Annuities explained

Annuities Explained
In Simple Terms with Tips &
Ideas That Could Save You Thousands
Financial &
Insurance Agency
Toll-free:
1-866-589-9366
Provided to you by:
Mr. Richard Loek

Annuities Explained
In Simple Terms with Tips & Ideas That Could Save You Thousands
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Annuities
Explained
First Published January 2013
by
Richard D. Loek
123 E San Carlos Street, #221
San Jose, CA 95112
www.calrima.com / rloek@calrima.com
www.iXrayRetirement.com / www.iXrayAnnuities.com
1-866-589-9366
Investment Advisory Services offered through Onesta Wealth
Management, LLC; Comments regarding safe and secure
investments, and guaranteed income streams refer only to fixed
insurance products. They do not refer, in any way to securities
or investment advisory products. Insurance and Annuity
product guarantees are subject to the claims-paying ability of
the issuing company, and are not offered by Onesta Wealth
Management. Insurance products are sold through CalRima
Financial & Insurance Agency, California Insurance License
#OF34289.
No specific individual advice, be it legal, tax or investment is
given here. As always, consult with your professional tax or
legal advisor before making any final decisions. This booklet
is to be used solely for educational purposes.

Table of Contents
Introduction:.............................................................................. 4
Annuity History: ....................................................................... 5
Types of Money........................................................................ 7
Spend Regular Money First .................................................. 9
Spend IRA Money First........................................................ 9
Assumptions:......................................................................... 9
Rules of Money....................................................................... 10
Rule of 100.......................................................................... 10
Rule of 72............................................................................ 10
Rule of 114.......................................................................... 11
Rule of 144.......................................................................... 11
Annuity types.......................................................................... 11
Understanding the Basics.................................................... 11
Flexible premium................................................................ 12
Single premium................................................................... 12
Annuity Phases.................................................................... 12
Accumulation phase............................................................ 12
Annuitization phase ............................................................ 12
Income phase ...................................................................... 12
Immediate Annuity ............................................................. 13
Fixed Annuity ..................................................................... 13
Variable Annuity................................................................. 13
Variable Annuity Riders ..................................................... 14
GMIB .................................................................................. 14
GMWB................................................................................ 14
Fixed Index Annuity or Hybrid Annuity ............................ 14
Hybrid Annuity Riders........................................................ 16
Does It Make Sense for Me to Change Annuities?................. 16
1. How safe is my annuity?.............................................. 17
2. How does the current interest rate compare to the
original contract rate? ......................................................... 17
3. Is my annuity lacking some of the newer annuity
benefits?.............................................................................. 17
1. What is the total cost to me of this exchange?............. 18
2. What about losing Death Benefits?.............................. 18
3. How do the surrender provisions compare?................. 18

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4. What are the new features and why do I need or want
those features?..................................................................... 18
How Annuity Payments Are Taxed ........................................ 19
Other Considerations .............................................................. 22
1. Surrender Fees. ............................................................ 22
2. Tax Consequences. ...................................................... 22
3. Features Vary Among Insurance Companies. ............. 22
4. Fees and Expenses. ...................................................... 22
5. Loans and Early Withdrawals...................................... 23
6. Company Stability and Regulatory Oversight. ............ 23
Taxation of Your Social Security Benefits ............................. 23
Cash Payments for Life........................................................... 24
For whom may a fixed immediate annuity be suitable? ......... 25
What can you expect to receive on an immediate annuity? 25
Planning for Extended Care.................................................... 26
Key Questions to ask your advisor ......................................... 28
Advisor Regulation................................................................. 29
In Summary............................................................................. 31
Definitions............................................................................... 32
References............................................................................... 33

Introduction:
Annuities can be a great way to make your money work,
but many people may not understand the risks, rewards, or the
workings of their annuities! As I have scoured the Internet
looking for information I can hear my doctor saying, “You can’t
believe everything you read on the Internet…” How true that
comment has been. False accusations, misinformation and of
course simply poor journalism abound.
[So much can be said. The purpose of this booklet is to
give you a basic foundation, spark questions and inspire you to
seek out the truth for your situation]
This booklet will point out some common mistakes to
avoid and show you how to get a lot out of your annuity. You'll
get an education and real understanding of your annuity, in plain
English! Most of all, if you already have an annuity, I hope I
can put your fears to rest or you can call and we’ll work with
you to make the most of what you already have.
On the positive side, this booklet will point out some
"hidden" values of annuities that many people are not aware of.
Items such as riders and how to avoid annuitization.
Annuitization is where people are often left feeling annuities are
bad.
When I first go into this industry I was confused by all of
the different “Experts” giving their opinions and advice. It took
a while to understand and expose the undercurrent that exits in
the financial or investment industry. It has been my experience
when someone is slamming another product it is because they
don’t understand that product or that product is causing them to
lose business. The varieties of articles I have read typically twist
the context and even worse the content of the article. To
unilaterally discount products or investments classes shows lack
of understanding.

