
3,750,000
7,500,000
10
500,000
1,000,000
2,500,000
5,000,000
5
250,000
500,000
1,250,000
2,500,000
How much of this money will be available to you when you retire?
How can you systematically accumulate money for retirement?
How can you guarantee a retirement income that you cannot outlive?
Lesson in Fixed Interest and Indexed Annuities for General Information
Page 2 of 15
Annuity Objectives
In planning for financial security in retirement, an annuity can help satisfy two basic objectives:
To accumulate retirement assets on a tax-deferred basis.
If you're already contributing the maximum to IRAs and any employer-sponsored retirement plans
and need to save more for retirement, a deferred annuity may be the answer to your retirement
savings need.
To convert retirement assets into an income that you cannot outlive.
On the other hand, if you're near or at retirement, an immediate income annuity can be used to
convert existing retirement assets into a lifetime income.
What Is an Annuity?
An annuity is a long-term savings plan that can be used to accumulate assets on a tax-deferred
basis for retirement and/or to convert retirement assets into a stream of income.
While both are insurance contracts, an annuity is the opposite of life insurance:
 Life insurance provides financial protection against the risk of dying prematurely.
 An annuity provides financial protection against the risk of living too long and being
without income during retirement.
Annuities are classified in several different ways, including:
 When annuity payments begin
 How premiums are paid
 How annuity premiums are invested
If you are already contributing the maximum to an IRA and/or
an employer-sponsored retirement plan, an annuity can be an
excellent way to save for financial security in retirement.
Lesson in Fixed Interest and Indexed Annuities for General Information
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Deferred Annuities vs. Immediate Annuities
When Annuity Payments Begin…
Deferred Annuities vs. Immediate Annuities
1.
Deferred Annuities
 A deferred annuity has two distinct phases: the accumulation or savings phase and
the income phase .
 During the accumulation or savings phase , annuity premiums, less any applicable
charges, accumulate in the contract on a tax-deferred basis until the annuity starting
date. Deferral of tax on annuity earnings is a major advantage that other non-
qualified financial products cannot provide.
 On the annuity starting date, a deferred annuity enters the income phase , at which
time the value of the annuity is converted into a stream of income.
2.
Immediate Annuities
 An immediate annuity has only one phase: the income phase .
 The single premium used to purchase an immediate annuity is converted into a stream
of income immediately or shortly after the date the annuity is purchased.
Installment Premium Annuities vs. Single Premium
Annuities
How Premiums Are Paid…
Installment Premium Annuities vs. Single Premium Annuities
1.
Installment Premium Annuities
 The annuity premium is paid in installments to the insurance company over a period of
time.
 The installment premiums can be either a fixed , scheduled amount or can be flexible ,
meaning that the amount paid can vary (within set contract limits).
 During the accumulation or savings period prior to retirement, installment
premiums, less any applicable charges, accumulate in the contract on a tax-deferred
basis until the annuity starting date
 On the annuity starting date , the value of the annuity can be converted into a
stream of income.
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2.
Single Premium Annuities
 The annuity is purchased with a single premium payment.
 A single premium deferred annuity has an accumulation period prior to retirement,
during which the single premium, less any applicable charges, accumulates in the
contract on a tax-deferred basis until the annuity starting date, when the annuity
value can be converted into a stream of income.
 In the case of a single premium immediate annuity , the single premium, less any
applicable charges, is converted into a stream of income immediately or shortly after
the date of purchase.
Fixed Interest Annuities vs. Indexed Annuities
How Annuity Premiums Are Invested…
Fixed Interest Annuities vs. Indexed Annuities
1.
Fixed Interest Annuities
A fixed interest annuity pays a fixed rate of interest on the premiums invested in the
contract, less any applicable charges. The insurance company guarantees* that it will pay
a minimum interest rate for the life of the annuity contract. A company may also pay
an "excess" or bonus interest rate, which is guaranteed* for a shorter period, such as one
year. Be aware, however, that an annuity offering a bonus interest rate may also be
subject to higher fees which will reduce or even eliminate the value of the bonus interest
rate.
2.
