What is a direct rollover?

A direct rollover is the tax-free movement of retirement plan assets directly into the IRA of the person receiving the payout. DIRECT means that your retirement plan assets would be paid to a select investment for the benefit of your IRA.

Are direct rollovers always tax-free?

YES. A properly conducted direct rollover is always a tax-free transaction. Choosing a direct rollover is often the only way to avoid mandatory federal and state income tax withholding on your retirement plan payout.

Why should I choose a direct rollover?

There are many benefits to conducting a direct rollover. As a direct rollover keeps your retirement asset tax-deferred. Probably the most significant benefit to conducting a direct rollover is that you hold the contract and control the asset personally, not a third party administrator.

What happens if I die before withdrawing my retirement plan dollars?

If you die before withdrawing your retirement plan dollars and your spouse is beneficiary, he or she may be able to roll the amount into his or her own IRA.

Direct Rollovers are a smart choice. We can assist you and your administrator in completing the proper direct rollover forms allowing you to retain control of your retirement dollars.

Annuity Basics

Annuities are designed to give customers a long-term growth and qualify as a retirement planning vehicle. They offer many benefits including tax deferral and retirement income.

Features and Benefits of an Annuity:

• Tax deferral
• Retirement income through systematic payouts, including lifetime guaranteed income options from annuitization
• Variety of payout options
• Penalty-free withdrawals
• The potential to avoid probate at death

Fixed annuities include both traditional fixed annuities and index annuities. Because index annuities include similar guarantees as a traditional fixed annuity, they are not considered a variable product. The main difference between a traditional fixed annuity and an index annuity is that an index annuity's interest earnings are based on the performance of an external index, subject to Caps, Margins or Participation Rates, and the index accounts do not include a declared interest rate.

Index Annuities Features:

• May credit excess interest based on index performance
• Do not include a declared interest rate (in index account crediting method)
• No loss of investment and interest earned due to market downturns
• Guarantee a minimum rate of return

Index Annuity Terminology

In order to fully understand how an index annuity works, Listed below are some basic terms and their definitions. These will be helpful when comparing different products and when trying to understand the different designs offered.

Index -

Underlying external benchmark that is used to measure the growth of an index annuity.

Participation Rate -

The percentage of index gain credited to the annuity.

Margin or Spread -

Percentage deducted from the index increase prior to crediting the index gain to the annuity. This is often used in products that have a 100% Participation Rate.

Return Cap -

The maximum interest that can be credited to the annuity for the period (caps may permit a higher Participation Rate or a lower Margin).

Minimum Guaranteed Contract Value ("floor" or MGCV) -

The minimum guaranteed return on the annuity. This amount accumulates interest regardless of index performance, and is a separate calculation from Index Growth. The MGCV applies to certain contracts and the Minimum Surrender Value applies to others. The Surrender Value is the amount that is available at the time of surrender. The Surrender Value is equal to the Accumulation Value, subject to the Interest Adjustment, less applicable surrender charges and state premium taxes. The Surrender Value will never be less than the minimum requirements set forth by state laws at the time of issue. The MGCV applies to certain contracts and the Minimum Surrender Value applies to others.

Index Annuity History & Sales Growth

The current generation of index annuities were introduced in early 1995. The financial tools to create index annuities have been around for several years, so why were index annuities suddenly introduced?

One reason is that the psychology of the times was right. 1994 had been a rocky year - bond fund returns were poor, the S&P 500®ended the year on a down note, and many stock funds and variable annuities had minimal or negative returns. In addition, the 8% and 9% interest rates customers had become accustomed with traditional fixed annuities appeared to be over. Interest rates were on a long downward slope from a historic point of view and insurers were looking for a fixed annuity designed to deliver respectable returns. Thus, the index annuity concept was born. It was designed to attract risk-adverse investors that wanted protection of premium and the opportunity for higher returns than those of a traditional fixed annuity or CD-type vehicle.

Since their inception, fixed index annuity sales have vastly increased. Fixed index annuity sales were $400 million in 1995 and by the end of 2005, annual total sales reached a record of over $27 billion! Growth not only occurred in sales, but also in the number of insurance companies offering these products. Currently, there are in excess of 230 fixed index annuities available from over 30 different insurers. These index annuities differ with varying Participation Rates, Caps, Margins, minimum guarantees, available indices and crediting methods.

The Link to An Index

All index annuities have at least one thing in common, the link to an external index. But what exactly is an index and what is indexing? An index is a benchmark or relative measure of performance. An index's value is an average, or weighted average, of the stocks included in the index. It offers diversification through multiple securities across various sectors. This reduces the volatility and risk associated with owning only one, or a few securities. An important point to understand when studying index annuities is that the index does not sponsor, endorse, or sell any index annuity.

The most common index utilized with index annuities is the S&P 500®.

• The S&P 500® is widely regarded as the standard for measuring large-cap U.S. stock market performance. It includes a representative sampling of leading companies in leading industries, including the industrial, utility, financial and transportation industries.

Although the S&P 500®Index is the dominant external index utilized, other indices are used. Today, companies offer indices beyond the S&P 500®. These indices include:

• The Dow Jones Industrial Average SM(DJIA) - Includes 30 of the largest U.S. stocks and leaders in their respective industries.
• The NASDAQ-100®- Represents 100 of the largest non-financial U.S. and non-U.S. companies listed on the National Market tier of the NASDAQ-100®Stock Market.
• The S&P MidCap 400®- Measures the performance of the U.S. mid-size company segment.
• The Russell 2000®- Measures the performance of the U.S. small company stocks.
• The Dow Jones EuroSTOXX®- Measures stock market performance on a Euro-wide basis. This index represents the largest and most liquid stocks in the market.

