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Michael Harrison

Associate Director, Sales and Education

Single Premium Immediate Annuity

FOR AGENT USE ONLY-Not to be Distributed to the Public22

Income Annuity Products

Single Premium Immediate Annuities (SPIA)

- A single premium paid to an insurance company,

- Provides a regular stream of income,

- Can be guaranteed for life or a certain period.

SPIA’s can be purchased with:

-Non-qualified funds (savings accounts, mutual funds or deferred annuities)

-Qualified funds (qualified retirement plan or IRA transfers)

FOR AGENT USE ONLY-Not to be Distributed to the Public33

Life Contingent options:

• Lifetime Income – Ends on death of annuitant; greatest income per dollar of purchase price.

• Lifetime Income with Certain Period – For life or certain period, whichever is longer.

• Installment Refund – Lifetime Income; if annuitant dies before premium is recovered, payments will continue to be paid until the total amount paid equals the initial premium.

• Cash (Lump Sum) Refund – Lifetime Income; if annuitant dies before the premium is recovered, the balance of the premium is paid in a lump sum to the beneficiary.

Certain Period option: • Certain Period – Provides periodic payments for a specific length of time.

Hybrid option:• Temporary Life - Payments continue for life of annuitant or the certain period, whichever is

shorter.

Payout Options

FOR AGENT USE ONLY-Not to be Distributed to the Public44

Tax-Advantaged ApproachAmerican General’s Platinum Income Annuity enjoys tax-favored treatment under current federal income tax laws in four important areas.

1035 Exchanges / Trustee-to-Trustee Rollovers - Exchanging an annuity contract, or life insurance policy; or rolling over a qualified retirement plan or IRA to an immediate annuity is not a taxable event.

Exclusion Ratio- Premium from nonqualified or after tax dollars, a portion of each payment is taxable. Remainder of payment is return of principal until original principal has been received. This is an advantage over most deferred annuities which are considered return of interest first and are 100% taxable until all interest has been withdrawn.

Spreading Tax Liability- Premium from qualified or pretax dollars, taxable only when distributed. By spreading out tax liability over many years, an immediate annuity helps minimize annual tax bills.

Avoiding the 10% Tax Penalty for Distributions Before Age 59 ½ - Qualified funds distributions made as part of a series of substantially equal periodic payments for life (or life expectancy) are exempt from the 10-percent tax penalty as per 72(t) of the Internal Revenue Code. For nonqualified funds distributions, 72(q) allows for an exemption if an immediate annuity is purchased.

FOR AGENT USE ONLY-Not to be Distributed to the Public55

Current Market for SPIAs

- Current estimated retirement assets (defined contribution plans and IRAs) is over $3 trillion

- Current estimated annual distribution is 8% or $240 billion

- Current SPIA sales approximately $3.8 billion (fixed and variable)

If SPIA sales were just 10% of the annual distribution market, sales should be around $24 billion

FOR AGENT USE ONLY-Not to be Distributed to the Public66

Reasons for Purchase

FOR AGENT USE ONLY-Not to be Distributed to the Public77

Reasons for Purchase- Guaranteed Lifetime Retirement Income

- Portfolio Diversification

- Funding Long Term Care & Insurance Policies

- Estate Planning

- Funding Divorce Decrees & Property Settlements

- Annuitizations

- Funding Retirement Home Costs

- Satisfy IRS required minimum distributions

- Avoid IRS penalty taxes

FOR AGENT USE ONLY-Not to be Distributed to the Public88

Sales Idea: Annuity Maximization

• Client has annuity assets that will not be used

• Transfer to life insurance

• Eliminate income and estate taxation at death

FOR AGENT USE ONLY-Not to be Distributed to the Public99

Annuity Maximization

• Solution: Annuity Maximization

– Move money out of the deferred annuity by systematic withdrawal or a SPIA

– Pay taxes on proceeds

– Use after tax money to fund ILIT

– ILIT purchases insurance to cover taxes (estate & income)

• VUL, UL, or Whole Life 2nd to die• VUL, UL, or Whole Life Individual Policy

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The 10%Solution

(systematic withdrawals)

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Deferred Annuity

Survivorship Policy10% Withdrawal

Tax Free Distribution of Life Insurance Proceeds at

Death

Less Accumulated Value – Smaller Tax

Bite at Death

FOR AGENT USE ONLY-Not to be Distributed to the Public1212

Systematic Withdrawals (continued)