Indexed Annuities
An indexed annuity has characteristics of both a fixed interest annuity and a variable
annuity. Similar to a variable annuity , the insurance company pays a rate of return on
annuity premiums that is linked to a stock market index, such as the Standard & Poor's
500 Composite Stock Price Index. Similar to fixed interest annuities , indexed annuities
also provide a minimum guaranteed interest rate*, meaning that they have less risk of
loss of principal than variable annuities. An investment in an indexed annuity is not a
stock market investment. Instead, the rate of return is linked to the performance of a
market index that tracks the performance of a specific group of stocks. Since the
minimum guaranteed interest rate is combined with this interest rate linked to a market
index, indexed annuities have the potential to earn returns better than fixed interest
annuities when the stock market is rising. You could, however, lose money on your
investment if the issuing company does not guarantee 100% of the principal and
you receive no index-linked interest due to a decline in the market index linked
to your annuity, or if you surrender your indexed annuity while a surrender
charge is in effect. Indexed annuities typically have lengthy surrender periods with a
surrender charge equal to a percentage of the amount withdrawn or a reduction in the
index-linked interest credited to the contract. In addition, any withdrawals before age 59-
1/2 may also be subject to a 10% penalty tax.
* All guarantees are based on the claims-paying ability of the issuing insurance company.
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A Closer Look at Fixed Interest Annuities
Deferred Fixed Interest Annuities:
Premium Payments:
A deferred fixed interest annuity can be purchased either with a
single premium or through a series of installment premiums.
Accumulation Phase:
During the accumulation phase, the insurance company pays a fixed
rate of interest on the premiums invested in the contract, less any
applicable charges. The fixed interest rate paid is determined by the
insurance company and is spelled out in the annuity contract. While
the insurance company guarantees* that it will pay a minimum
interest rate for the life of the annuity contract, a company may also
pay an "excess" or bonus interest rate, which is guaranteed* for a
shorter period, such as one year. Be aware, however, that an
annuity offering a bonus interest rate may also be subject to higher
fees which will reduce or even eliminate the value of the bonus
interest rate.
Income Phase:
On the annuity starting date, you can elect to receive the value of the
annuity in a single lump sum or you can select from a variety of
annuity income options, some of which guarantee* you a fixed, level
income that you cannot outlive.
Immediate Fixed Annuities:
Premium Payments:
An immediate fixed annuity can be purchased with a single premium
only.
Income Phase:
The single premium less any applicable charges is converted into a
guaranteed* fixed, level income that begins immediately or shortly
after the premium is paid.
* All guarantees are based on the claims-paying ability of the issuing insurance company.
Lesson in Fixed Interest and Indexed Annuities for General Information
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Hybrid Annuity...Equity Indexed or Indexed
Annuities
The indexed annuity has features of both a fixed interest annuity and a variable annuity:
 The insurance company pays a rate of return on your annuity premiums (less any
applicable charges) that is tied to a stock market index, such as the Standard & Poor's 500
Composite Stock Price Index.
 Similar to a fixed interest annuity , an indexed annuity also provides a minimum
guaranteed* interest rate. Unlike a fixed interest annuity, many indexed annuities only
guarantee that you'll receive 87.5% of the premiums you paid. In addition, early
surrender of any annuity can result in loss of some principal and/or interest earnings.
An indexed annuity is an insurance contract and not an investment in the stock market. Indexed
annuities credit interest using a formula based on changes in the index to which the annuity is
linked. Any index-linked interest payable in excess of the minimum guaranteed* interest rate is
determined by a formula contained in the annuity contract. There is, however, a limit or cap
placed on the index-linked interest paid. As a result, it is important for you to review
the annuity contract carefully in order to understand how these indexed annuity
features work together, since they can have a substantial impact on the return on your
investment:
 Indexing Method: There are different methods used to determine the change in the
relevant index over the period of the annuity. The indexing method used will impact the
amount of interest credited to the contract.
 Participation Rates: How much of the gain in the index will be credited to the indexed
annuity? If, for example, an indexed annuity has an 80% participation rate, the annuity
will be credited with only 80% of any gain experienced by the index.
 Spread/Margin/Asset Fee: An indexed annuity may contain a spread/ margin/asset fee
instead of, or in addition to, a participation rate. If, for example, an indexed annuity has a
3% spread/margin/asset fee and the index gains 9%, the interest credited to the annuity
will be 6%.
