Hi! I'm John Vucicevic, Welcome back.
This is the annuity basis course and we're doing this in conjunction with Rob Lambert and the AssetProtectionTraining.com.
The word annuity makes people scared and I believe it comes from lack of knowledge. The course here is a bullet point course to discuss of the very basic terminology, if you will with respects to annuities.
So, sit back and enjoy yourselves.
Annuities have to life cycles.
One life cycle is the Grove life cycle and the second one is the income life cycle. They're designed to pay interest and it's designed to pay out income. You give your money to an annuity company, an insurance company as a rule and they'll take it as a single premium payment. That payment, if it's a single payment typically, in my experience, is going to come from some sort of transfer or rollover out of an account someplace.
Rollovers are for qualified money like pension plans or 401ks IRAs things in that nature. Transfers coming from non-qualified accounts or if you're just going to put in money on a monthly basis, like you do your 401k, you can do that through a systematic payment plan.
Interest is earned
Interest can be fixed and I'll say this, all annuities have some sort of guaranteed rate of interest built into them. However, you can also buy an annuity that pays two percent, three percent, five percent given the time that you purchase it for a period of years is very very similar to a CD.
Ondex interest - is interest that's index to the sp500 or some sort of index out there in the stock exchange, for russell 1000, the nasdaq something like that. The money that's inside the annuity is not invested in. It is invested in underlying assets of the company, but it's tied to the index to measure interest.
Then you have market-based growth which are traditionally mutual funds of some sort, asset classes and invested through an Annuity. These will ebb and flow with the marketplace, however all have some sort of guaranteed a place to put the engine and put the money so that you can earn some sort of guaranteed income flow.
Then you have an income life of the new this comes at the end, sometimes right at the beginning, it depends on the person that's buying it. You can get a lump sum payment, you're going to see this flow a lot and it's very prominent once a week every time the lottery draws numbers. You can take a lump sum payment or you can take the payment over time, that's called an annuitization. Get it on monthly you can get it annually. If we are talking about the lottery you have a choice you have a choice between getting in over 25 years or getting it in a lump sum, if you were lucky enough to win the lotto.
Getting it over 20-25 years is called a period certain and that's how the state can pay out ten million dollars for instance over 25 years. They don't put as much money in the upfront that's what the lump sum would be, they annuitize it over a timeline. You can also get an annuity for life, not from the lottery. But you'll see this is in everybody's lives really with respects to anybody that you might know. You might be the person that has a pension check. You're getting an income for life, maybe your spouse is attached to it somehow someway. that is an annuitized payment okay.
They can be for life with a period certain. What we're saying here is that the person it's entitled to the money, gets it for their entire lifetime. If they do it for 20 years- let's say and they die in year 10, there's still 10 years that are going to be paid out to a beneficiary. Life with a period certain and then you can decide how you get the money.
You've grown it for 10 years let's say, and then you say, well I want to get it every three years I want to check, when you can decide to do that. However, if it doesn't have for life after it, it's not going to be; and when you spend your money you spend your money, it's your money you can spend it. All so you can get some income riders this is beyond the scope of this class but those writers are there to create income flow as well.
The Annuity Contract
The rule book is typically called the annuity contract. This is going to decide or not decide. It's going to guide what the company's obligations are to you and what your obligations are to the company. It's going to talk about and define all the benefits all the costs involved and the time. Everything is measured, everything is calculated and you know exactly what's going on because it's in this contractual format. It's going to tell you how interest is earned. Again this varies based on a type of annuity that you're looking at, again it can be fixed, it could be indexed or it could be driven by the market one hundred percent.
Right, so both parties are in there for disputes for instance, and this is the important piece, I think anyway.
Beneficial interests are defined inside the contract, annuities passed by beneficiary. If you don't make it to your long life and are able to get income what happens to your money, and it passes through the beneficial interest. They're defined inside the contract.
The annuity principles are not only the company but the annuity owner, this is the person that put the money into the annuity. it can be a person it can be a trust or it can be a bit this entity of some sort corporation or Something. The annuitant is the person that's going to receive the benefits at some point. The owner owns the money, the annuitant gets the benefits. That can be the same person but the annuitant can never be a trust or a business, and the reason is the annuitant that the person receiving benefits has to have a life Expectancy.
You know for companies going to, from a logical standpoint here, if a company is going to guarantee a benefit for life, they want to make sure you're going to die at some point. A trust and a business don't fit that model so it has to be a breathing person.
Why on earth would anybody put money into an annuity?
Because of the guarantees
· guarantees involved for income
· guarantees involved for returns
· guarantees involved for costs
Everything is known up front prior to any decisions being made. You make a decision with all the facts right out there in front of you.
Principal can burst and foremost it's safe. It's protected by the underlying assets of the insurance company. If you put ten thousand dollars into an annuity and you want to get money out of it, they have to have that money available for you off of their books. It's not an asset of the company it's a liability, it's called a legal reserve. It's sitting off of the insurance company's books that's what makes it safe. However, most states have a guarantee pool, a guarantee Association is what they call it in my steak, and that will protect the purchaser or the annuitant for any defaults of the Company.
Another big reason why people buy annuities is because the interest is deferred. That doesn't matter if it's a qualified account that's preferred anyway. But if it's not qualified money, money that's not an IRA or 401k. All the interest and all the games that are put inside this annuity are sent out to some different point or some other point in time. You don't pay tax today you're going to pay tax on it later at some point.
On non-qualified money the distributions from an annuity can be very tax-favored, specially when you're talking about lifetime benefits.
Probate protection this is the beneficial interest, you know beneficiaries in any contract bypass probate. Life insurance, annuity contracts things of that nature, they passed by beneficial interest so avoids probate.
In addition is very state specific but some states provide credit for protection for money placement to an annuity, also critical in on this protection. If you can't qualify for long-term care for instance an annuity might be a good option for you. That's a very complex planning strategy, not pertinent all states but it is a big benefit and, in the states that it qualifies for.
I hope this has been a benefit to you. In the next classes, we're going to talk about the single premium immediate annuity and some of the planning features around that. We're going to the third class that will be about the indexed annuity, and then we're going to talk about the variable annuity.
Thanks for watching, my name is John Vucicevic.