Life Insurance and Annuities- A practical introduction


During this webinar, you will be introduced to the basics of life insurance and annuities. We will discuss

  • Types of Life Insurance Policies – term, whole life, universal life, variable life, and variable universal life

  • What to consider when purchasing Life Insurance, such as “how much” and “what type” to purchase

  • The different types of annuities – fixed annuity vs. variable annuity

  • Key terms such as annuitization, accumulation phase, guaranteed death benefit, and settlement options

About Lisa:


Lisa Horowitz, CLU, ChFC, has had her own insurance practice for 29 years. As a highly experienced broker, she specializes in negotiating across many health industry platforms such as life insurance, long term care, Medicare, and all its iterations. In this capacity, she has worked with individuals and families to integrate their insurance needs with every area of life, including retirement, estate planning, building and maintaining small businesses, transfer of property after divorce, or life altering illness. As a result, her expertise also extends to management of long term and end of life care, which includes accumulation and liquidation of estates. Finally she is expert at navigating the worlds of public and private health related benefits. Her resources include partnerships with estate planners, hospitals and facilities, social workers, hospices, attorneys, accountants, financial planners, insurance brokers, gay & lesbian groups, women’s groups, caregiver support groups, and parenting networks.


Maggie: Welcome to the Savvy Ladies Wednesday Wisdom Webinar.
I’m Maggie Montemurro and I’m the marketing manager at Savvy Ladies.
If you have a question during the webinar you can type it into the chat box and if you’re joining us by phone you can email your question to
Today’s presenter is Lisa Horowitz founder of LifeCycles.
She has had her own insurance practice for 29 years.
Lisa is a highly experienced broker and specializes in negotiating across many health industry platforms such as life insurance long-term care, Medicare and all its iterations.
Lisa’s expertise also extends to management of long term and end-of-life care and she is an expert at navigating the worlds of public and private health-related benefits.
Lisa is a chartered life underwriter and a chartered financial consultant.
Thanks for joining us Lisa and I’ll hand it over to you.
Lisa: Very good Maggie, thank you so much.
Good afternoon everybody, I’m Lisa and I want to first and foremost thank Maggie and everyone in savvy ladies for inviting me this afternoon to present this webinar on life insurance and annuities a practical introduction.
What I’m hoping to accomplish today is to give everyone an introduction, a little bit of education and some tools and some questions that they can mull around in their mind to figure out what their own needs are what their own ideas are about buying life insurance buying annuities what they’re for, how they can be incorporated into your own individual personal financial planning.
Please again, as Maggie said, if you have any questions please feel free to ask them in the format that she suggested and if everyone’s set I’m going to get started.
So there’s that great picture of me and at the bottom right of that little picture is the top of my 13-year old’s head so just to give you an idea of who I am life insurance and annuities a practical introduction so let’s talk about life insurance first.
Life insurance is something that is purchased as what we like to refer to as the foundation or the building blocks of a successful financial plan for people.
A lot of times people will say to me I don’t need life insurance, I’m not married, I have no children and that and that most of the time can be true it also cannot be true.
What I say to people is if you have anybody who is dependent on you financially, if you have any assets that you want to protect and preserve should something happen to you, if there is a charitable organization that you’re interested in giving a substantial gift to in the future, life insurance is for you.
What life insurance really is is the creating of an immediate pool of money a large pool of money for what can be very small dollars up front.
So let’s talk for a minute about the different types of life insurance policies that are out there in the market today.
We have term insurance we have whole life insurance we have universal life insurance.
The fourth one which is the variable life and variable universal life I’ll get to in a minute that’s more of an investment but for purposes of this conversation today let’s focus on term, whole life and universal.
What I like to tell people is that there are basically two different types of insurance there’s the kind of insurance that you buy when you have a specific period of time in mind that you need to protect, either a family member or your family, or your funding car something for education or you have a loan obligation like a mortgage and that’s when we use term insurance.
Its term is usually short for temporary or term of time.
When we look at term insurance in the marketplace today we see everything from 10-year guaranteed renewable 15 year 20 and 30 and what that means is the premium is guaranteed for the first 10 years that you keep the policy in place, the first 15 years the first 20 years the first 30 years.
At which time the policy quote-unquote expires usually people have the opportunity to continue these policies when they’re finished or when they expire, however insurance life insurance all life insurance is based on how old you are at what we call attained age in other words how old are we when we’re buying the insurance.
The rule of thumb is the younger you are the less expensive it is, so and and the other rule of thumb to remember with term insurance is the longer you’re asking the insurance company to guarantee that level premium paying time that 10 years that 20 years or 30 years the longer the period of time you’re asking for the guarantee the more expensive the premium is.
So we’re looking at 10 year term we’re looking at 15 year term are looking at 20 year term.
All of these policies again have a guaranteed premium for that set period of time they have a level amount of protection in other words face them out which is another term we use for death benefit, so for example somebody could buy a million dollars of 10 year level term they could buy 20 years of a million dollars of level term it means that whatever that premium is it will stay in that in that mode until that policy expires in year 21 in year 11 depending on which policy you’ve purchased the premiums will increase based on your newly attained age so if you bought a 10-year policy and in year 11 you want to keep it you’re 11 years older the premiums go up.
