Generic PRODUCT / PROGRAM EXPANDED SUMMARY AND DESCRIPTION
Designed to Support Verbal Presentation of each feature and benefit and not complete without that verbal presentation.
By Robert Fulton not product vendor
What in a name?
Complete Product / Program Name/Description expanded with all supplemental adjectives as shown in the header at the top of this page:
FIA: Single Premium Taxed Deferred Fixed Indexed Multi Strategy Accumulation Annuity.
Each underlined word group in the name above tells you something and I will try to explain each and then expand on them and fill in the gabs. See the “Larger Bold font” to find each word group in the sections below.
Taxation Scenarios:
This program, a FIA, which is one of my favorite products for capital accumulation with my client profile can be used to fund IRA’s and NQ regular long-term savings (which I call wealth) makes the account tax deferred to grow the asset quicker. So below I will first cover NQ in two paragraphs, then move on to the use of a FIA to fund an IRA’s.
NQ: Non-Qualified- meaning non-IRA: Allows growth from Interest credits to accumulate tax deferred providing more productive results for wealth accumulating for long-term savings. You pay taxes on interest only when you take the money out, but not until you decide to the that and there are not any RMDs for NQ FIAs.
Qualified: Types of IRA accounts allowed and supported:
Traditional IRA: Rollover, Transfer and or new contribution deposit to an IRA with application, as a new account for you.
SEP IRA: Transfer (via signed authorizations) or deposit with application.
ROTH IRA: Transfer (via signed authorizations) or deposit with application.
Key Word in name above: “Taxed Deferred” growth is a dynamic feature for NQ accounts and one of the major benefits of this program being used to fund long term savings. While IRA accounts already by design enjoy tax deferral, when this product is use to hold regular NQ savings, taxed deferred growth really enhances wealth buildup, without the nuisance of compliance with RMD withdrawals, (again when NQ’d). In other words, you earn interest profit gains on money still in your account over the years that you have not “yet” shared with the government. Then you pay taxes when you take it out on “LIFO” basis. Account holders (Annuitants), who make withdrawals of their deferred profits before age 59.5% pay taxes on their gain along with a 10% penalty on the profits. This program is designed to hold long term wealth and age 59.5 comes pretty quick. But works far better when withdrawals are after turning age 59.5.
Key Word in name above: “Accumulation Annuity” to explain this, one needs to first review the definition of the word “annuity.” The most sophisticated definition is the simplest which is:
“A contract issued by an issued and administered by an insurance company” and really not more complicated than that. (Of course, insurance companies issue many types of contracts which I am not explaining here such as Life Insurance). Please remember a FIA is for accumulation and a SPIA is for income discussed on its own page of the website.
There are two general categories of Annuity contract designs so to speak, which are “deferred” (FIA) and “Income (SPIA).”
Deferred = Accumulation Annuity (FIA) used to hold money for future withdraw as lump sum or in the form of a regular stream of systematic flexible withdrawals that you control the amount and frequency; or some option of annuitization. The taxed deferred growth is not taxed until withdrawn.
Income = Immediate Annuity (SPIA) which provides non modifiable monthly income you cannot outlive.
SPIAs can be either non-qualified (non-IRA) and then come with a special "Exclusion Ratio" for income taxes, so a large portion of your monthly income is not subject to income taxes. With a FIA 100% of the interest, is taxable, but not until you take out. Then when you draw it down to your original principal (your basis) it is tax free. The key thing about a SPIA is the insurance company guarantees the income will not stop because you have run out of money.
There are three general quality groups of Annuities, “Total Junk” and “Just Ok” and “Extremely Good” and most are in the first group. I have found it extremely challenging to find the good ones but have. I used the words “wealth buildup” in one of my paragraphs above and underlined it which was indicating that the type of annuity (FIA in this product description) is a “deferred” which holds money (sort of like a savings account) and grows money, through interest credits (if any) and in the future allows you to simply withdrawal your money, all meaning that this is in the category of a “Deferred” (Accumulation) Annuity. Friendly reminder, we are not talking about SPIAs (Immediate Annuities) here, which is a totally different animal which provides level monthly income you cannot outlive, which again, you can learn on its own web page.