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As a result of all the confusing and misleading information
I felt compelled to produce this document with valuable
information I have collected.
If you find that you have questions after reading the
booklet, feel free to call CalRima Financial & Insurance Agency
or the Advisor that has provided you with this booklet. The
Advisor’s phone number is on the last page.
Let's get started...
Annuity History:
As a tool for investment and financial security, the life
insurance annuity has been around for quite a long time.
Annuities first started the ancient Roman Empire. They were a
way for Roman citizens to receive a yearly payment for their
lifetimes or for several years in exchange for a large upfront
payment. Early roman annuities were often given to Roman
legionnaires as payment for years of faithful military service. (1)
As time passed, the modern life insurance annuity began to take
shape.
In medieval times, lifetime annuities bought with a single
initial premium became popular among nobles for funding the
constant warfare that was a fact of life then. , records show that
one of the most popular annuities of the medieval era was called
the tontine. (2) In this annuity the participants purchased a share
in an annuity pool, and then, in turn, received a lifetime annuity.
The payments were divided among surviving participants
of the initial annuity pool. Thus, as time passed, each participant
would receive a larger payment. As the participants died off,
ever increasing payments would be made to them. The sole
remaining survivor would reap the benefits of the remaining

annuity principal. One of the oldest and longest lasting tontines
was the annuity called the State Tontine of 1693. It was started
in the United Kingdom as a way to pay for its many wars with
France.
The modern financial system started to develop. Dr. James
Dodson of England formed the Equitable Life Assurance
Society of London in 1756. This was one of the first companies
formed to offer a modern form of life insurance annuity. (3)
Dodson founded this company and the annuity that it offered to
provide a form of insurance to persons of all ages.
The Equitable Life Assurance Society issued policies
based on the assurance of fixed sums on the surviving
policyholder's beneficiary’s lives. The company issued policies
for any term for which the policyholders wanted to purchase the
life insurance annuity. Premiums of this annuity were governed
by the age, lifestyle, and health of the policyholders seeking to
enter into the annuity. These basic rules laid down the
foundation of a distinguished modern life insurance annuity
company that still exists today.
In the United States, the Presbyterian Ministers
Association first developed annuities as a retirement income for
minsters, windows. The Presbyterian Church funded the annuity
services of this association. The services were passed from the
policyholder to their surviving spouse. The annuity offered by
the association also passed on to surviving children if they were
under the age of adulthood.
The history of Benjamin Franklin's annuities are an
interesting note in the history of the American life insurance
annuity. Franklin left two annuities to the cities of Boston and
Philadelphia on his death. Boston city officials finally ended the
annuity he left them in 1993.
The US developed its banking and insurance industries.
The states found that banks were selling their own annuities. In
the financial turmoil following the First World War, many of

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these US annuity contracts were found to be unsafe. As a result,
many states passed laws allowing only life insurance companies
to issue annuity contracts. This began the modern life insurance
annuity as we know it in the US today.
The Great Depression of the 1930s came upon us. Then
many people were kept financially solvent because they trusted
the security that the modern life insurance annuity has come to
offer. Thousands lost their entire life savings in the stock market
then. At the same time life insurance annuity investors retained
a large portion of their savings. Babe Ruth is quoted as saying,
“I may take risks in my life, but I will never risk my money. I
use annuities and I never have to worry about my money.”
In today's highly volatile economic climate, perhaps the
Babe's advice is worth listening to. The life insurance annuity of
today provides a high level of safety and security for an
investor's money.
That high level of safety and security simply cannot be
matched by many traditional investments. Given all of this, one
might do very well relying on a modern life insurance annuity
for their future economic and financial security.
Types of Money
Before we dive in too deeply I need to distinguish that
there is more than one type of money. Annuities can be funded
with money from retirement accounts or non-retirement
accounts; as such we need to spend a moment to explain these
two types of money.
There are two types of money: The money that has already
been taxed, called non-tax qualified money or after tax money.
The other type of money, money that has not been taxed, is
called qualified money or pre-tax money typically called

"retirement money" such as IRA, 401k, 403b, etc. When you
spend a dollar of after tax money, the cost to you is exactly $1.
When you spend $1 of retirement money, the cost to is much
higher. Consider you must pay taxes on that dollar. To get one
dollar if your federal tax ratei
is 25% you must withdraw
$1.33(1/.75). Therefore, if you want to reduce your taxes,
consider not taking more than the required distribution from
your retirement money.
Some people think they should never spend their principal,
but this can be a mistake if you want to save taxes. It could be
better to spend some of your regular assets first, so that you can
take advantage of the tax-deferral benefits associated with IRAs
and qualified retirement plans. You could be better off
financially from an income tax standpoint. Your lifetime tax bill
can be less or you will at least defer taxes for many years.
Consider the following hypothetical example that assumes
you have a taxable regular money account and a tax-deferred
retirement account with a $100,000 balance each. Let's assume
the money in each account earns a return of 6% per year. Let's
further assume that annual NET distributions of $6,000 per year
are being taken for a 20-year period. Under one scenario, the
$6,000 will be taken first from the taxable money. The other
scenario considers what would happen if the money was taken
first from the qualified money. Under this example, you would
have $150,000 more at the end of 20 years by spending your
regular money first. The upside is that you could potentially hold
onto more money while you are alive.
Of course, the down side is that your beneficiaries will
eventually have to pay income taxes on the money when you are
gone. As the information provided by this example is
hypothetical, actual results will vary depending upon the
performance of your investments.ii
Spend after-tax Money First

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Today In 20 Years
Spend Regular Money First
Regular Money $100,000 $40,916
IRA Money $100,000 $320,713
TOTAL $200,000 $361,629
Spend IRA Money First
IRA Money $100,000 $0
Regular Money $100,000 $211,247
TOTAL $200,000 $211,247
Assumptions: All money is assumed to earn 6%. This
assumed rate is used for tax illustration purposes only and does
not reflect any particular investment. Federal income taxes are
assumed to be 35% in this example, and your income tax rate
could be lower based upon your annual income. This illustration
covers a 20-year duration, with distributions of $6,000 occurring
each year. The income taxes on withdrawals are also deducted
from the IRA account.