So there’s a level premium there’s level coverage and there is no cash value at all there’s when you look at the illustration or you look at a quote for term insurance you’re going to see two columns you’re going to see premium and you’re going to see death benefit, as opposed to whole life or Universal Life which I’ll get more into in a minute there are other columns that show some of the premium going towards what we call cash value or the savings portion of the insurance policy but let’s get back to the term insurance for a minute.
So there’s level term there’s also annual renewable term where it’s not level for 10 years or 20 years it could increase every year.
but again the coverage is the same and there is no cash value.
Let’s talk about whole life for a minute whole life is at the other end of the spectrum of buying life insurance.
It’s the most expensive form of life insurance the reason being it offers the most guarantees.
You have a level premium for the life of the contract so if you buy it at age 25 where you buy it at age 40 or you buy it at age 50 whatever rate you’re you’re given at that time is the rate you’re gonna pay throughout the life of the contract as long as you keep it.
The coverage is absolutely level if you bought $500,000 of insurance it stays $500,000 insurance all the way through and then in addition you’re growing what we call cash value it’s a savings portion, if you will, piece of the whole life contract.
These cash values are guaranteed it’s a very low rate of interest that’s credited to your cash value and I want to just make a point here of being very clear I am NOT for one minute purporting to use whole life insurance as a means to invest money to save for the future as a retirement vehicle, that’s not what this is.
This is an insurance contract you are paying for the most part most of those dollars you pay in premium are going towards paying premium in your insurer for your insurance coverage and as I said the younger you are the less expensive it is so if you buy a whole life policy when you’re 40 and you’re paying $1,000 a year when you’re 65 and you’re still paying premium you’re still paying that thousand dollars a year so it’s level coverage and the cash value it you know may-maybe in in 10 15 20 years you will basically see it in your cash value that you will have equal you will now have in your cash value the same amount of money that you paid in premium and as the years go on you know you’re 21 years 30 you’ll see a little bit of an accumulation there where you have a little bit of growth, which is great, you know so that at the end of the day at the end of the time that you either don’t want the insurance anymore or you know you maxed-out you’ve hit age 100, which is when these contracts end, you can either you know you can cash out the policy you can surrender the policy and get all that cash value back into your pocket so if you keep being a contract for a long enough period of time it’s very possible that you know 25 35 years later -which I know sounds like a really long time- but that’s what we’re talking about when we’re talking about insurance products it is a long term commitment invest not investment but it is a long term commitment and an arrangement that you’re making with an insurance company.
You know, so if you have a policy that you’ve had in place for 25-30 years it is very possible that in year 32 you call up your agent or you call up the insurance company you don’t need the coverage anymore and you are able to collect back all the premiums you’ve paid into it over those 30 years plus a little bit of interest.
When we look at those kind of scenarios sometimes people say to me you know Lisa if I collect back sixty thousand dollars in premium aren’t I going to be taxed on that and the answer to that is that you will collect back all the money that you put in tax-free and anything that was considered interest or accumulation you will be paying income taxes based on that.
It’s the most expensive form of coverage because it offers the most guarantees they offer guaranteed premiums guaranteed death benefit and guaranteed cash values.
Having said that to you the last point I want to make is that this is not a flexible contract, which is what we’re going to talk about now which is Universal Life.
Universal Life is a level or adjustable premium and coverage cash value insurance contract it’s also a form of permanent insurance different than a term policy.
You can be building cash value, you can have a guaranteed premium, you can have a guaranteed death benefit, but it is a it’s adjustable and adjustable for the person who owns the policy.
You can adjust the premium up and down based on your ability to pay for it as you adjust it up and down obviously the cash value is going to be impacted by that as well as the death benefit.
When we look at an illustration for Universal Life you’re going to see several columns the first one is always premium what does it cost on an annual basis, the second and third columns are usually the cash value columns, the last column is the death benefit.
With universal life you are actually able to see if you’re spending a thousand dollars a year in premium at age forty and you bought you know two hundred and fifty thousand dollars of Universal Life coverage a typical universal life policy will show you that you’re a thousand dollars six hundred of is going towards paying for insurance four hundred is going into your cash value.
This is what we we call unbundling, so you’re unbundling that premium those dollars to see exactly how much is the insurance costing.
As long as you continue to meet that unbundled premium amount, your life insurance amount your face amount will remain the same, but again it’s flexible, if you needed to reduce the amount of premium that you’re paying because, you know, times got tight money got tight you don’t need the coverage as much anymore whatever the reason is, you can reduce the amount that you’re paying, and again if you reduce it below the amount that is unbundled to show the premium you reduce it below that, obviously your death benefit is going to be reduced as well.
It can be guaranteed depending on how you set up the contract and how you maintain paying the money into it operates very similar to a whole life policy where you are building cash value at the same time it also endows or ends at age 100 just like a whole life policy very flexible contract.
So if you see on the chart I put up now this is basically a very small review of what I just talked about you have whole life, term life and universal life.
The cash value in whole life there’s there is always cash value it is always guaranteed.