 

Maturity Date

The Maturity Date is not how long you must keep the annuity, but how long the company will let you keep annuity interest deferred before annuitization.

 

Surrender Charges

Almost all annuity contracts will include waivers of surrender charges for critical situations like confinement to a nursing home or a diagnosis of a terminal illness.

 

Basic Designs of Index Annuities

There are a wide variety of index annuity designs! The most familiar design is the Annual Reset/Ratchet method. The main components are illustrated below.

Annual Reset Method

• Gains are calculated and interest credited each year.
• Interest is "locked-in". This means once interest has been earned, it cannot be subtracted in the future due to a market downturn.
• Because interest is "locked-in" each year, the contractholder benefits from compounding.
• This design is usually coupled with a Participation Rate or Margin that is reset each year.

Potential Customers for Annual Reset

• Customers who want the potential to earn greater than fixed rates over the term of the contract.
• Customers who want to see a return credited annually
• Customers who feel market is choppy or unstable
• Customers who want “locked-in” growth.

The number of crediting methods and combinations is virtually boundless. This makes it extremely difficult for a producer to compare "apples to apples". However, the more knowledge obtained about the different crediting methods, guarantee provisions, and features of index annuities (Caps, Margins, Participation Rates, etc.) the more effective producers will be in determining which products to offer customers. The modules that follow will help to increase index annuity knowledge.

When investing index annuity premium, the Insurance Company needs to take into consideration the contractual guarantees, expenses and profits, and the goals of the annuity.

The 3 components of index annuity investing consist of:

• Bonds
• Expenses/Profit
• Call Options

The mechanics of index annuity investing occur in the following order:

• First, fixed rate investments (bonds) are used to support the underlying minimum guarantee.
• Second, the company covers normal expenses and profit margins. (The cost of doing business.)
• Next, call options are purchased to support the growth in the index.
• Then, options give the company the right to purchase an index at a specific price. If current prices are lower, we can choose not to purchase the index. If the price is higher, we can choose to purchase the index and participate in the gains.
• Finally, bonds + expenses/profit + call options = premium invested in the index annuity

Guarantees

All fixed annuities offer a minimum guaranteed return. For index annuities, this minimum guarantee promises an Accumulation Value usually equal to a percentage of the original premium, less any withdrawals, accumulated at a minimum guaranteed interest rate by the end of the surrender charge period. To provide this minimum guaranteed return, the insurance company invests in bonds or other conservative instruments.

An index annuity contains guarantees that protect and maximize retirement dollars.

 

Index Annuity Guidelines

Union Estate Planning offers a variety of innovative index annuity products. With numerous companies offering a wide array of index annuity product designs, it is important to understand all of the features and options available. The following section explains the features of typical index annuity portfolio. While this section tries to explain the main features, all index annuity products are different; therefore, please refer to product-specific brochures, annuity disclosure statementsfor more information.

Please note:Index Annuity products are not investments in the stock market and do not participate in any stock, bond or equity investments. In addition, market indices do not include the payment or reinvestment of dividends in the calculation of the performance.

Fixed Account:
The fixed account will earn the current fixed account interest rate. This rate will be guaranteed for the entire year, thereafter a new rate will be declared annually. For current rate information, please contact Union Estate Planning at 1-877-355-9080.

Index Account:
Index Annuities offer interest credits based on the performance of various market indices. Each year the resulting interest credit is credited to the index account. A Cap may also be applied to this index credit on certain products and crediting methods. Please refer to Union Estate Planning at 1-877-355-9080 for more information.

Index Cap Rate:The Index Cap Rate is the maximum percentage of index credit that can be earned for that year. It is set at the beginning of each contract year and is guaranteed for one year. The Index Cap Rate can be applied to either the Annual Point-to-Point or Daily Average – see the product guide for more details.

Index Margin:
The Index Margin is a percentage deducted each year from any increase in the underlying index. It is guaranteed for the first year and declared annually thereafter.

If the index growth is zero or negative after applying the Index Cap Rate and deducting the Index Margin, the amount credited in that year to the index value will be zero. (Please note that the Index Cap is applied before or after the Index Margin or Participation Rate depending on the product).

Participation Rate:
The Participation Rate is a percentage that is multiplied by the gain at the end of the index period to determine the index credit to the customer's contract.

Transfer Options:
The customer may transfer the values between the fixed account and the index accounts on each contract anniversary. Transfers are allowed 5 days and up to 30 days following the contract anniversary. Based on current tax laws, these transfers between options are not taxable or subject to surrender penalties.

Minimum Guaranteed Cash Value (MGCV):
The Cash Surrender Value cannot be less than the MGCV. The MGCV is a percentage of premium received, compounded at the guaranteed minimum interest rate, less withdrawals and surrender charges if applicable. For the products that contain premium bonuses, those premium bonuses are excluded from the MGCV calculation. The MGCV applies to certain contracts and the Minimum Surrender Value applies to others.

Maturity Date

The Maturity date is not how long you must keep the annuity, but how long the company will let you keep the annuity interest tax deferred before annuitization.

Surrender Charges

Almost all annuity contract will include waivers of surrender charges for critical situations like confinement to a nursing home or diagnosis of a terminal illness.