California Annuities Training Course

1. California Annuities Training Course An 8-Hour Continuing Education Course To begin the course, click on the forwardarrow in the bottom navigation bar or click the next topic in the left menu bar.

2. California Annuities Training Course Course Navigation Instructions • You can use the menu on the left to click from one screen to the next. The menu will expand as you reach each section. You can also use the navigation buttons at the top and bottom of the screen to move forward or backward within the course. • Use “EXIT” button in upper right when leaving the course. • Review questions are interspersed throughout the course to check your understanding as you go along. Explanations are provided to indicate the correct or incorrect responses. • To move from one lesson to another, continue to navigate through the course or use left menu bar to jump directly to the desired module. You must answer end of lesson quiz questionsin order to proceed to the next lesson. • Upon completion of all of the lessons in the course, access to the final exam will be available. Follow instructions provided at the end of the course for launching exam. • Optional CE credits are available but can only be awarded as long as course is approved by the state. If state approval expires, the status in your “My Courses” library will be shown as “Non-CE Course.”

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4. Key Terms Glossary

5. California Annuities Training Course Lesson 1 Historical Development of Annuity Contracts

6. Lesson 1: Historical Development of Annuities History of Annuities • One of today’s most popular financial planning tools is also one of the oldest. • The first historical mention of annuities is found in Roman contracts called annua, which is Latin for annual income or payment. • Roman citizens of means made one-time payments to the government and received lifetime annual payments in return. • In Medieval times the concept surfaced again, this time as a vehicle for raising the funds for war and conquest. • Citizens could purchase a share in a financial program such as England’s State Tontine, established in 1693, nominating another individual, often a child, as the recipient of an annuity that continued until death.

7. Lesson 1: Historical Development of Annuities History of Annuities • Sporadic uses of the annuity concept can be found early in American history, but the first significant use of annuities can be traced to The Pennsylvania Company for Insurance on Lives and Granting Annuities, which first offered annuities to the general public beginning in 1912. • The stock market crash of 1929 and the depression of the 1930’s led to record sales of annuities, as Americans’ distrust of the stock market created an impression of insurance companies as a low-risk alternative. • These annuities were little changed from their predecessors. Investors would make a single lump-sum payment, which would grow at a fixed rate during a period of years. • Upon withdrawal investors could choose from a fixed payment amount over a period of years or a smaller, guaranteed annual payment for life.

8. Lesson 1: Historical Development of Annuities History of Annuities • After World War II one of the first innovations in annuities was introduced in the form of the variable annuity. Variable annuities offered contract holders a return on the annuity assets that could be expected to rise with inflation. • Instead of receiving the difference between the investment return and the interest guaranteed to the policyholder, the insurance company charged specific fees documented in the contract. • The policyholder received the entire return from investments such as long-term bonds or equity securities held under the policy less the company’s fees. • The result was higher returns for policy holders when the investment value increased, but in return the risk of loss was transferred from the insurance company to the policy holder.

9. Lesson 1: Historical Development of Annuities History of Annuities • The first variable annuities created securities and tax problems. Was a variable annuity an “annuity,” and exempt from registration under the Securities Act of 1933, or a “security” subject to such registration? Also, should companies that issued such annuities be considered “insurance companies,” and therefore exempt from the Investment Company Act of 1940? How should year-to-year gains in variable annuity accounts be treated from an income tax standpoint? • It took the Supreme Court to determine that variable annuities are to be considered securities, not annuities, for purposes of the federal securities laws. Congressional legislation was required to resolve income tax issues raised by the creation of variable annuities. The Life Insurance Company Income Tax Act of 1959 (“LICITA”) recognized the existence of variable annuities for federal tax purposes, ensuring annuitants would not be liable for income tax on the growth of variable contracts prior to annuitization as long as no payments were received during the accumulation period.

10. Lesson 1: Historical Development of Annuities History of Annuities • The more recent introduction of equity-indexed annuities, which allow owners to participate in stock index gains while limiting risk due to a guaranteed minimum interest rate, has further broadened the applicability and appeal of the annuity instrument. • Today annuities are a popular vehicle for achieving any number of financial goals and are available in many formats, each of which offers distinct features. Deciding which annuity is most appropriate for a certain individual’s situation is a complex matter, often requiring the assistance of a licensed representative. • Annuity sales of all types are strictly regulated by federal and state authorities. Financial services representatives who sell annuity products must be well educated in all current regulations, and must meet mandated continuing education requirements in states such as California.