Universal life there’s cash value, but it’s not guaranteed it depends on how you put your premium dollars in.
Is interest earned on this cash value yes with whole life, no with term because it’s not that there’s no interest, is that there is no cash value with term life it is surely you’re purchasing death benefit only.
Universal life there was interest earned at a minimum rate, is it flexible? I already discussed that.
With whole life it is very inflexible, you either pay your premium or you don’t and the same thing with term except that there’s no cash value.
Are there loans allowed? This is another point I want to make.
You’re building a contract that has a cash value in it.
This cash value grows -as I said- tax deferred.
As long as you keep the insurance and force any interest or dividends that are accruing to your cash value grow tax-deferred you’re not going to get a 1099 at the end of the year like you would if you had mutual funds so you had money invested in the stock market you would get a 1099 to show what interest or what capital gains you earned for that year that’s not how it works with life insurance.
Any money that grows inside the life insurance contract in the cash value whether it’s a universal life or it’s a whole life policy grows tax-deferred you pay taxes deferred later on down the line.
You are able to borrow this money from and really you’re borrowing money from yourself, it’s your money, but you’re borrowing money out of your cash value.
Can you do that with whole life? Yes, as long as there’s cash value accumulated you’re usually most contracts are written that you’re able to borrow between 50 and 90 percent of the cash value and still continue to pay your premium and still keep your coverage in force.
With term life you can’t borrow anything because there’s nothing there.
With universal life, again, you can make a loan and it depends on what kind of cash value you have available, depends on how much premium you’ve paid into it.
Premium, bottom line how much how much is affordable, how much you paying, whole life as I said right up front is the most expensive form of life insurance but it’s also offers the most guarantees term insurance is the cheapest form of insurance you can buy universal life is somewhere in the middle.
What I always suggest to people when I’m doing a financial plan with them we’re looking at life insurance how much you need, how much a death benefit you need, what is it for, obviously you cannot buy what you cannot afford, and I don’t want people to get into situations where they really like the whole life and they need a million dollars of coverage but they really can’t afford it, so what I always suggest to people is you know look it doesn’t have to be all or nothing, you can buy several different policies you can ladder them you can buy you know if you need a million dollars of coverage if it’s been determined between you and the person that you’re working your advisor that you’re working with that you need a million dollars of coverage, you could there’s no reason you can’t buy two hundred and fifty thousand dollars a whole life, two hundred fifty thousand dollars of Universal and five hundred thousand of term life.
There’s nobody saying you can’t do anything like that you can be as creative as you need to be the bottom line is that it has to be affordable, it has to fit into your budget and it’s not something that’s gonna go away anytime soon, so it’s not about making that first premium it’s about thinking about is this still going to be manageable for me in five years and ten years and then you get into a bigger discussion with yourself and with your advisor and you whoever else you need to share this kind of discussion with, you know, what are your goals, what where are you now, where do you see yourself in five years and ten years, are you thinking about going back to school, are you finished with school, are you having children, are you moving, is there an elderly person in your family that you’re gonna have to take care of, all of these things factor in to do you need life insurance? If you need it, how much do you need? What kind of policy? What kind of cash flow you’re gonna have over the next five to ten years? This all factors into what kind of insurance you need to purchase and what kind of policies would work best for you.
The policies are designed to work best for people that understand the need for them and understand the importance of them and are willing to make a long-term commitment to protecting whatever assets it is that they need to protect.
The last piece of the life insurance discussion I wanted to bring to the table today is something we call variable life and variable universal life.
These are products that in addition to the dimensions and dynamics that I just described to you about whole life insurance and universal life insurance, now we have variable whole life and variable Universal and what that means is within the cash value that’s accumulating up until now, with standard vanilla whole life or universal life those accounts grow and are accredited and accruing interest without any of the investment risk being borne by the insured or the owner of the policy.
All of that is managed at the insurance company.
If they’re guaranteeing 3% in 3% interest rate that’s their concern and the insurance company’s risk on how they achieve that they’ve guaranteed it and that’s the end of it nobody’s asking the person who’s buying the insurance policy how should I invest the money how am I going to make sure that we get 3% over the next 20 years.
With a variable life and a variable universal they’re giving us an opportunity to offer to the public a policy where you can make investment decisions, where you’re asked to bear the investment risk.
They operate just like the whole life and the universal life contract so they just suggested to you, however there is this piece of it on top of it that makes it a variable contract, which means that nothing is really guaranteed, even in the whole life contract, because everything is based on you putting money into these contracts and directing the investing of how they take the money that’s not being used to pay the premium, how they take that money that would be putting into your cash value, how they invested.
And they usually give five or six, ten, depending on which company you go to, different what we call separate accounts, where people can choose, you know, you want to stock portfolio, you want a bond portfolio, you want a combination of the two, there’s always a guaranteed interest account and the investment risk is completely borne on the shoulders of the person who’s purchasing the contract or the insured.
That benefit can go up and down depending on whether or not the investment performs the way it’s supposed to, and because of that it’s to me in my professional career of almost 30 years, I will tell quite honestly, to me if you have a need for life insurance, if you have to protect something, it’s black and white.