 Interest Rate Caps: Some indexed annuities contain a cap or upper limit on the amount
of interest the annuity will earn. For example, if the cap rate is 10% and the index linked
to the annuity gains 12%, only 10% will be credited to the annuity.
* All guarantees are based on the claims-paying ability of the issuing insurance company.
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Fixed Annuity Suitability
First of all, an annuity should be considered as a longer-term investment. If, for example, your
objective is to save for retirement and you are already contributing the maximum to an IRA and/or
employer-sponsored retirement plan, an annuity might be right for you. But which type of
annuity? The answer to that question depends primarily on your investment objectives and risk
tolerance.
Fixed interest annuities may be best suited for individuals who:
 Prefer to rely on fixed rates of return
 Focus on preservation of assets
 Want protection from market volatility
 Prefer to delegate investment decisions and risks to the insurance company
 Understand that a fixed rate of return may not provide a good hedge against inflation
Indexed annuities may be best suited for individuals who:
 Are adverse to risk
 Understand that a rate of return linked to stock market performance provides the potential
for higher returns than fixed interest investments, together with the risk of losing money if
the issuing company does not guarantee 100% of the principal and no index-linked
interest is credited, or if the indexed annuity is surrendered while a surrender charge is in
effect
 Prefer to delegate investment decisions to others
 Want less market risk than with a variable annuity
Lesson in Fixed Interest and Indexed Annuities for General Information
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Annuity Comparisons
Fixed Interest Annuities vs. Indexed Annuities
Fixed Interest
Indexed
Annuities
Annuities
Minimum guaranteed return?
Yes 1
Yes 1
Choice of investment options?
No
No
Opportunity to earn a higher No
Yes
return?
Possibility of losing principal?
No 1
Maybe 2
Tax-deferred growth?
Yes
Yes
Minimum death benefit?
Yes 1
Yes 1
1 Subject to the claims-paying ability of the issuing insurance company.
2 It is possible to lose principal in an indexed annuity if, for example, the issuing insurance
company does not guarantee 100% of the principal and no index-linked interest is credited to the
contract because the index linked to the annuity declines, or if an indexed annuity is surrendered
while a surrender charge is in effect.
Immediate Annuities vs. Deferred Annuities
Immediate Annuities
Deferred Annuities
Premium
Single premium only.
Either a single premium or a series of installment
payments?
premiums.
Annuity
Begins
immediately
or Begins at a future annuity payout date, providing
payout?
shortly after premium is time for annuity accumulation.
paid.
Partial
Possibly; review the features Yes, subject to the terms of the contract and
withdrawals? of the contract you are possible charges, partial withdrawals can be
considering to determine if made
from
a deferred
annuity;
partial
withdrawals may be made withdrawals may be subject to a premature
and under what conditions.
withdrawal tax if made prior to age 59-1/2.
Withdrawals will reduce the value of the death
benefit and any optional benefits.
Surrender
None; the contract cannot be Yes, a deferred annuity can be surrendered for
value?
surrendered.
its value, subject to surrender charges and a
possible premature withdrawal tax if surrendered
prior to age 59-1/2.
Lesson in Fixed Interest and Indexed Annuities for General Information
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Annuity Income Phase
When you are ready to begin receiving income from a deferred annuity, you can select from a
variety of options, including:
Lump Sum
You can surrender your deferred annuity and receive the entire value in a
Distribution
lump sum payment. This option requires that income tax be paid on the
annuity earnings in the year you receive them. In addition, a lump sum
distribution does not solve the problem of outliving your retirement
income.
Systematic
You can set up a systematic withdrawal plan, through which you receive a
Withdrawals
specified amount of money at regular intervals, such as $1,000 per
month, until all assets have been withdrawn. With this option, you have
the flexibility to change the payment schedule in the future. Since, for
income tax purposes, earnings are considered withdrawn before principal,
the likelihood is that the earlier withdrawals will be fully taxed at ordinary
income tax rates. In addition, with this option there is no guarantee that
you will not outlive your retirement income.
NOTE: A lump sum distribution or systematic withdrawals made prior to
age 59-1/2 may be subject to a 10% federal tax penalty on the taxable
amount of earnings withdrawn, unless one of the exceptions is met.