Rules of Money
Rule of 100
Simply put the rule of 100 is used as a base line to determine
how much of your assets could be at risk. The rule is as
follows. You take 100 and subtract your age. The result is a
guideline stating how much of your money could be at risk.
Each person’s situation varies and this is a good starting point
for your risk planning. See the table below:
Age Formula Result
40 100 – 60 40%
50 100 – 50 50%
60 100 – 60 40%
70 100 – 70 30%
80 100 – 80 20%
Rule of 72
The power of doubling money through compound interest on
tax deferred investments. The rule of 72 states that you divide
the number 72 by the rate of return and the result is the number
of years it will take for your money to double. See the table
below:
Rate Equation Result
2% 72÷2 36 years
6% 72÷6 12 years
7.2% 72÷7.2 10 years
8% 72÷8 9 years
10% 72÷10 7.2 years

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Rule of 114
The Rule of 114 is about how long it will take for your money
to triple. The same formula is applied as the Rule of 72.
2% 114÷2 57 years
6% 114÷6 19 years
7.2% 114÷7.2 15.8 years
8% 114÷8 14.3 years
10% 114÷10 11.4 years
Rule of 144
The Rule of 114 is about how long it will take for your money
to quadruple. The same formula is applied as the Rule of 72.
2% 144÷2 72 years
6% 144÷6 24 years
7.2% 144÷7.2 20 years
8% 144÷8 18 years
10% 144÷10 14.4 years
Annuity types
Understanding the Basics
Generally speaking an annuity is tax deferred. The money
in an annuity grows tax deferred like a retirement account. As
with an IRA, (Individual Retirement Arrangement – as named
per IRS document 590) the money in an annuity is ear-marked
for use after age 59 ½.
As such, annuities are not to be used without careful
consideration. Points to consider are surrender charges, how
long you must hold the annuity to get full value or principal

back, how will your annuity earn credits or interest. All of these
points are covered on this web site.
Choosing a suitable vehicle for your retirement is not an
easy task. With the numerous choices, which product is better
suited for your needs? On one hand, you might want the
guarantee of principal and past earnings. On the other hand,
many prefer the potential of higher returns by being linked to the
equity markets.
Flexible premium - Most annuities will allow for
additional principal (premium) to be added to the contract. This
is called a flexible premium annuity.
Single premium – some annuities will only allow for
a single premium payment to be made to an annuity. These are
called single premium annuities.
Annuity Phases
Accumulation phase – money is added to annuities
and allowed to grow income tax deferred. This stage is called
the accumulation phase. As noted above, some annuities may
allow more premium(s) to be added to a contract during this
phase.
Annuitization phase – during an annuitization
phase the contract is unable to be altered. Annuitization has also
been coined as “annuicide”. There are a few different ways to
annuitize a contract. From a high-level you may annuitize for
the remainder of person or persons lives, for set period of time
or a combination of the two.
Income phase – different products have different
ways to address this. For the most part you either have a classic
annuity that only allows for annuitization or you have an annuity
with a rider that allows for greater income options without
committing annuicide.

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Immediate Annuity
With an immediate annuity a person gives an insurance
company a lump sum of money and that money is turned into an
income stream, like a pension. This income stream has options.
The income could be for a set period of time, for the rest of the
person's life or a couple's lives, or lastly a combination of the
two called a period certain with life. An immediate annuity is
also known as a SPIA – single premium, immediate annuity.
NOTE: This does offer protection or guarantee of the principal.
Fixed Annuity
Is a deferred annuity that works similarly to a certificate of
deposit (CD) that you could get at a bank. There are however
key distinctions that need to be addressed. With this type of
annuity you may get a set rate of return for the period of deferral
or you may get a higher rate the first year and lower rates in
following years. NOTE: This does offer protection or guarantee
of the principal.
Variable Annuity
As the name indicates, the principal (premium) in this type
of annuity can fluctuate up and down. Careful consideration
must be taken as to how much risk an investor wishes to take;
variable annuities can fall just as quickly as equities, or mutual
funds and no guarantees to the actual principal are offered. Also,
investors should make themselves aware of the fees for both the
fixed and variable portions of a variable annuity. NOTE: This
does not offer protection or guarantee of the principal.