You have to have a certain amount of insurance.
A variable contract is not for you.
A variable contract can underperform, can completely bottom out if the market takes a huge downturn and you’re invested in the market, and your death benefit is contingent upon how those investment accounts perform and it doesn’t perform well you could end up with much less insurance than you needed or thought you were going to have, so, you know, again, if it’s out there it’s popular because it allows people to basically do all their financial business under one contract.
You can have your life insurance and you’re investing all in one place.
Might be palatable for some people, for some people, you know, I would rather see them but open an IRA, participate in their company’s 401k, do their investing in a more conventional manner, as opposed to doing it under a life insurance contract.
What to consider when we’re purchasing life insurance? Who will be the owner of the policy? If you’re a single person and you don’t have children, you don’t have a spouse, it’s possible that this really isn’t an issue for you, however the only thing I’ll say about who’s the owner of the policy: When you have a married couple for example, very often you will have the spouse on the policy understand that when life insurance is paid, when the death benefit, when a death occurs and the death benefit is paid to the beneficiary, those dollars, as long as it’s a person and not a corporation or an estate, those dollars the half a million dollars a million dollars comes to the beneficiary a hundred percent tax-free.
However, the person who owns the policy which a lot of times it’s the insured, that amount of death benefit gets included in their estate for estate tax calculations.
Sometimes if you have life insurance that gets included in an estate it can bump the estate up to such an amount that all of a sudden we have a tax consequence.
So sometimes it makes sense to have these spouses own the insurance.
If it’s a business arrangement and you have a corporation buying life insurance for a key employee they’re trying to protect the business should something happen to this important person, the corporation might be the owner and there were all kinds of tax implications which are beyond the scope of this conversation, suffice to say it is something to consider, depending on your individual situation.
How much life insurance do you need? Sometimes it’s a very clear cut you know I have a $350,000 mortgage and I want to buy three hundred and fifty thousand dollars of life insurance sometimes it’s not that clear sometimes it’s about you know a need that would arise should a death occur and you need to look at things like, you know, you’re 40 years old you have another 25 another 30 years of work life left you need to figure out how much is that? How much is that worth at the end of the 30 years how much how many raises am I going to receive? How much more money am I going to earn? Am I trying to save for retirement and if something happens to me the person who is going to retire with me isn’t gonna isn’t going to have the contributions they expect it to have.
Am I going to need to fund a college for a child or am I going to go back to school? Am I going to need to take care of my mother or father a grandmother or sister? Am I going to need to pay off a mortgage? All of these factors come into play when you’re figuring out how much life insurance.
And any good financial planning insurance broker sales person, whatever they call themselves, should be able to provide you with a very simple to a very sophisticated way of calculating what we call the human life value, what is your life worth.
You know it sounds kind of, I don’t want to say creepy because it’s not creepy, but it can be an eye-opener shall we say as to looking, taking a snapshot of your life now and pulling it out another 30 years and seeing really what would your life be worth if you live till you know aged 90.
And you are able to come up with an estimate of how much insurance.
Now do you need to insure all of that? That’s an individual question that needs to be asked and answered.
Can you afford to insure yourself for that amount? Again an individual question.
You know very often we do these calculations and we come up with these very large numbers that are just not manageable for people.
And it doesn’t mean you don’t buy any insurance, it means you do a proper plan and you buy what you can afford and you do perhaps what I said, instead of buying all of it permanent life insurance and locking in that premium for the remainder of your life, you buy a combination, you buy some term insurance, you buy some whole life insurance.
Who are you working with when you’re buying the insurance? In this day and age in 2016 in our 21st century you absolutely can go online and buy life insurance.
You can go to a bank and buy life insurance.
I feel very strongly that I bring a tremendous amount of value to a meeting that I would have with somebody to help them figure out who they want to work with.
You want to be working with someone that you can trust, you want to be working with someone who you obviously have been referred to by somebody else who has used them, you want to make sure the person is properly accredited and and licensed.
In the United States of America we have insurance departments in all of our 50 states.
Each state Department of Insurance licenses people to sell product.
So if you’re living and working in New York you need to work with an insurance broker who is licensed in the state of New York.
There are thousands of us you need to work with somebody that you can build a relationship with, somebody who’s going to listen to you, somebody who is not going to ignore your concerns or invalidate your concerns, somebody who’s going to respect you and somebody who’s going to go the distance with you.
If you tell somebody you tell an insurance broker that you only have, you know, a hundred dollars a month to spend and they don’t listen to that and they don’t respect that then it’s perhaps not the right person for you to be working with.
The most important thing is that you feel that you can build a trusting relationship with the person.
I’m just running through some review questions here on the screen here.
Did you go through a process to determine how much life insurance you need? What type of a product will work best for you? Again as a good insurance professional I’m gonna ask you questions and I’m gonna listen to the answers and I’m gonna incorporate those answers into my proposal as to how to properly insure you.
One thing that I didn’t mention here and I don’t have a spreadsheet on I want to just talk for one second about insurability.
All life insurance in this day and age in the United States barring some policies that you can obtain through your employer, if you’re buying life insurance on your own you’re going to need to satisfy medical requirements.