Systematic withdrawal method to age 100 = $6,505After tax proceeds = $4,553Buys Platinum Survivor Ultra 500 =

Level death benefit of $391,627

10% Free Withdrawal Option

$50,000 – Basis

$50,000 – Accumulated Value

$100,000 – Total Value

Male Age 70

Female Age 70

Tax Bracket = 30%

FOR AGENT USE ONLY-Not to be Distributed to the Public1313

Benefits• Keep access to money for emergencies• Can change payment amounts paid into life insurance

Downsides

• Taxes paid by last in, first out method

• Deferred annuity interest rates can be lower than alternatives

• Have to “guess” when clients will die or be conservative

• Income and estate taxes due on assets remaining at death

• Deferred annuities do not pay commission when annuitized

Systematic Withdrawals (continued)

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The SPIA Method

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Deferred Annuity

Immediate Annuity

Survivorship Policy

1035 Exchange

Tax Free Distribution of Life Insurance Proceeds at

Death

No Value – No Assets Return to Estate at

Death

FOR AGENT USE ONLY-Not to be Distributed to the Public1616

SPIA Method (continued)

Purchase Joint and 100% Survivor SPIA = $8101.74After tax proceeds = $6,380 (based on 29.2% exclusion ratio)

Buys Platinum Survivor Ultra 500 =

Level death benefit of $548,656

10% Free Withdrawal Option

$50,000 – Basis

$50,000 – Accumulated Value

$100,000 – Total Value

Male Age 70

Female Age 70

Tax Bracket = 30%

FOR AGENT USE ONLY-Not to be Distributed to the Public1717

SPIA Method (continued)

Benefits

• Systematically utilizes premium & interest based on actuarially sound pricing

• Maximizes amounts paid into life policy

• Guarantees payments for the life of clients

• Payments can be made directly to life carrier

• No amounts left upon death so income/estate taxes are minimized

• 1035 exchanges into SPIAs pay commission to agents

• Period can be predetermined so limited pay plans can be used

Downsides

• Non-surrenderable so payments are locked in

FOR AGENT USE ONLY-Not to be Distributed to the Public1818

Other Opportunities

When assisting clients on the Annuity Maximization strategy, you might run across clients who either:

A) Have had health problems and their life insurance will be table rated,

B) Want to pay for their life insurance in a limited pay situation in order to build up the values in the policy.

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For client with health concerns, use

Impaired RiskSPIA’s

FOR AGENT USE ONLY-Not to be Distributed to the Public2020

Impaired Risk Opportunities• For individuals with medical conditions that may reduce their life expectancy,

• Clients are assessed based on medical conditions and ages are rated by a physician,

• Rated ages are higher than the client’s actual age,

• Rated ages increase the benefit payment per dollar of premium.

Chart based on $100,000 in premium for a male age 70. Rates effective as of 07/16/2002. Rates are subject to change at any time.

1159.44

831.73

966.04

500

650

800

950

1100

1250

70 5 yr rate-up 10 yr rate-up

Rated Age

FOR AGENT USE ONLY-Not to be Distributed to the Public2121

Impaired Risk Continued

1. Provide Medical Information

Medical information from treating physician goes to the immediate annuity team.

In compliance with the Gramm-Leach-Bliley Privacy Act of 1999, a valid customer authorization or release must be provided when submitting medical records for all impaired risk annuities.

2. Impaired Risk Assessment

A medical underwriter will review and assess information. The standard for completing this estimate is 24 hours.

3. Quote Generation and Delivery

The immediate annuity team will deliver an impaired risk quote within 48 hours. This quote will show the actual and rated ages used. A Rated Age Letter which will explain the rated age and that the rating will stay in place for one year will also be sent.

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If your clients want a great way to fund limited pay life insurance policies -

Use a Temporary Life

Immediate Annuity

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A Temporary Life Immediate Annuity is

a payment option where payments

continue for life of the annuitant or the

designated period, whichever is shorter.

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For example take a 70 year old male who is needing $500,000 in life insurance

182,702

165,628

150,000

160,000

170,000

180,000

190,000

10 year Certain Period Temporary Life

Temporary Life - an example

Illustration based on purchase of a Platinum Provider Ultra UL policy using current values. Limited pay requires $22,207 per year. SPIA rates based on those in effect as of 07/16/02.Rates subject to change at any time.