From FINRA’s website, http://www.finra.org “Investing
in a variable annuity within a tax-deferred account, such as an
individual retirement account (IRA) may not be a good idea.
Since IRAs are already tax-advantaged, a variable annuity will
provide no additional tax savings. It will, however, increase the
expense of the IRA, while generating fees and commissions for
the broker or salesperson.”iii
Variable Annuity Riders
GMIB – Guaranteed Minimum Income Benefit rider can
be added to some variable annuities. What this provides is
income at some point in the future. This usually requires
annuitization, which means you lose control of your money.
NOTE: This does not offer protection or guarantee of the
principal.
GMWB – Guaranteed Minimum Withdrawal Benefit
rider can be added to some variable annuities. This appears to
be a more flexible cousin of the GMIB. The distinction here is
that you get to withdraw money without annuitization – thus
possibly maintaining more control. NOTE: This does not offer
protection or guarantee of the principal.
Fixed Index Annuity or Hybrid Annuity
Would you like an annuity that tracks the performance of
the stock market, yet helps to protect your principal when the
market declines? The fixed-indexed annuity could help you to
cover these objectives.
The hybrid annuity can offer some market risk protection,
tax deferral, a minimum interest rate guarantee, probate
avoidance, and guaranteed minimum income payments for life.
The interest earnings for these annuities are based upon the
growth in an accepted equity index, such as the S&P 500 Index,
Dow Jones Industrial Average, and Russell 2000 as well as a

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host of other indices. The interest rate applied to these annuities
is based, in part, upon the overall movement of the index.
Many of these annuities will base the interest rate upon a
pre-determined percentage of the market movement. For
example, let's assume for illustration purposes that the annuity
company set its participation rate at 50% of the index movement
of the S&P 500. Let's assume that the S&P 500 had a good year
and increased by 30% (this is a hypothetical assumption and is
not based upon the performance of any particular investment).
Let's also assume that the interest rate could actually move as
high as 15% before any rate limitations were applied. Based
upon the facts of this example, the interest rate that would apply
to this hypothetical account would be 15% (before contract fees
and expenses are subtracted from the account balance). Please
note that participation percentages do vary among companies
and can range anywhere from 50% to 90%.iv
Some companies
also set a cap on the interest rate, which can vary from company
to company (typically between 10% or less).
The second fundamental feature of these annuities is the
market risk protection. In the event that the market index should
go down, this feature will help prevent your principal investment
from being reduced below a certain percentage of your principal
investment. The minimum guaranteed account value typically
can also vary among companies and generally ranges anywhere
from 75 to 100% of your premium, depending upon the type of
product involved.
These annuities can be useful for those who wish to participate
in the stock and bond markets and not have their principal at
minimal risk. These annuities are also called equity indexed or
fixed indexed annuities. The short name is FIA or EIA. These
annuities can be simple or very complex and difficult to
understand. The more complex the annuity, the less likely it is

appropriate for retirement planning and seniors – beware, if
you don't understand the product, you should give serious
second thought to this product. See below “Key Questions to
ask your advisor” to help determine if this is a fit for you.
NOTE: This does offer protection or guarantee of the
principal.
Hybrid Annuity Riders
Many companies have riders for their index annuity
products, some are better and each needs to be evaluated for the
appropriateness and if this is a fit for each client.
Features: income for life, rising income, death benefit,
compound interest during deferral, (4%, 5%, 6%, 7%, 8%)
Ask your advisor, what other income riders did you
consider before recommending this one?
Does It Make Sense for Me to Change
Annuities?
If you have an annuity contract of any kind, you may have
been approached about the idea of exchanging it for a new model
or one with the latest features. A 1035 exchange could help you
to achieve these objectives. 1035 refers to a provision in the
federal tax code ("Code") that allows you to transfer the
accumulated funds in an existing annuity to another annuity
without creating a taxable event. In other words, the earnings
from your original investment continue to receive tax-deferred
treatment until you take money out of the annuity.
But the continuing tax benefit comes with some important
conditions. First, the Code says the old annuity contract must be
exchanged for a new contract. Therefore, you should have your
current annuity company send the account funds directly to the
new company. Secondly, the Code says you can make a tax-free
exchange from: 1) a life insurance contract to another life
insurance contract or an annuity contract or 2) from one annuity

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contract to another annuity contract. You cannot, however,
exchange an annuity contract for a life insurance contract.
Why might you want to exchange or roll over an annuity?
Here are some questions to consider on this:
1. How safe is my annuity? For any annuity product,
the safety of your money is backed by the claims-paying
ability of the issuing insurance company, not any
government agency. You need to make sure that the
issuing company is in sound financial health. Annuity
owners will sometimes exchange to a company with
greater financial stability.
2. How does the current interest rate compare
to the original contract rate? Some fixed annuity
products offer competitive initial rates to attract investors.
However, the interest rate might only be guaranteed for a
limited period of time, say one or two years. With this in
mind, your current renewal rate could be lower than what
you might otherwise get on a new annuity.
3. Is my annuity lacking some of the newer
annuity benefits? In a highly competitive business,
many annuity companies work to offer new insurance
features, such as interest rate guarantees, bonuses,
guaranteed death benefits, long-term or extended care
riders and guaranteed income payments to attract
investors. Therefore, you could find that a new annuity
may better meet your needs or provide you with the
opportunity for competitive returns.
Whether or not an annuity exchange makes sense depends
on your existing policy and your individual financial situation.
Although the thought of switching annuities might, at first,