Typically it’s a blood and urine sample, a battery of medical questions that have to be asked and answered.
Everybody is either insurable or not.
There is some middle ground where people are insurable but they might cost a little bit more than somebody else’s their age due to a health history situation.
There are people that are absolutely not insurable.
All the money in the world isn’t going to get them an insurance policy.
You, again, this is where it’s so important that you work with somebody that you can trust and that has experience and brings value to you.
A computer illustration, a person in the bank is not necessarily going to be able to walk somebody through this can be quite lengthy process of underwriting with somebody who has a serious medical condition.
If you have a serious medical condition, you have type 1 diabetes, you’ve had cancer in the last three years, you’ve had open-heart surgery, you have some kind of hereditary condition it doesn’t mean you’re not insurable, it means you have to find the right person who has experience who has the resources necessary to bring you to the insurance company that will give you the best or for possible.
Sometimes the process can be as simple as a couple of weeks, sometimes it can go on for months a lot of times when we get into buying life insurance and somebody has submitted medical requirements and they have admitted they’ve gone to the doctor in the last year the insurance company typically will write to the insurance company they will typically write to the doctor the provider to get a statement of health.
Not all doctors take these requests in timely fashion, sometimes these things can stretch out.
Sometimes a doctor will send a statement and it will refer to another doctor in it that they’ve recommended that the person goes to see and then they have to write to the other doctor, so it can be a lengthy process.
It doesn’t, and I don’t say that to turn people off or to push people away just I think it’s important that people are prepared and that’s another way you can you can gauge who you’re working with.
Is the person honest with you about the process? Are they laying it all out in front of you so you know what to expect? Are they asking you the medical questions? Are they probing? Are they listening? Are they taking it seriously? Are they offering information to you? These are all the ways that you could determine whether or not somebody is experienced enough to be working with you.
If somebody has enough values for you to to earn your trust.
My next topic I want to talk about today is annuities.
We talked about annuities when we talk about life insurance because they are insurance products.
When I talked about life insurance in the very beginning I suggested that perhaps the idea of a life insurance policy is, you know, for a couple of dollars, you know, for a monthly premium a quarterly premium you create this immediate pool of money.
A very large pool of money in some circumstances.
An annuity is basically the opposite of that.
You already have a big amount of money and you want…the goal of an annuity, the reason people buy annuities, why they’re so popular nowadays, is because it’s the only product that is available on the market today that will absolutely guarantee you will not outlive your income.
It doesn’t guarantee that it’s enough money to live on every month or every year, but it guarantees that no matter how long you live you will be able to collect an income stream.
The term annuity itself comes from the Latin term meaning an annual and generally refers to any circumstance where principal and interest are liquidated through a series of regular payments made over a period of time.
An annuity can provide a guaranteed income stream for the life of the annuitant or the owner.
No other investment vehicle can offer such a guarantee.
Regardless of the actual longevity the annuity will continue to payout income for the life of the annuitant.
There are two basic types of annuities.
There are actually a couple more, but, again, for purposes of introducing these concepts today, I want to just focus on two.
The first one is a fixed annuity.
A fixed annuity is an annuity that’s characterized by a guaranteed minimum interest rate and guaranteed.
It’s guaranteed by the insurance company.
There is absolutely no investment risk and with a fixed annuity the focus is on the safety of the principal and the stable investment returns.
A variable annuity on the other hand, again, there’s that word variable just if you remember like we were talking about with the variable life insurance, a variable annuity put up against a fixed annuity is almost the opposite.
It offers no guarantees as to the investment returns and as a result offers no guarantee as to the how the money that is put into these will grow.
It is still an annuity make no mistake about it, and you can structure a variable annuity to guarantee an income stream for the life of the annuitant.
You can guarantee a death benefit, however with it with a fixed annuity you’re guaranteeing not only that there will be an income stream, but you’re also guaranteeing safety of principle and the amount of the money and how much it will grow.
With a variable annuity all you’re guaranteeing, if you set it up properly, there will be an income stream for the life of the insured or the annuitant, but there is no guarantee as to how large that pooled money or how large that income stream will be.
Funds contributed by the contract owner are placed in special variable annuity sub accounts.
Within these sub accounts the annuity owner may choose to invest the funds in a wide variety of investment options.
Annuity benefits depend upon the investment results achieved and the investment risk rests entirely on the contract owner.
The goal is to provide benefits that keep pace with inflation.
And in a minute I’m going to give us two examples of very clearly where a fixed annuity is appropriate and where variable annuity is appropriate.
I want to go over some key terms first.
The accumulation phase when we’re talking about an annuity is exactly what it sounds like it’s the period of time that you are growing your pool of money.
The contract owner either contributes funds through a single lump sum or through a series of payments.
Each payment is used to purchase accumulation units in the investment sub accounts for a variable or each payment or each lump sum is put into a fixed annuity and will be accredited with the guaranteed interest rate.
The cost of the accumulation units in an in a variable annuity is fluctuates based on the underlying value of the investments.
So that’s the accumulation phase that’s growing the amount of money that’s going to later pool and become this income stream to the annuitant.