11. Lesson 1: Historical Development of Annuities Market Overview • Before defining an annuity in more depth, it’s important to understand why annuities are receiving so much attention and why they’re being purchased in record numbers. In 2001, sales of annuities totaled 184 billion. More than 25 million fixed annuity contracts were in force at the end of 2001. Further, annuity contracts in the benefit paying (annuitization) phase paid out more than $68 billion in benefit payments in 2000. • In 2001 variable annuity sales totaled nearly $113 billion, down from a record $137 billion in 2000. Life insurance industry figures show that over 19 million individuals were covered by variable annuity plans at the end of 2000. By way of historical perspective, in 1985 variable annuity sales totaled a mere $4.5 billion. By 1990, that figure had increased to $12 billion and in 1993, total variable annuity sales amounted to $43.5 billion. At the end of 2001 there were nearly $883 billion in total variable annuity assets, down from $956 billion at the end of 2000.

12. Lesson 1: Historical Development of Annuities Market Overview • Although the equity-indexed annuity is new and reliable sales figures are difficult to find, it has been estimated that 2000 sales of EIAs totaled about $5.4 billion with sales reaching $6.4 billion in 2001. • In the past several decades, annuity sales have made up an increasing portion of the total premiums received by life insurance companies. • In 1976, annuity considerations made up only 21% of all premiums received by life insurance companies. • In 2000, annuity considerations accounted for over 56% of the total premiums received by life insurance companies.

13. Lesson 1: Historical Development of Annuities Market Overview • In recent years, baby boomers – Americans born in the years following World War II – have begun reaching the age when retirement planning becomes a priority. • In 1980, only 11.3% of the U.S. population was 65 years of age or older, but by 2000 that figure had risen to 12.4% By 2025 population experts predict that 18.5% of the country’s population – nearly one person in five – will be at least 65 years of age. • Many boomers are coming to realize that Social Security and their employer-provided retirement plans will not be sufficient to provide the type of retirement they desire. In fact, a recent survey found that retirement planning is the benefit that employees say that they want and need the most – even more than health care.

14. Lesson 1: Historical Development of Annuities Market Overview • Nonqualified annuities are one of the best ways that individuals have to set aside money on a tax-deferred basis. While the premiums paid into this type of annuity do not result in a current income tax deduction, the premiums and the interest earned on these funds accumulate on an income tax deferred basis. And, unlike employer-provided plans, anyone can purchase an annuity and contribute any amount of premium (subject to certain maximum premium limitations imposed by some insurance companies). • In addition to their wide availability, nonqualified annuities offer those planning for retirement investment options that may keep pace, or even out pace, inflation. Variable annuities with their myriad of stock, bond, and other investment accounts are especially attractive for this reason. Additionally, the new EIA provides those looking toward retirement with another useful planning tool.

15. Lesson 1: Historical Development of Annuities Market Overview • Although retirement planning is the not the only use for nonqualified annuities it is the one of the most popular. Charitable planning and education funding are two other frequent uses for nonqualified annuities. • Annuities can help with the concern of not saving enough to meet needs during retirement. • Whether or not people are saving as much as they will need – or want – for retirement often depends on how accurate they are in projecting their needs. According to a Retirement Confidence Survey, only a little more than 20% of workers say they are very confident of having enough money to live comfortably throughout their retirement years. Another 45% say they feel somewhat confident. A good question is, “do these survey respondents actually understand how much money it will take to meet their definition of “living comfortably” or even how long of a period they need to plan for?

16. Lesson 1: Historical Development of Annuities Market Overview • When asked if they had tried to calculate how much money they will need to save for their retirement years, only around 37% of working people responded positively. When asking couples together, 43% responded that they had calculated their needs for retirement. • Of those who have tried to figure out what would be needed, 15% estimated the need to be less than $250,000; approximately 7% responded the need to be between $250,000 and $499,999; around 9% thought they needed to save between $500,000 and $999,999; while 17% believed they would need more than $1,000,000 to retire in the manner they envision. • And even though they responded that they had calculated the need, 36% were unable to provide the result of their calculation, while another 3% were unable to perform the calculation.

