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How it Works - Year One
When you apply you make 4 decisions.
Define the amount of annual income that wish to receive at your selected retirement age.
Define the number of years that premiums will be paid into the life insurance policy.
Define an assumed baseline interest rate that the policy will be credited until retirement.
Define the number of years you wish to receive income, typically lifetime or over two lives.
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AN EXAMPLE: Jill, a 35-yearold women wishes to receive an annual income beginning at age 65 in the amount of $75,000 per year. Her four decisons might look like this:
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$50,000 Target Income
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30 Years (Age 35 thru 64)
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5%
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Lifetime
Based upon a 5% assumption, the required savings amount is $1,000/month.
What Happens Next?
EXAMPLE: CONTINUED: Because we can't know in advance how any stock index will perform; we can safely say that the performance from year to year will differ from the 6% baseline assumed interest rate. Assume that in year two the policy earned less than the assumed rate. Let's say 4% was credited. The Defined Benefit Annuity contract management system will send an annual report informing the annuity owner of two options:
1. Raise the premium to the amount required to keep the policy of track for the $50,000 income, or, 2. Keep the premium unchanged and be on track for a slightly lower income.
Hypothetical Year Two:
Annuity is credited a lower interest rate than assumed.
4%
Jill's Option One
Adjust Premium Required to Keep On Track
$1,045/mo.
From age 35 thru 64
$50,000/yr.
Jill's Option Two
Premium Unchanged, Now On Track for Smaller Income
$1,000/mo.
From age 35 thru 64
$49,120/yr.
Our example assumes that Jill decided to increase her savings amount to $765/month to stay on-track for $75,000.
Hypothetical Year Three:
Annuity is credited a higher interest rate than assumed.
6%
Jill's Option One
Lower Premium to Remain On Track
Jill's Option Two
Premium Unchanged, Now On Track for Higher Income
$962/mo.
From age 35 thru 64
$50,000/yr.
$1,045/mo.
From age 35 thru 64
$51,070/yr.
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"Defined Benefit Annuity provided Jill a tax-advantaged solution to substantially strengthen her retirement security. Including, giving Jill a lifetime income of $75,00 per year beginning at age 65.
The above example is for illustrative and education purposes only. It does not represent an actual example. Benefits from annuities are subject to the claims-paying ability of the issuing insurance company.
Take Jeanne's advice. Request a free proposal. Just give Jeanne a "click."
Watch Jeanne, an Ai Assistant, Describe the Powerful Advantages of Defined Benefit Annuity."
What Type of Annuity?
About the Multiple Advantages of the Flexible Premium Fixed Index Annuity (FPFIA)
It has a really long name, but the annuity that funds Defined Benefit Annuity offers many advantages for savers. To understand why, let's start with some definitions. This is important because insurance has its own vocabulary.
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"Premium" is the savings you deposit into the annuity,
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"Flexible Premium" means that you can vary the amount of money you save in the annuity.
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"Fixed" means that the annuity is not subject to investment losses.
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"Index" refers to how interest is credited. Specifically, by linking the annuity growth potential to market returns to the performance of one or more indices.
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"Annuity" means that at any time you may convert the annuity's account value to a stream of guaranteed regular "paychecks," including for life.
FPFIA offers the potential for interest crediting that exceeds typical safe money choices.
The opportunity for growth.
Without the risk of loss.
AN EXAMPLE
The hypothetical example below illustrates the downside protection provided by Defined Benefit Annuity.
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Over the course of two years, index performance increased by 20%, and then decreased by a like amount.
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"Year one gains are locked-in."
20%
Index Increase
70%
Participation Rate
20%
Index Increase
70%
Participation Rate
Year One
Year Two
20% X 70% = 14%
20% X 70% = 14%
Participate in the Gains.
But Not the Losses.
The Flexible Premium Fixed Index Annuity offers the potential for interest growth linked to a market index. That said, FPFIA is not an investment, and it should not be compared to investments. Rather, the annuity is a tax-advantaged vehicle for saving that offers downside protection and the option for lifetime guaranteed income.
. Many annuities policies have a "current" or non-guaranteed participation rate. In this hypothetical example, the index grows by 6%. But when applying the 200% participation rate, the interest credited to the policy is 12%. Some IUL policies "cap" the level of interest that can be credited in any year.
In this example, the IUL policy has the same 200% participation rate. However, for the year in question the index lost 15%. But because the IUL policy provided a "floor" of 0%, the policy owner is insulated against the 15% index loss. Instead, the policy would receive no interest credit for that year. This example illustrates a critical advantage of IUL: The potential for growth without the risk of loss.
About Annuity Fees
Today's annuities typically have no upfront fees. Instead, they have surrender charges that are imposed if the annuity is canceled or "surrendered" before it's full term. Licensed insurance agents are required to provide you detailed information on these or any other fees that may be part of the annuity recommended to you. Ask questions. When you fully understand its provisions, and conclude that it meets your needs, that is the one to purchase.
Flexible Premium Fixed Index Annuities have "participation rates," the percentage of index growth that is credited to the policy.
For example, a 60% participation rate would mean that the policy would be credited with 60% of any index gain. At the time a policy is issued, the participation rate will be the "current" participation rate then applicable. It may be guaranteed for one or more years. It will not, however, be guaranteed for a long period of time. Why? A main reason is that the participation rate is highly sensitive to interest rates. The insurance company cannot know in advance the level of future interest rates. Therefore, the annuity will guarantee a baseline participation rate. Similarly, the policy will stipulate a minimum interest rate. As the years pass, and as interest rates move up and down, the insurance company will tend to change the participation rate in accordance with interest rate movements. Licensed agents must provide an illustration that shows the minimum guaranteed results of an annuity recommended to you.
This chart from the Federal Reserve shows how interest rate can vary dramatically over time.
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You are always in control with multiple options, and always empowered with the information you need to make a good choice.