Key Word in name above: “Single Premium” is the wording needing to address next because I just used the word “premium” above in a different context and therefore need to review the definition of this. But first in a nutshell the FIA products I recommend normally just allow money to be put in once in the beginning. The ones (contracts) that allow money to be added anytime in the future, or even monthly are called "Flexible Premium" and the administration cost are higher with those so the growth or returns may not be as high.
This narrative is to teach about the type of annuity called FIA's. Everything has a tradeoff. I am only trying to teach you the differences for your reference and decision making. Normally, when a client comes to me thinking about purchasing an Immediate annuity for income, I share that every year you wait to purchase one the better your level lifetime income will be. This is because the older you are the closer to death you are and since the payout is actuarially calculated, the better the payout monthly. HOWEVER, we are in a currently high-interest rate environment and the has caused the payouts to be really high which makes that subject kind of a wash. To me in low-interest rate periods, the payout on a SPIA for those under 62 (outside my model client profile) are too young to get a high enough pay-out to make the tradeoff worthwhile compared to the higher historic average annual returns of the FIAs I promote. The interest credits on FIAs historically have been great and average out well when compared, as I can demonstrate. Some clients live on withdrawals from FIAs, but they will never be as level, nor will the client receive the perfect monthly level income that you could set your watch to as the income out of an Immediate annuity (SPIA). Also, when you purchase an Immediate Annuity, you literally pay a premium for that benefit, and the traditional definition of "Premium," meaning that you lose control of that capital, and the insurance company keeps it as a premium. With the FIA account (designed for accumulation) the concept is you can access the principal of your money (that you put into it) as needed to supplement your income; of course that will lead to you running out of money. The income from a SPIA will never allow you to run out of money not matter how long you live.
So, as I started to explain above, with “Deferred” Accumulation type Annuities the word “Premium” more resembles what I think of as a deposit since there are withdrawal features and, in the future, you can get 100% of that money back into your checking account again in the future if you want. To expand on something I wrote about above, there are generally two categories “Flexible” and “Single Premium” Deferred Annuities.
Flexible Premium = Feature that allows the Annuitant customer to send in more money in future years with each premium track separately in a sub-account. The insurance company has cost associated with the administration, servicing and accounting of these so called future premium deposits which often hinders or dampens some results associated with return or yield.
Single Premium = As the name implies only allows one for the collection of one deposit. However often when the account is open multiple IRA accounts are all transferred into one of these single premium contracts. The streamlined concept without the extra costs to the product vendor for administering future premiums, is more ideal especially when no future premiums are anticipated or planned can in itself result in a major improvement in return.
My experience has observed without exception that Single Premium products have performed much better than the Flexible premium products due to the increased costs of administration of the extra sub-accounts and many other reasons. So if you do not need the “Flexible Premium” feature you may be losing a little ground owning one. The biggest disadvantage of this is you need to save up a little money in the bank then open this account since the minimum deposit maybe about $25,000.00, generally less when it is IRA money. Many of my clients purchase a new account once a year.