In a variable annuity we also have the annuitization phase.
Once the contract owner decides to annuitize the contract, in other words they want to start receiving their income stream.
The accumulation units that have been purchased are exchanged for what we call annuity units.
The number of annuity units received depends on the price per unit and certain insurance company assumptions regarding income, mortality and expenses.
Once determined the number of annuity units remains constant.
The actual value of these units fluctuate again based on the valuation of the underlying assets.
The amount of periodic income payable is determined by multiplying the current value of each a unit of each annuity unit by the number of units that you own.
As the value of each annuity unit increases, because the underlying value of the assets underneath it increase, or decreases, so does the periodic income.
Other key terms that are important to remember when talking about annuities: Guaranteed death benefit.
Remember I said this is an insurance product.
You don’t have to go through the insurability and the underwriting that you do when you’re buying life insurance, however it there is still a death benefit.
Most, if not all, insurance annuity products offer an option to purchase a guaranteed death benefit.
Some contracts offers an optional feature a guaranteed death benefit should the annuitant die before they start collecting payments.
This guaranteed death benefit can be, it can be, you know, you can buy a death benefit that would basically protect the value of your initial investment.
So if you if you put five hundred thousand dollars into an annuity and you went along your business for a couple of years and then you passed away, the beneficiary would be able to collect the way the death benefit is usually written the debt that the beneficiary of the death benefit would be able to collect whichever is larger what the account was worth at the day of death, so if there was some interest that accrued they would get that, or if it was a variable annuity and the investments were not doing well and it was less than what was originally put in, the market was down so to speak, you’re guaranteeing that at least what you put in your initial purchase payment or your periodic payments that that would be the amount that’s paid out as the death benefit.
Most of these death benefit options that are offered under annuity contracts are not free.
So you’ll see when you look at an annuity contract there are mortality and expense fees, M&E for short, and these are the fees that are paid to the insurance company to manage your money to provide the death benefit and to cover the expenses of the insurance company.
If you don’t want a guaranteed death benefit URM any expenses will be a little bit lower maybe you know a quarter of a point 1/2 a point something like that.
What’s an annuitant? An annuitant is the person whose life expectancy the income stream is based on.
Settlement options: The options the owner has with regard to receiving payments there are things called periods certain, life only and joint survivor.
Let me talk about that for a minute.
Again, remember, for purchase of an annuity is to guarantee an income.
You can take life only, which is what I’ve been talking about, you have one person who buys an annuity and guarantees that it’s going to pay them an income for their life remainder, that’s life only.
At the end of their life whether it’s five years from when they purchased it or it’s 60 years from when they purchased it the insurance company has to continue to pay that amount.
Period certain is a little bit different.
Period certain says that instead of paying the annuitant for their entire life, that you’re going to pay it for 10 years, or you’re going to pay it for 20 years.
Again these are options that when you purchase the contract it’s a process you go through to ascertain what your needs are.
Joint survivor, so most of the time the expectancy the life expectancy of them the mortality of the person of the annuitant is what’s taken into place to calculate how long this pot of money is going to last and again, it’s the insurance company’s responsibility to make sure that regardless of what their expectancy is if they think the person is going to live till they’re 87 or till they’re 92 and the person lives till they’re 103 it doesn’t matter.
If they have committed to paying a life income then they’re going to have to pay for those for the rest of their life.
You can with a legal spouse ensure both people.
So you have a situation where you have the primary annuitant who purchases the annuity and at the time of purchase they decide that I want you to pay me for my life.
If I pass away I want you to pay my spouse for the rest of his or her life and then they’re going to look at the mortality for both people.
The payment, the actual monthly income stream is going to be smaller, than if it had been on just one person but because you’re covering two lives.
Let’s talk about taxes for a minute.
Tax treatments from an annuity will vary based on where in the lifecycle of the annuity the payments are made.
If before, if funds are funds are taken out of the annuity before the contract has been annuitized, in other words you have not notified the insurance company that you want to start getting your income stream, but you decide that for whatever reason you need to take money out, income the the money that comes out is taxed as ordinary income in addition if funds are withdrawn because remember, an annuity is it is a retirement product, and as such all the growth that occurs within the annuity contract all the interest, all the accumulation is again it’s a tax deferred vehicle.
This is why we have annuities, this is how our government encourages us to save right whether it’s an IRA or it’s through the 401 K or whatever it is that you have at work or you’re buying an annuity.
A lot of those principles operate in the same way.
To encourage people to save for retirement the government allows people to put money into vehicles that are qualified plans like an annuity and that the money that grows, grows tax-deferred you don’t pay income tax every year on what you aren’t inside an annuity it’s deferred until you either start making your pay start taking your payments or until you surrender the contract.
When you surrender the contract is due it depends on that’s how we determine whether or not all of it is taxable or some of it.
So if you take money out of an annuity before you’re fifty nine and a half just like if you pulled money out of an IRA there’s not only is there a an income tax penalty, but there’s also a ten percent penalty if earnings are completely withdrawn and payments have been made from an owner’s initial investment withdrawal is treated as a tax-free recovery capital.