appear to be in your best interest, you should always consider
the costs that will often be involved to do this.
Your consideration of the consequences should also take
into account the following additional questions:
1. What is the total cost to me of this
exchange? Although income taxes continue to be
deferred, there are some other costs to consider before
making the switch. For example, will the annual fees or
other charges assessed by the new insurance company
offset the higher interest or bonus payments? Does the
surrender charge justify the added benefits? What are the
comparative costs associated with the guaranteed benefits
and investment options?
2. What about losing Death Benefits? Often with
a variable annuity there is a death benefit provided. If the
underlying annuity sub-accounts have performed poorly
there could a larger death benefit you will be giving up.
This is possibly the most complex issue we have to review
with clients. There is not an answer that works for all
clients in all situations. This will require a consultation.
Please contact the advisor who provided you this booklet.
3. How do the surrender provisions compare?
Often the biggest transactional cost that often comes into
play for any annuity exchange is the surrender charge. For
many companies, surrender charges eventually expire with
an existing contract after a certain period of time.
However, a new contract could increase or reinstate these
charges and could even increase the period of time in
which the surrender charges apply.
4. What are the new features and why do I
need or want those features? For example, you
might realize the terminal illness guarantee or extended
care or long-term care benefit rider is not really needed if
other resources already exist. Of course, just the opposite
could hold true if you need the coverage and cannot find a

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life or long-term care insurer to take you because of health
reasons. Please, also consider whether there are any
limitations that apply to the features. For example, if there
is a guaranteed interest rate, then how long does the
interest guarantee last? Although the current interest rate
for one company might be better, it's also important to
consider past payment history. Also, what are the relevant
expenses? Do they justify the benefits?
Keep in mind that a 1035 exchange does not provide
permanent income tax exclusion for gains on such exchanges,
but merely a deferral-since the basis of the annuity contract
exchanged is carried over as the basis of the new contract
received.
One major benefit of surrendering or transferring a
variable annuity is that you may realize a tax benefit. If your
annuity has lost value (is worth less than you put into the
annuity) you may be able to write off the loss on your taxes.
If you would like to find out whether an annuity exchange
can benefit you, we offer a complimentary service to evaluate
the appropriateness of performing a 1035 exchange.
How Annuity Payments Are Taxed
Getting the most value from any annuity arrangement
begins with an understanding of the relevant income tax rules.
This helps us to understand how much income taxes will be
taken from our annuity payments during retirement. This article
will discuss some important tax rules you need to be aware of
with respect to annuities.

The income tax rules that apply to all annuity payments
start with Section 72(b) of the Internal Revenue Code ("Code").
This rule begins with the idea that every person should be
allowed to recover his or her own contributions to a non-
qualified annuity free of tax. This makes perfect sense, as your
own non-qualified contributions were paid for with after-tax
money. Your personal investment in a non-qualified annuity is
commonly referred to as your cost basis.
The Code allows you to recover your cost basis gradually
over the time you are receiving annuity payments. So, out of
each payment received by you, a portion will represent a tax-free
return of your basis. The amount of the payment that exceeds the
basis portion is subject to federal income taxes at your respective
tax rate. This will range anywhere from 10 to 35%, depending
on your income level during your retirement years.
To understand how this works, let's look at an example.
First, let's assume that our annuity owner, who is a non-smoking
60-year-old male and in good health, invests $250,000 of his
own funds into a fixed deferred annuity that will start making
income payments to him for the rest of his life when he turns 65.
Let's assume that this taxpayer will pay income taxes at a 15%
marginal rate when he retires.v
Let's also assume that the annuity
payments in our example come to $2,164 based on the
accumulated value of $304,000 when the annuity owner starts
taking payments.vi
Now we have enough information to
determine the federal income tax on the annuity.
Looking at the life expectancy tables published by the
Internal Revenue Service, we would see that the life expectancy
established by these tables for a 65-year old male is 85 years of
age. Based upon the initial investment, annuity payment, and life
expectancy, the annuity owner will be allowed to exclude $1,042
of each annuity payment from income taxation.vii
Once we apply
the 15% rate to the remaining portion of the payment, we come
up with a federal income tax of $168 for each annuity
payment.viii
Here's a breakdown of how the excluded part of the
annuity payment was calculated:

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Investment In Contract
($250,000)
x Payment ($2,164) = $1,042 Excluded
Amount
Expected Payment over
Life
($2,164 x 12 mo x 20 yr)
In the event of an unfortunate death prior to the life
expectancy, the Code still allows you to recover your unused
cost basis by taking this as a deduction on the final tax return.
For example, if we assume in our previous example that
something happened to the annuity owner in the fifteenth year,
he would be entitled to a $62,520 deduction on the final return.ix
On the other hand, if annuity payments are received after the life
expectancy period, then the entire amount of these payments are
subject to taxes.
Like all annuity guarantees, annuity payments are subject
to the claims-paying ability of the issuing company. The
payment assumptions were taken from a hypothetical annuity
illustration of a healthy male who is eligible for preferred
underwriting rates. Your results could vary based, among other
things, upon your age, income and tax rate status, contribution,
annuity payment beginning date, health and tobacco-user status.
Please also note that tax laws are subject to frequent changes.
You should therefore consult with your tax advisor regarding
your individual circumstances.