Key Word in name above: “Multi Strategy” once your money is in the account there is a 30 day window every year just before your anniversary date when you will receive a letter discussing the different strategies which are there in your account and you receive quotes for them, so theoretically you could change it in order be consistent with your philosophy in different economic cycles. This can of course be used to make an adjustment to deal with a change in philosophy “so to speak.” The choice of Strategy and consequences are always ultimately the choice of the account holder. I am here to guide you and help match your philosophies to the product and its strategies for you to select within the account. Currently, I (Robert Fulton) only promote two or three of the strategies. The first is called the “1 Year Point to Point with XX% Performance Participation in the gains of the S&P 500 Index with CAP. The other I really like which has a slightly lower Participation Rate but no CAP. The third is Annual Point to Point with you receiving 100% of the S&P 500 index gains up to the CAP which is published each year. The operative words in this paragraph above, not to have missed are those of “1 Yr Pt to Pt,” “XX%,” “S&P 500”, “gains,” “CAP” and implied absence of the word “loses or downturns.” So this means when the market goes up you get profits (interest credit) based on a pre-selected formula, based on the increase (gain) in the index during that specific one year period you just finished, (again, converted to an interest credit to your account) and the term “Point to Point" meaning the points in time period, with the first being, that of your contract issue date to your 1 st anniversary date, (a year after the contract was issued) thereafter from each anniversary date, to your next anniversary date, then to the one that follows that and so on, thus the words “Point to Point.” So obviously the word “gain” means experiencing an increase in index value between your initial contract date, compared to the next “point” in time of your 1 st anniversary date and each one after that. On this date the value of your current principal receives the new deposit of this interest credit (your % of the gain in the market). Then that locks in on your anniversary date(s) and then, that amount of total accumulated money (prior principle and new interest) is never subjected to being reduced from a future downturn in the market. Again, the market refers to the “S&P 500 Index” and you can sit at your computer and Google “S&P 500 Index” at the end of any business day and see the index value for that day. So this index value is established at contract issue and on the Anniversary date then they are compared to each other to establish the gain (if any) of which you will receive a credit of up to the CAP, but no adjustment downward is made in years when the index value has declined when compared to the prior year. In other word your account value just remains the same as what it was on your last annual statement.
The word or acronym CAP means “CAP Rate”, which is the “highest” return rate you could earn, set as a limitation (cap on) your earnings in the program for the next period set each anniversary date. So, my words, absence of the words of “loses or downturns” are actually more than implied. This is the core theme of the FIA and its strategies. Simply put, we (us account holder-Annuitants) do not participate in market loses or downturns!
So, you have just learned the general strategy of the FIA, but what may not be apparent is the gains seen in these accounts are much as that of 50% of total market return, in some years. This is because you do not have to pay "catch up" before you start earning money, since each year stands on its own. I will get into more detail on how that works specifically when and if you ask for an illustration, for your situation.
My computer illustrations using historical returns call it the "Capture Rate of Profits" and generally show capturing between 75 to 90% of the overall market gains over time but without the exposure to capital risk of the stock market. This is very impressive and a key thing to the strategy using an FIA to grow your nest egg.
Relax and enjoy the peace of mind that comes with knowing your money is protected from a loss in value if the index declines.
So, when the comparison of the index value on your anniversary date compared to the previous period or point (your last anniversary date), or the issue date on a one-year-old account, if the index goes up you have a gain equity position improvement in the period. During the year I call this “in the money” during the year but the year is not over until the anniversary date and a lot can change by then. But when you get the gain, this locks in and is held for you, and this increases your total account value. Thus, this is where the key wording came from in the name of the product/program/contract, “Indexed.” But if the index has the declined since the last comparison, (where and when normal direct investor would have lost money) your account value remains the same. So, when you receive your annual statement the asset amount (account value) will be the exact same as it was the year before to the penny. I am just trying to teach you the mathematics or mechanics of the strategy. Needless to say, if you took some money out of the account during the year for any reason then of course the account balance would be adjusted downward by the withdrawn about; but could not be because of a market decline.
The concept here since you do not have to play catch up to get even again on your account balance before you can start enjoying a period of positive earnings. This is why over time historical returns of the better FIA's gain capture of the market gains than the 50% Participation Rate of the basic strategy.
Fear of Loss, Hope of Gain and matching client suitability
This is perfect management strategy for people seeking to avoid having their nest egg’s asset value shrink for entering a negative economic cycle in the economy. It is hard to predict these cycles, and my brief we are at the top equity market or near the top of a high now, and normally these are followed by the ones to avoid.
This could be the perfect management strategy for people who can allow their money to grow seeking the highest likelihood of doubling their money over the next ten or eleven years without the traditional exposure to capital risk.
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