Annuitization
You convert the value of your deferred annuity into a lifetime income or
into a stream of payments for a fixed period of time. Alternatively, you
use other retirement assets to purchase an immediate income annuity.
As reviewed on page 13, there are a variety of annuity income options
from which to select.
Other Options
Talk to your licensed financial adviser about other options that may be
available in the annuity contract you are considering.
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Annuity Income Options
At retirement, annuity income can be structured in a variety of ways, enabling you to select the
income option that best satisfies your unique needs. While you can surrender a deferred annuity
and receive a lump-sum payment equal to the annuity value, many people elect to convert the
annuity value into a stream of retirement income using one of these income options:
Life Income
 Payments are made for as long as the annuitant is alive.
Option
 Payments cease at the annuitant’s death.
 This option produces the maximum guaranteed* lifetime income.
Life Income with
 Payments are made for as long as the annuitant is alive.
Period Certain
 If the annuitant dies before a specified number of payments have
Option
been received (e.g., 120 monthly payments), the remaining
payments in the period certain are made to the beneficiary.
Life Income with
 Payments are made for as long as the annuitant is alive.
Refund Guarantee
 If the annuitant dies before payments equal to all or a specified
Option
portion of the purchase price have been received, the beneficiary
receives the balance of the payments, up to the refund guarantee*
amount.
Joint-and-
 This payout option covers two lives.
Survivor Option
 The same payment can be received for as long as either of the two
annuitants is alive or, alternatively, at the death of the first
annuitant, the payment to the surviving annuitant can be structured
to reduce to a specified percentage (e.g., 75%) of the payment
received while both annuitants were alive.
 A joint-and-survivor payout can also include a period certain feature.
Period Certain
 Payments are made for a specified number of years, such as 10 years
Option
or 20 years.
(no guarantee of
 Payments cease at the end of the period certain.
lifetime income)
 If annuitant dies before receiving all guaranteed* payments, the
beneficiary will receive the remaining payments.
* All guarantees are based on the claims-paying ability of the issuing
company.
Flexibility
While these are the five basic annuity income options, some annuity
contracts offer additional flexibility…ask your licensed financial adviser
about contract features that may add flexibility to your use of an annuity
to provide retirement income.
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Page 11 of 15
Non-Qualified Annuity Taxation
During the Accumulation Phase:
 Earnings credited on the funds in a deferred annuity are tax deferred, meaning that the
earnings are not taxed while they remain in the annuity.
 Withdrawals from a deferred annuity during the accumulation phase are treated as
withdrawals of earnings to the extent that the cash value of the annuity exceeds the total
premiums paid and are taxed as income in the year withdrawn. To the extent that a
withdrawal exceeds any earnings, that portion of the withdrawal is considered a non-
taxable return of principal.
 In addition, a 10% penalty tax may be imposed on withdrawals made before age 59-1/2,
unless certain conditions are met. The penalty tax is in addition to the regular income tax
on the withdrawal.
 If the annuitant dies during the accumulation phase, the value of the deferred annuity is
generally included in the annuitant’s estate, to the extent of the deceased annuitant’s
proportional contribution to the annuity purchase price.
During the Income Phase:
 The annuity purchase price is returned in equal income-tax-free amounts over the
expected payment period (based on the annuitant’s life expectancy).
 The portion of each payment in excess of the tax-free return of the purchase price is
taxable in the year received.
 In summary, a portion of each annuity payment is received income tax free and the
balance is taxable as received.
 At the annuitant’s death, the present value of any remaining annuity payments due is
generally included in the annuitant’s estate, to the extent of the deceased annuitant’s
proportional contribution to the annuity purchase price.
A professional tax advisor should be consulted for more detailed information on annuity
taxation in your situation.
Lesson in Fixed Interest and Indexed Annuities for General Information
Page 12 of 15
Fixed Annuity Advantages and Disadvantages
An annuity can be a great way to save for retirement on a tax-deferred basis, in effect creating
your own personal "pension" plan. As with any investment, however, there are also potential
disadvantages that should be evaluated before purchasing an annuity.
Advantages:
 A fixed annuity protects against a decline in asset value during market downturns.
 Earnings on your annuity premiums are tax deferred so long as they remain in the annuity.