Other Considerations
Notwithstanding the benefits previously discussed, there
are many other things that should be considered before a
purchase is made, including:
1. Surrender Fees. Like fixed deferred annuities,
equity-indexed annuities have penalties for early
withdrawal called surrender charges. These charges can
result in a loss of your principal investment (see discussion
below on withdrawals). These charges typically decline
over the length of the surrender charge period (typically 5
to 15 years, depending upon the company).
2. Tax Consequences. These annuities are also suited
for investors with long-term investment horizons.
Withdrawals from these annuities prior to age 59½ can
also subject the annuity owner to income taxes and an
additional 10% income tax penalty on the distributed
amount.
3. Features Vary Among Insurance
Companies. There are many companies that are
offering these types of annuities, and the methods of
calculating the minimum and maximum interest rate vary
greatly among them. Although many companies offer a
minimum interest rate (typically ranging between 1.5 to
3%), some companies offer minimum interest rates as low
as 0%.
4. Fees and Expenses. Asset management fees will be
incurred on these annuities. Maintenance fees, sales
commissions, trading costs and other contract charges
could also apply. These charges will, in many cases,
reduce the account value of these annuities.

Annuities Explained
P a g e | 23
5. Loans and Early Withdrawals. Although some
companies do allow you to take minimal withdrawals with
surrender charges, it is important to remember that some
withdrawals can affect the amount of market downside
protection provided under the contract.
6. Company Stability and Regulatory
Oversight. All annuity features are guaranteed by the
claims-paying ability of the issuing company. Please note
guarantees associated with an equity index applies only if
the annuity is held until the end of the contract term and
that loss of principal is possible if the annuity is
surrendered before the end of the contract term. Despite
the market participation feature, the various state insurance
departments regulate these products.
Taxation of Your Social Security
Benefits
Prior to 1984, Social Security income was tax-free. Today,
however, taxpayers could be paying tax on up to 85% of their
Social Security income.x
The good news is that annuities can
help reduce and sometimes eliminate the income tax on your
Social Security income!
The IRS calculates the tax on your Social Security income
based on your total income from all sources. However, income
you earn on an annuity that is left to accumulate does not appear
on your current tax return.
Therefore, annuities may reduce your total income for
Social Security benefit taxation purposes. In fact, if you shelter
enough income in annuities and bring your income below the
thresholds (adjusted gross income of $25,000 for a single

taxpayer and $32,000 for a married taxpayer) you then pay no
tax on your Social Security income.
For your own benefit, please consult with a qualified tax
advisor or attorney. Want to see if these calculations work to
your advantage? Bring in a copy of your tax return (including
Schedule B) to the advisor who has provided this booklet to you.
They should be able to let you know how much you could save
in taxes.
Annuities can provide yet another benefit....
Cash Payments for Life
It's possible to get a fixed return on your money with a
fixed immediate annuity.
Similar to other types of annuities, an immediate annuity
involves a premium payment to an insurance company. In
exchange, the company will immediately start making monthly
payments to you. Part of these payments is considered income
and part comes from your principal investment. These payments
can last for a term of years or even for your lifetime if you so
choose. Note that immediate annuity payments could incur
premium taxes in some states. Maintenance expenses and
contract fees charged by the insurance company could also
reduce your payments. For a detailed discussion on annuity
income taxes, please revisit the article appearing earlier this
booklet.
The amount of money you receive each month is
dependent on several factors, including your estimated life
expectancy, the amount of money you have invested and the
current interest rate being paid by the annuity company (which
is locked in at the time of purchase). The payout will typically
be higher the older you are because the insurance company does
not expect to have to make payments as long as they would to a
younger person. Assuming that you have chosen the lifetime
payment option, your annuity company will continue to make

Annuities Explained
P a g e | 25
payments to you even if you live past your normal life
expectancy. If you die sooner, the insurance company keeps the
balance of the annuity. You may also be able to elect to receive
a lower payment in exchange for having the payments continued
to your heirs until the entire amount of your original premium
has been paid out.
For whom may a fixed immediate
annuity be suitable?
 A retiree needing increased monthly cash-flow
 A person with no heirs or who is not concerned about
leaving an estate
 Someone who has set aside other funds to leave to heirs
if they desire to leave an inheritance
 A retiree desiring the fixed payment and wanting to
avoid maturities, rolling over investments and the
maintenance and administration required of investing
on one's own
What can you expect to receive on an
immediate annuity?xi
$100,000 Premium, Male
Age Monthly
65 $646
70 $707
75 $800
Life annuity payments, Comparative Annuity Reports, January 2008