17. Lesson 1: Historical Development of Annuities Market Overview • Workers appear to underestimate the proportion of their pre-retirement income they will need to live comfortably in retirement. Half of workers expect that they will need less than 70% of their pre-retirement income; 16% anticipate needing between 70 and 79%; and less than 20% estimate needing 80% or more of their pre-retirement income to live comfortably. • A key reason that workers underestimate their retirement needs are anticipated plans to continue working in some capacity after retirement. Seven in ten workers believe they will continue to work in some capacity for pay after they retire – which is almost three times the number of actual retirees who indicate they actually worked for pay after retirement. Seven in ten workers also indicated they expect either full-time or part-time employment to be a major (20%) or minor (50%) source of retirement income.

18. Lesson 1: Historical Development of Annuities Market Overview • This contrasts with the experience of actual retirees, with only three in ten reporting that employment is a major (8%) or minor (20%) source of retirement income. • It appears that today’s workers have an expectation that they will enjoy good health well into their retirement years, which may not meet actual experience. • Couple this with the fact that the number of retirees interested in working will increase significantly as baby boomers continue to retire, and one may conclude that planning for post-retirement employment to be a relied-upon source of retirement income may prove unwise.

19. Lesson 1: Historical Development of Annuities Market Overview • These findings indicate that there is a strong market for annuities utilized to provide an income stream during retirement. • Those who are not saving enough can benefit from the readily available annuity products for long-term savings and the tax deferred nature of annuities. • Those who do not how to allocate their premiums can benefit from professional money management, diversification, and other features of variable annuities. • Those whose savings and investment actions fall short of their plans can benefit from the availability of annuity payout options that maximize the income that can be produced from the capital available.

20. Lesson 1: Historical Development of Annuities Market Overview • While some people prefer not to dwell on how much they can accumulate and how much income can be produced from it, the fact is, some will have a nagging concern over whether things will work out as well as they anticipate. • Some people want to know in detail how to make the money they have accumulated last as long as they live. Annuities offer solutions for these scenarios. • The values in an annuity can be annuitized essentially at any time. The payments can be set up to last for a specified period of time or for the life of the annuitant. • This feature makes annuities extremely valuable in retirement planning and creates a strong market.

21. Lesson 1: Historical Development of Annuities Attachment I – Annuity Legislative History • Understanding of the history of annuity legislation is significant. It provides the evolutionary changes for each law throughout the years. It is important to know what impact changes to legislation have had on annuity insurance. • To view a list of changes to legislative history, click here.

22. California Annuities Training Course Lesson 2 The Primary Uses of Annuities

23. Lesson 2: The Primary Uses of Annuities Definition of Annuities • An annuity is defined as the liquidation of a principal sum to be distributed on a periodic payment basis to commence at a specific time and to continue throughout a specified period of time or for the duration of a designated life or lives. • Annuities are valued tools for retirement planning. In this lesson, we will review the uses of annuities and also consider alternative financial planning vehicles used to help fulfill consumer’s retirement goals.

24. Lesson 2: The Primary Uses of Annuities Primary Uses of Annuities • Since the annuity’s unique feature is to provide a stream of payments that cannot be outlived, annuities are frequently used as a tool to provide for a monthly retirement income. However, annuities can be used in many other ways. • Annuities allow an individual to take advantage of tax-deferred accumulation of interest, since the interest earned inside an annuity is not subject to taxation until it is withdrawn. • An annuity is an investment that can be used as collateral for a loan. • Annuities provide a fairly high degree of liquidity, meaning owners can withdraw funds within certain limits during the accumulation phase. • An annuity can be a useful estate planning tool for people who want to pass on a large sum of money to an heir that is not subject to probate and cannot be contested by a will.

25. Lesson 2: The Primary Uses of Annuities Primary Uses of Annuities • To create an appreciating asset that does not require any care and feeding (such as dividing money between accounts, etc.) • As an alternative to an IRA, particularly since there are no IRS limits to the amount which can be contributed annually as there are with IRAs. • Annuities are very useful for conservative investors whose primary goal is to preserve funds yet still earn a guaranteed level of interest over a long period of time.

26. Lesson 2: The Primary Uses of Annuities Retirement Planning • Although the annuity can be used for many purposes, probably its best and most frequent use is retirement planning. • Retirement has been the focus of much attention in recent years. • Since people are living longer than at any prior time in history, there are more retirement years to be planned for and paid for. • Americans of the baby boomer generation, those born between 1945 and 1964, are quickly nearing retirement age and have begun planning for their retirement years in earnest. • Further, the downsizing of major American corporations is symptomatic of an economy in which employees cannot rely on their employers to finance their retirement.