When compared to an investment whose earnings are taxed each year, tax deferral offers
the potential for accumulating significantly higher amounts of money over time.
 An annuity can be used to provide a steady source of retirement income that you cannot
outlive.
 Unlike an IRA or employer-sponsored retirement plan, there are no annual contribution
limits to an annuity…you can contribute as much as you want.
 Subject to the terms of the contract, there is no required date by which you must begin
receiving annuity income payments, providing you with the flexibility to defer payments
until you need the income.
 If you die while your annuity still has value, the annuity death benefit passes directly to
your beneficiary without probate.
 In most states, an annuity is free from the claims of a creditor.
Disadvantages:
 The growth of a fixed annuity may not keep pace with inflation.
 Premiums for a non-qualified annuity are not tax deductible, meaning that they are made
with after-tax dollars.
 While you can surrender or make withdrawals from a deferred annuity before you begin
receiving income payments, the surrender or withdrawal may be subject to a charge if
made within a stated number of years after the annuity is initially purchased.
 If made prior to age 59-1/2, a surrender or withdrawal will be subject to a 10% federal
penalty tax unless one of the exceptions to this tax is met.
 When received, investment gains are subject to ordinary income tax rates and not the
lower capital gains tax rate.
 Once annuity income payments begin, annuity contracts vary in regard to whether the
payment amount can be changed and/or whether amounts can be withdrawn from the
contract. Ask your licensed financial adviser to explain whether the contract you are
considering allows for annuity payments to be increased or decreased and whether
withdrawals are available.
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Fixed Annuity Checklist
Once you decide that an annuity is right for you, there are a number of factors you should consider
in evaluating the specific annuity you will purchase. These include:
Fees and
The annuity fees and expenses an insurance company charges can include:
Expenses
 Premium charges deducted when premiums are paid;
 An annual maintenance fee (e.g., $30);
 Mortality or insurance charges for death benefit features; and/or
 Surrender charges assessed when the annuity is surrendered or
withdrawals are made in the early years of the contract.
Carefully evaluate fees and expenses, since they will impact the amount of
money ultimately available in the annuity.
Insurance
Since an annuity is an insurance contract, you need to be able to count on
Company
the financial strength and claims-paying ability of the insurance company
Ratings
from which you purchase an annuity. Ask for company rating information
from respected sources, such as A.M. Best, Moody's or Standard & Poor's,
before purchasing an annuity.
Annuity
Make sure you understand the terms and limitations of the annuity contract
Features
before you purchase it, including:
 In the case of a fixed interest annuity , the current interest rate being
credited, how often it changes and the minimum interest rate
guaranteed by the contract;
 in the case of an indexed annuity , how amounts credited to the annuity
contract are determined;
 the withdrawal and surrender options;
 how the death benefit is determined and paid;
 the income payout options available.
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Important Information
The information, general principles and conclusions presented in this report are subject to local,
state and federal laws and regulations, court cases and any revisions of same. While every care
has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter
Company is engaged in providing legal, accounting, financial or other professional services. This
report should not be used as a substitute for the professional advice of an attorney, accountant, or
other qualified professional.
Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping
them in force. All contract guarantees are based on the claims-paying ability of the issuing
insurance company. Consult with your licensed financial representative on how specific annuity
contracts may work for you in your particular situation. Your licensed financial representative will
also provide you with costs and complete details about specific annuity contracts recommended to
meet your specific needs and financial objectives.
NOTE : This annuity discussion is intended primarily to provide information on personal, non-
qualified annuities that are not purchased to fund an IRA or qualified employer-sponsored
retirement plan. An annuity purchased to fund an IRA or qualified employer-sponsored retirement
plan does not provide any additional tax deferral, since tax deferral is provided by the IRA or
qualified plan itself. If an annuity is purchased to fund an IRA or qualified employer-sponsored
retirement plan, it should be done for the annuity features and benefits other than tax deferral.
U.S. Treasury Circular 230 may require us to advise you that "any tax information provided in this
document is not intended or written to be used, and cannot be used, by any taxpayer for the
purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was
written to support the promotion or marketing of the transaction(s) or matter(s) addressed and
you should seek advice based on your particular circumstances from an independent tax advisor."
© VSA, LP All rights reserved (VSA 1a2-14 ed. 07-13)
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