So if you buy an annuity with after-tax dollars and you decide five years in you need some of the money and you’re not 59 and a half yet you’re gonna pay tax on the interest that they calculate you’re also going to pay the 10% penalty.
If you take money out after annuitization after you are receiving your income stream how do they calculate is that considered totally taxable and so after annuitization regular annuity payments are treated as part earnings and part return of capital.
Earnings portions taxed as ordinary income.
Once the owner has completely recovered her investment in the contract all remaining payments are fully taxable as ordinary income.
Also still subject to the 10% federal income tax penalty if the person is annuitizing prior to age 59 and a half.
My next slide will give you a quick comparison of annuities.
Fixed annuities, variable annuities.
Remember I said under a fixed annuity guaranteed fixed rate of return low to no investment risk.
So as a result, when you’re in the world of investing, the more guarantee that you’re asking, for the more safety of principle that you’re asking for, the less likely that you’re going to have the ability to earn a lot of interest.
It’s a direct correlation.
If you are completely risk-averse in terms of your you cannot lose you cannot take the chance of losing any of the money any of the dollars that you’re putting into the annuity, then you and you’re putting it into a fixed annuity you’re going to earn a very low rate of return two percent two and a half percent.
With a variable annuity where you are willing to bear that investment risk, you can put your money in, and you can choose where your money is invested, and you could earn whatever the stock market or the investments are earning it you could go as high as you know 10, 11, 12 percent, or, conversely, the market could drop we could have a catastrophic something and you could lose, not only any interest but you could also invade principle and lose some of your principle.
There is no guaranteed rate of return with a variable annuity.
With a fixed annuity you have no options for investment selection, with a variable annuity or several types to choose from and remember, again, what I always say to people when they when they look to make any kind of investment whether it’s in the bank or it’s a mutual fund or stock or it’s an annuity, that the goal of the annuity or the investment product should meet your goal.
If your goal ultimately is safety of principle you have no business being in anything that’s going to fluctuate you need a fixed product, you need a fixed annuity.
If your goal is to provide benefits that keep pace with inflation then you need to be in something that’s going to give you exposure to the market so they have the potential to earn the returns that you’re gonna need to keep pace with inflation.
My last two areas here I want to just show you two scenarios where a fixed annuity is appropriate and the second scenario where a variable would be more appropriate.
So let’s look at this for a minute.
We have an Annie.
Annie’s retiring from her position at the printing company that she’s worked at for 32 years.
Her employer will be transferring the money in her retirement plan to her as the plan does not allow for money to be held for employees no longer employed at the company.
So understand here, she hasn’t retired, she just she’s leaving her position there she’s used quitting.
The plan was designed where all the contributions were from the employer and the employee had no control as to how it was invested which is a very traditional form of pension plan it’s not something we see a lot of anymore.
Nowadays we you know when you work for a company most of the time you’re going to see a retirement plan in place that has a place for the employer to make a contribution and a place for the employee to contribute as well.
It also allows for the employee to make the decision about where the money is invested.
I’m not talking about that in this particular example, I’m talking about a situation where it’s a traditional pension where based on years of working at the company based on income however the plan was set up, the employer puts a certain amount of money away on behalf of each of their employees and at the end when they retire when they’re 65 when they’re 70 whatever the retirement age is, they’re guaranteed to receive a certain amount of monthly income.
That guarantee is based on the investment risk that is borne by the employer solely.
The employee has nothing to do with where this money is being held.
Annie wants to know that her money will continue to work for her by growing and by providing her with income when she retires in about ten years.
Her plans include starting her own business and continuing to contribute to a retirement plan for herself.
She purchases a fixed annuity with the entire balance coming from her employers retirement plan and will collect a guaranteed monthly income starting in ten years.
She will not be involved in choosing where the money is invested as a fixed annuity with a guaranteed stated interest rate.
When the time comes her income stream will start and will continue until her death if no other options are selected.
In addition she has the ability to select the beneficiary to collect the death benefit upon her demise.
So that’s the perfect example especially in our world today where so many people not so much in 2016 but I have run into I can’t even say how many of my clients, how many of my colleagues, how many people I know in my life, that lost their jobs over the last ten years that were downsized, companies left the area, whatever it is, and they were people working in larger institutions, banks, hospitals, universities, and they were let go.
And they had these retirement accounts that had substantial assets in them you know three-quarters of a million a million whatever it is and they were always working under this assumption that when they retired their employer was going to provide them with a monthly income.
And they had no idea how they were going to do it or what they were invested in but that because that was something that was borne by the employer, suffice to say that it was something that the individual employee did not need to think about they just knew that they would guarantee to get you know once a year they’d get a statement and they would say if you retire today you’re entitled to you know X amount of dollars per month.
When people were downsized they were faced with this reality of oh my god I have all this money how am I going to make sure that it stays this amount and that I’m gonna continue to be protected then I’m going to get an income stream that was equal to what I was would have gotten with my employer.
A fixed annuity is a perfect product for that.
My next scenario is Rose.
Rose was downsized from the bank after 19 years as a customer services manager.
She had participated in the bank of 401K for all those years and accumulated almost three hundred and fifty thousand dollars.