27. Lesson 2: The Primary Uses of Annuities Retirement Planning • As a result of these and other factors, there has been a steadily increasing interest in the financial aspects of retirement. • Most Americans expect to receive Social Security benefits at retirement, and many are participants in qualified retirement plans provided by their employers. • Experts warn, though, that if baby boomers are to afford the retirement lifestyle they seem to want, these two sources of retirement income will not suffice. • Personal savings must make up the difference.

28. Lesson 2: The Primary Uses of Annuities Retirement: Accumulation Planning • One of the best vehicles for accumulating funds to supplement retirement income from Social Security and qualified retirement plans is a nonqualified annuity. • The use of the labels “qualified” and “nonqualified” refer to whether the annuity is used as part of a retirement plan that is “qualified” under certain sections of the Internal Revenue Code. • A qualified annuity is one that is used as part of, or in connection with, a qualified retirement plan. A nonqualified annuity is one that is not used as part of any qualified retirement plan. • If the annuity is labeled nonqualified, this simply means that it may be purchased by any individual or entity and is not associated with an employer-provided plan.

29. Lesson 2: The Primary Uses of Annuities Retirement: Accumulation Planning • As with many financial planning strategies, earlier is better than later when deciding to save for retirement. • To illustrate, consider annuity holder Mrs. Smith, who begins saving for retirement at age 40. She will have accumulated $138,598 by age 65 by saving $200 per month, resulting in a monthly benefit of $812. • The same monthly amount started at age 50 would result in a retirement sum of $58,164. Waiting until age 60, with retirement only five years away, severely cuts down on the available funds, resulting in a sum of only $13,954. Under the annuity started at age 50, the monthly benefit would be $341, while under the annuity started at age 60 she would receive only $82 each month.

30. Lesson 2: The Primary Uses of Annuities Retirement: Accumulation Planning • The usefulness of starting early can be illustrated another way. Assume that Mrs. Smith, with the help of her financial planner, determines that she needs $500 per month at retirement to supplement her retirement income from other sources. • If Mrs. Smith begins paying premiums into the annuity at age 40, she will need to pay a monthly premium of $123 in order to accumulate the $85,320 that will pay her a life income annuity of about $500 each month beginning at age 65. • If she delays starting the payments until age 50, she must pay $293 each month; while waiting until age 60 would require a monthly payment of $1,223. Clearly, starting early is the best course of action for this type of retirement planning.

31. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • With the large number of baby boomers hitting retirement age, a great deal of attention has turned to looking at ways to help retirees receive their retirement benefits. One term used for this type of planning is “income distribution planning.” This activity of planning to receive funds is, in some ways, the opposite of planning to accumulate retirement funds, which has received far greater attention. • With the ability to provide a life-long income stream that an individual cannot outlive, annuities can be an ideal vehicle for income distribution planning. Most annuities offer payout options as part of the contract. Thus, an annuity holder can typically elect to receive the funds in an annuity over his lifetime, over the lifetimes of the annuity holder and his spouse, over a certain number of years, in a certain monthly amount, or according to one of several other alternatives typically available. Other names for these payout options are settlement options and payment contracts.

32. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • To illustrate a basic method in which a nonqualified annuity can be used for distribution planning, consider a scenario featuring Mr. Jones, age 62, who has decided to retire from his accounting position. • Over the years Mr. Jones has contributed to the retirement plan offered by his employer and, in addition, has made a modest monthly contribution to a nonqualified annuity. • This annuity now has a value of $35,000. If Mr. Jones elects, under the annuity contract’s settlement options, to receive this amount over his lifetime, his monthly benefit will be approximately $235. He will receive this amount each month for the remainder of his life, regardless of how long this ends up being.

33. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • Since a nonqualified annuity can offer a greater degree of flexibility with regard to distribution than can many employer-sponsored qualified plans, the nonqualified contract can be a useful distribution vehicle for individuals who wish to begin receiving retirement benefits earlier than the typical retirement age. • Many qualified retirement plans assume age 65 as the age at which retirement benefits can commence. Even if a plan participant can begin receiving benefits before age 65, the amount of the benefit may be less than it would be at age 65. • Also, delaying the start of Social Security benefits will result in a greater amount of monthly benefit and this may be an attractive alternative to some individuals.

34. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • Suppose an individual wants to retire at age 55-1/2 or wishes to take another job, start a business, or engage in some other activity that will result in less income than was previously received. • If the individual has a nonqualified annuity, he might consider using these funds as income over the next ten years until age 65. • To illustrate, let’s assume that Mr. Black is now age 55 and wishes to leave his regular job and start his own painting business. • He has both a defined benefit and a 401(k) retirement plan through his employer, but can’t begin receiving full retirement benefits from these plans until he reaches age 65.

35. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • If Mr. Black has been contributing to a nonqualified annuity, he can consider using these funds to supplement his income from his start-up business for the next ten years. He can do this by electing a ten year term certain settlement option payout from the annuity contract. • Another option would be to move funds currently in his annuity to an immediate annuity that would pay benefits over the next ten years. • Assuming Mr. Black’s current balance in the nonqualified annuity is $50,000, a ten year payout would result in about $465 per month. • At the end of ten years, the funds in the nonqualified annuity will have been used up but Mr. Black will then be able to start receiving retirement benefits from his previous employer’s qualified retirement plans.

36. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • Another possible use of the nonqualified annuity in the distribution phase of retirement capitalizes on the fact that not all of the benefit payments received from a nonqualified annuity are currently taxable. • As will be explained in Lesson 7, with a nonqualified annuity only a portion of each benefit payment will be taxed. The other portion is considered a return of principal and is therefore not taxed. • In contrast, with most qualified retirement plans and traditional IRAs, the benefit payments are fully taxable. Thus, if a client has both a nonqualified annuity and qualified retirement plans, it may make sense to receive the nonqualified annuity benefits first and delay starting receipt of the qualified benefits until a later time.

37. Lesson 2: The Primary Uses of Annuities Retirement: Distribution Planning • Yet another way in which annuities can be used in the income distribution process is as Individual Retirement Annuities used to receive rollovers or direct transfers from retirement plans. • Although a complete description of the IRA rules is beyond the scope of this course, it is helpful to realize that annuities can be used, as IRAs, to receive funds from qualified retirement plans. Typically, a qualified plan participant will have the option to make a direct transfer of his or her balance in the plan into either an IRA or another qualified plan. • Among other times, this option is often available when the person terminates employment or retires. Moving the funds to an IRA as part of an eligible rollover distribution will likely allow the individual to exercise a greater degree of control over how the funds are invested and how and when benefit payouts begin.

38. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • To make the best use of the nonqualified annuity in retirement planning, one should understand alternate retirement planning techniques and grasp how these options interact with nonqualified annuities. • A brief discussion of the more commonly encountered types of retirement plans follows.

39. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • Individual Retirement Arrangements - An individual retirement arrangement, or IRA, is a similar planning tool to an annuity in many ways. Both are vehicles for tax-deferred savings. • However, an IRA contribution often results in an income tax deduction in the year the contribution is made. This deduction depends on income levels and on participation in other employer-provided plans. • And most IRA investments cannot offer a stream of payments that the owner cannot out live (unless, of course, the annuity is owned within an IRA).

40. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • IRA investments, other than annuities, may offer more or less liquidity than an annuity, and the investor must consider the impact of fees such as surrender charges and early withdrawal penalties. • For example, a mutual fund owned within an IRA may offer fairly rapid access to cash in case of an emergency, but require a sizable early withdrawal penalty. There are two ways to withdraw funds from many annuities: surrenders and loans. The availability and specific terms associated with these options vary between annuities, so careful scrutiny of available options is often called for. • In 1998, another form of IRA, the Roth IRA, became available. While contributions made to a Roth IRA are not tax deductible, funds distributed from a Roth IRA may be received completely free of any income tax, provided certain conditions are satisfied.

41. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • From a financial planning perspective, it is important to note that high-income taxpayers cannot take advantage of IRAs, making the use of a nonqualified annuity to accumulate funds for retirement purposes an attractive option. • While it is true that premiums paid into a nonqualified annuity are not income tax deductible and benefit payments from such an annuity will be partially taxable, there is no limit on the amount of funds that may be placed in a nonqualified annuity. • And, of course, the interest earned on the funds inside the annuity is tax deferred.

42. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • Qualified Retirement Plans ­- Generally, a qualified retirement plan is an employee benefit arrangement offered to employees by an employer. There are several different types of qualified plans, such as profit-sharing plans, 401(k) plans and employer stock ownership plans. A detailed explanation of these is beyond the scope of this course. • However, it is important to understand that while these plans are designed to provide an employee with some type of retirement benefit, most employees have little control over the type of plan offered by their employer or how the plan’s funds are invested. The nonqualified annuity offers a method of retirement planning over which the employee retains a much greater degree of control.

43. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • Most large corporations provide their employees with some type of qualified retirement plan. A few provide more than one plan. • However, many small companies and self-employed individuals do not have sufficient income to make contributions to such a plan. • Contributions to a nonqualified annuity by these individuals may provide their only source of retirement income other than government benefits such as Social Security.

44. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • Tax Sheltered Annuities - A tax sheltered annuity, or TSA, is a special type of annuity that is available only to individuals employed in public schools and nonprofit organizations that are operated exclusively for religious, literary, charitable, scientific, or educational purposes. Included here are churches, synagogues, hospitals, and colleges. • A TSA is usually issued by an insurance company. It may be either a fixed or a variable annuity contract.

45. Lesson 2: The Primary Uses of Annuities Other Retirement Planning Vehicles • Small Business Retirement Planning - For a self-employed individual, the use of a nonqualified annuity may provide the only source of retirement income, other than government benefits such as Social Security. • Many agents and financial planners find that a business owner who has just purchased an individual disability income policy is interested in beginning his retirement planning also.

46. Lesson 2: The Primary Uses of Annuities Split Annuity Arrangement • One use of nonqualified annuities that has generated interest is called a “split annuity” or “combined annuity” arrangement. • Basically, with this arrangement an individual starts with a sum of money and then places a portion of the funds in an immediate annuity and the remainder of the funds in a deferred annuity. • The immediate annuity begins to pay out an income right away and typically is set up to continue to the payout for a set number of years. • The funds in the deferred annuity are not accessed during this period and remain in the deferred annuity.

47. Lesson 2: The Primary Uses of Annuities Split Annuity Arrangement • Some versions of this arrangement suggest that at the end of the immediate annuity payout period, which may be somewhere between five and ten years, that the value of the deferred annuity may have increased to the point where the annuity holder can take a portion of the deferred annuity and purchase another immediate annuity that will pay a similar income for another set period of years. • Of course, whether this arrangement will work out as planned depends upon whether the rate of return assumed on the deferred annuity portion of the arrangement is met.

48. Lesson 2: The Primary Uses of Annuities Annuities for Charitable Planning • There are occasions when an individual who has purchased an annuity finds that he would like to make a gift of either the contract itself or the funds held in the contract. There is no reason that an individual cannot make a gift of a nonqualified annuity contract, if that is his wish. However, there may be some unanticipated tax results. • An annuity holder who decides to surrender an annuity fully and make a gift of the funds must pay income tax on the amount received from the insurance company less his or her basis in the contract. Barring previous partial surrenders, the basis will likely be equal to the amount of premiums paid into the annuity. If the annuity holder is not at least age 59-½ at the time of the surrender, a 10% penalty tax on premature distributions may also apply.

49. Lesson 2: The Primary Uses of Annuities Annuities for Charitable Planning • After surrendering the annuity and paying the necessary taxes, the individual can make a gift of the cash received from the surrender. Generally, a gift of up to $10,000 per person as indexed ($11,000 in 2004) can be made before any gift tax will be due. In addition, an unlimited deduction from gift tax is generally available for gifts to charity. • The annuity holder could also simply make a gift of the annuity contract itself. This provides the person who receives the gift with the advantage of the income tax deferral on the interest earned inside the annuity. However, if the gift is of an annuity contract issued after April 22, 1987, the person making the gift is treated as having received an amount equal to the cash surrender value of the contract at the time of the gift minus the annuity holder’s investment.

50. Lesson 2: The Primary Uses of Annuities Annuities for Charitable Planning • Charitable Gift Annuity – As opposed to making a gift of an existing annuity, an individual can enter into a charitable gift annuity arrangement. There is no previously-purchased annuity contract in this instance. • Generally, a charitable gift annuity is an agreement between a charitable institution, such as a church or college, and an individual who wishes to make a contribution to the charity. If an individual donates property to the charity under a charitable gift annuity, he receives an annuity from the charity for the remainder of his life. There is no transfer of an annuity contract, rather the annuity payments are made directly from the charity to the individual and are backed by the charity’s assets and good name. The tax consequences of a charitable gift annuity can be complicated. There is usually an immediate income tax deduction for the person making the gift, although the amount of the deduction may be limited.