Planning for Extended Care
More and more people know someone or have a family
member who has needed extended care. In fact, over half of
those almost age 65 spend at least some time requiring nursing
care.xii
This is not medical care, but the type of care received in
the home (shopping, meal preparation, assistance with bathing,
eating, etc.) or in a nursing home.
As you know, Medicare does not usually pay for this
care. People are left to pay for this in one of three ways:
1. Out of their own pocket (about $6,478 per month).xiii
2. Purchasing long-term care insurance while they are
healthy.
3. Qualifying for Medicaid (different than Medicare).
Many people cannot afford the $6,478 or more per month
that some nursing homes charge. That's why many people are
feeling the financial pinch within a year of entering a nursing
home. This leaves many people exposed and unprotected from
the catastrophic cost of extended care.
The state government may pick up the tab for you, but you
may have to spend down your assets. Depending upon your
state's Medicaid rules, this could leave you with as little as
$2,000 in liquid assets (Medicaid allowances do allow spouses
to retain some additional assets). So, if you have $100,000 in the
bank, you could be required to spend it on your care before the
state provides any assistance. Prior to applying for Medicaid, it
might be possible to shift some assets to the healthy spouse.
Please note that transfers to other relatives could be subject to a
look-back period of 60 months. If the transfer took place within
the look-back period, the transferred asset will be counted as
your property for Medicaid spend down purposes.

Annuities Explained
P a g e | 27
There are ways to shelter your assets, however, and qualify
for Medicaid without spending down your assets! One option is
to place your funds in an immediate annuity. These annuities
(when purchased in compliance with Medicaid rules) may be
exempt assets, depending on how much you get and the state
where you live. Some states exempt annuity payouts only up to
a certain amount. That means you can keep this asset and still
qualify for Medicaid payments. This is one way to obtain
government support for extended care and not have to spend
your last dime.
The rules on this are particular and vary by state so please
consult someone knowledgeable on Medicaid procedures or call
for more information.

Key Questions to ask your advisor
These are some great questions to consider asking any advisor
either your current advisor or an advisor you are evaluating
working with.
 What is the minimum guaranteed interest rate?
How long are they guaranteed at this rate?
 How does the income stream work?
 Who bears the risk?
 What other products did you take into
consideration before recommending this to me?
 When do I get the money?
 What is contract, cash or walk-away value vs. the
rider's value?
 What is the partial withdrawal and how does it
work?
 How will I be taxed?
 What happens when I die?
 Guarantees – what are they and how do they
work?
 What can go wrong?
 Can we read the prospectus/disclosure together?
 How much of my money should I put in this
product? Why?
 What are the fees or charges?
How are the deducted from my principal?
 Is interest earned compounding?
 How much money will you (the advisor) make by
my buying this?

Annuities Explained
P a g e | 29
 What disclosure documents are you required to
give? Did I get them yet?
 How sound is this company? What is their
rating?
 How is this annuity the best income option for
me? (if income is the deciding factor).
 What riders do I have and how do they work?
Specifically, why is this rider appropriate for me?
 How long can I receive the roll-up interest in the
income account?
 Can we call the insurance company and ask them
the same questions? (HINT: you can after you
purchase the contract or already have one).
 How will my beneficiary get the money?
What will they get? (Do they get the GMIB,
accumulation value or something else?)
 How much income will I receive?
What can you promise or guarantee me vs. what
is hypothetical?
 How is this suitable for me?
Advisor Regulation
When it comes to hiring an advisor you want to determine the
qualifications and who regulates the advisor. From the book,
(Jason) “The AARP RETIREMENT SURVIVAL GUIDE”.
Chapter 7 explains the how various advisors are regulated.
Here is summary of key advisor classifications.

InsuranceAgent
StateLife-insurance
license
Life-insuranceand
annuities
StateInsurance
Commissioners
NONE
Registered
Representative
Series6orSeries
7License;
backgroundcheck;
examinations
Securities
FINRAandstate
securities
regulators
NONE
RegisteredInvestment
Advisor
RegistrationwiththeSECor
individualstate;Series65;
backgroundcheck;
examinations
Investmentadvice
SECorstatesecurities
regulators
Qualifications;Compensation;
potentialConflictsofinterest
CertifiedFinancial
Planner
Notlicensed;Boardof
StandardsCertified
FinancialPlanner
requiresCFPholders
tomeeteducational,
examinationand
continuingeducation
requirements
NONE
NONE;
NONE
License
Requirements
PermittedSales
Regulatedby
Required
Disclosure

Annuities Explained
P a g e | 31
In Summary
Any product may have a position in your portfolio
Not to be all one or another
Diversify what you are doing
A process to determine what makes the best sense or fit for you
These are only a few ideas to help you better protect your
annuity assets and make the most of what you worked hard to
accumulate.
Financial and retirement planning can have an impact
on your estate, even if your estate is of modest size.
 Find an advisor who is knowledgeable in senior matters.
 Find an advisor who will answer your questions as well
as answer questions that you have not thought to ask.
 Find an advisor who will point out opportunities and
caution you about risks and one who is knowledgeable
about the special needs of retired individuals.
With the sound advice of experience and a conservative
retirement plan, you and your family can get the most out of
your assets.