She was accustomed to choosing her own investment option.
So Rose took that three hundred and fifty thousand dollars and purchased a variable annuity that will allow her to continue making her own investment choices while continuing to earn a return that grows tax-deferred.
In addition Rose was concerned about what happens to have three hundred and fifty thousand should suddenly pass away.
Could she make sure that her family collects it? A variable annuity can guarantee a death benefit equal to the initial investment in addition to providing an income stream at retirement.
In addition she’d be able to continue to make her own investment choices by using the various options available to her under her variable annuity contract.
So there you have it everyone, life insurance and annuities, hopefully I brought you a practical introduction to the products and remember that you know we invite you to ask questions, please feel free to either email them or put them in the chat box and I will answer them if I can in a moment.
I also want to let you all know today that that I would offer a free consultation to anybody who calls me as you can see there is my phone number 718-352-1311 there is my email address and the address of my website
I thank you all for participating today I look forward to any questions you might have.
Thank you
Maggie: Thanks Lisa
So, as Lisa mentioned, if you have a question now you can type it into the chat box or you can email
One of the questions we have come in is:
“Should I be asking an advisor how he or she came up with the number for how much life insurance I need? Is everything in my life really getting considered when that number is calculated ?”
Lisa: That’s a great question and as I had said during the presentation absolutely you should be able to ascertain how this advisor came up with that number.
Hopefully they came up with it the way I would come up with it they asked you a bunch of questions: do you have a mortgage? do you have dependents? do you have anybody in your family who’s dependent on you financially? do you have loans? do you have anything that needs to be protected? do you have a charity that you want to make a donation? to all of those questions are factored into how much life insurance somebody needs it’s a very individual process.
There is no such thing as saying you know you’re 35 or you’re 50 so if you’re 50 you need a million dollars of life insurance and if you’re 35 you need 750 thousand.
It’s a very individual process and it is absolutely a process that you should be part of with your advisor.
Maggie: OK, great, thank you!
And another question we have here is “Is there a minimum investment amount that needs to be met to purchase annuities?”
Lisa Sometimes, sometimes it depends on the product.
There are all different kinds of products out there if it’s a valuable annuity usually it’s based on either an annual first-time contribution or if you’re committing to doing it on a monthly basis that you’re actively saving.
There are minimums most of them start with 2,500 or 5,000 with being able to make a commitment where you know you’re basically allowing them to auto-draft money out of your bank account once a month if you sign up.
Like that sometimes you can depend again depending on the insurance company, depending on the product, you can get them down to you know $50 a month $200 a month if you are looking for an immediate annuity in other words you’re looking for a product that is going to start paying you an income stream right away that’s called an immediate annuity and very often those are larger commitments you know they want a hundred thousand they want two hundred and fifty thousand it depends so again you know these are the questions that an adviser should be able to answer for you but yes as a rule there is a minimum you cannot open an annuity with ten dollars.
Maggie: OK, Thank you and the next question is “I’ve heard some different things about ILET’s irrevocable life insurance trust I know it wasn’t really talked about in this presentation but are you able to talk a little bit about the pros and cons in those?”
Lisa: Sure, an irrevocable life insurance trust is a tool, a financial tool that’s developed to protect assets when you have a situation where there is going to be state tax consequences or where I’ve seen it used also is when you have perhaps a person who is directly involved in the finances of the family or the business who cannot manage their own finances for whatever reason it is, so we set up a trust which is a separate entity ,it gets its own tax ID number, it files its own tax return, and the word irrevocable means once it’s set up, you cannot take it back.
So we set up a life insurance trust and we make the owner of the insurance policy the trust.
The trust so now the life insurance policy sits inside this trust the insurance the the I’m sorry the premium for the insurance is paid for with dollars that come out of the trust so when you set up a number of life insurance trust you’re also usually putting in money again to get it out of somebody’s estate because once it’s put in the trust it no longer belongs to whoever gave it to them.
So if that person should pass away and they have a lot of money you you’re taking things out of people’s estates to minimize how big the estate would be upon death and minimizing the tax bite.
So those are the pros and that’s why we use them occasionally so you’d have an attorney draft up a trust document you file with the state for a tax ID number every year the trust needs to file a tax return so I guess the cons would be it’s not cheap to do this it would cost several thousand dollars to set the trust up and then it has to be managed.
A checking account has to be established for the trust and as I said a tax return has to be filed, so those things cost money you know to hire an attorney or a CPA to take care of the necessary required documentation annually, probably cost another thousand dollars a year just to do that, however if you’re talking about a family or a situation that’s worth millions of dollars or you’re talking about protecting a disabled person and you need to keep things in trust for them a couple of thousand dollars set it up and a thousand dollars a year to run it is nothing compared to what’s at stake, so I would say you know again it’s something it’s a sophisticated planning tool that is utilized by people that have reason to use them.
Maggie: OK great, well those are all the questions we had for now Lisa so I want to thank you for a really great presentation and I believe you said if people have further questions they can contact you.
Lisa: Absolutely we’d love to talk to them
Maggie: OK great well I want to thank everyone for joining us today and thanks again.
Take care of everyone thank you bye-bye.

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