Definitions
 Accumulation Value Account – this is the money that is
yours, the principal or premium.
 Annual asset Fee - Typically a charge or a percentage
amount that is deducted from the index growth
calculation.(4)
 Annual lock-in - the act of locking in earned credits in
regards to annuities.
 Annual reset - A way of calculating annual yield for an
index annuity in which the baseline from which growth is
measured resets every year. With an annual reset, previous
years' growth is never lost.(1)
 Arm's Distance - an idiom meaning keeping oneself at a
distance. If one is at arm's distance from someone or
something, then that someone or something cannot touch
them.
 Being Transparent - allowing all information and intents to
be boldly spoken of and addressed.
 Cap - Some annuities may put an upper limit, or cap, on the
index-linked interest credit. This is the maximum credit or
rate of interest the annuity will earn, typically expressed as a
percentage. Not all annuities carry a cap rate. (2 , 4)
 Crediting Strategy – the concept of earning interest in an
index annuity product.
 Custodian – the company that is holding funds, usually IRA
funds are what we are speaking of.
 Fiduciary – acting in the best interest of the client. Not all
advisors are bound by this principle. Investment Advisors
are bound by this principle.
 Spread - A preset deduction from the percentage of indexed
growth that is used to calculate the indexed interest rate that
is credited to an annuity contract each year. The spread will
reduce the percentage of annual growth that an annuity can
potentially earn in a given contract year. (3.)
 Suitability – define

Annuities Explained
P a g e | 33
 Participation rate - Also referred to as the Index Rate, this
indicates the part of the index's increase credited to an
equity-indexed annuity's account value. In some contracts, a
cap is imposed on this amount.( 1.)
 Walk-away – this is the money or time that you can take
100% of the accumulation account value and put it back in
your pocket.
References
http://www.freeannuityrates.com/annuities/glossary.php
http://www.freeannuityrates.com/annuities/article.php?title=Is-
an-Annuity-For-Me
http://financial-dictionary.thefreedictionary.com/spread
http://capitalindemnitygroup.com/AnnuitiesFIA.aspx
http://www.finra.org/investors/protectyourself/investoralerts/an
nuitiesandinsurance/p005976
http://www.finra.org/investors/protectyourself/investoralerts/an
nuitiesandinsurance/p010614

i
Federal income tax rates range between 10% to 35% under the 2011
federal tax code, and are based upon the taxpayer's level of annual income.
State income taxes could also apply, which vary from state to state. Please
note that federal and state tax laws are subject to frequent changes.
ii
The fact that the beneficiaries are going to pay income taxes at a later date
could be an advantage if they are in a lower tax bracket. As previously
explained, estate taxes could also apply.
iii
http://www.finra.org/investors/protectyourself/investoralerts/annuitiesandin
surance/p005976
iv
Accuquote blog 9/17/07.
v
Married couples filing joint returns are taxed on the first $65,100 of their
taxable income at the lower 10% and 15% rates (2008 IRS tax tables).
vi
American National Life, assumes 4% during deferral period and life
payout based on January 2007 monthly rates of $7.12 per $1,000, male age
65.
vii
Reg. 1.72-9 (Table V).
viii
($1122 multiplied by 15% tax rate).
ix
(1042 x 12 mo) x 5 remaining years = $62,520 deduction on final return.
x
Per IRS Publication 17, 2007, single individuals and married with
modified adjusted gross incomes exceeding $34,000 and $44,000,
respectively, pay tax on up to 85% of their Social Security income. The
explanation of the tax treatment of payments under an annuity contract is
found in IRS Publication 17, 2007.
xi
Subject to the claims-paying ability of the insurance company, please note
immediate annuities are designed to enhance cash flow and save taxes but
are not the only investment vehicles by which these goals may be achieved.
Always consider all possible investment options before you invest.
xii
Penn State University Policy Research Institute 3/2/06.
xiii
The MetLife Market Survey of Nursing Home and Care Costs, 2007.
Survey calculations based on private room rates in licensed nursing homes
for 87 metropolitan areas of all 50 states and the District of Columbia.

Annuities Explained
P a g e | 35
About
Mr. Richard Loek
Mr. Loek is a San Francisco Bay Area Native and enjoys
supporting people in accomplishing tasks & goals that are
important to them. Mr. Loek is an Investment Advisor
Representative, a licensed Life and Health Insurance Agent and
a member Ed Slott's Master Elite IRA Advisor group. Mr.
Loek and his team at CalRima Financial & Insurance Agency
(CalRima) have been working with people in a variety of
capacities for over 20 years. CalRima has a comprehensive
team of associates and affiliates that pride themselves in
providing outstanding customer service and achieving
customer loyalty.
Ed Slott's Elite IRA Advisor Group™ is an exclusive
group of advisors who are dedicated to being leaders in the
IRA industry. Because being the best in business requires an
enormous amount of ongoing education, time and effort. The
Elite IRA Advisor Group™ is a single resource for serious
professionals. The Elite IRA Advisors are equipped with up-
to-date tools and resources to help their clients.
http://irahelp.com/eliteGroup.php
Mr. Loek volunteers his time to coach people in accomplishing
what is important to them. Mr. Loek holds a variety of
positions in the community. Mr. Loek served as the Charter
President of the San Jose Willow Glen Lions club; The Mental
Health Advisory Board of Santa Clara County, has participated
in half-marathons & triathlons and is a program leader at the
company that is widely recognized as the industry leader in
training and personal development.
©2013 CalRima Financial & Insurance Agency
California Insurance License #0F34289

First Published January 2013, revised May 2013.
This booklet is copyrighted. It may not be reproduced
without express written permission of the author.
Published by Richard Loek

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