section 1 - The American College Online Learning Center

(1) Example: One approach is to cover expenses for a bridge period—such asfrom age 62 to 70 to support deferral of Social Security benefits.(2) With the bucket approach, a term certain annuity may be an appropriateproduct to provide income for the expenses over the most current incomebucket.(3) Term certain annuities are also used by some in a low interestenvironment—to defer the decision to purchase a life annuity.e. Immediate fixed annuities are a common approach for creating a reliable incomefloor under the flooring approach. The three issues involved in choosing anannuity for flooring purposes include:(1) Choosing the type of annuity—for example, single life or a joint andsurvivor annuity.(2) When to purchase the annuity as the amount of the payment dependsupon the underlying interest rates that change over time.(3) The reliability of the promise—which relates to the rating of the insurancecompany from which the annuity is being purchased.5. Immediate annuity innovationsa. Accessing principal(1) Some products today offer on a limited basis the ability to access a portionof the principal.(2) If a lump sum withdrawal is elected, future annuity payments will bereduced to reflect the withdrawal.b. Another limitation is the concern for the loss of purchasing power due to inflation.(1) Annuities today can be purchased with inflation protection.(2) Products that tie increases to the CPI will generally have a cap on theamount of potential increases.(3) Other products provide for a specified increase each year, such as 3percent.c. Creating an income floor(1) When creating an income floor a strong argument can be made that aninflation adjusted annuity providing for guaranteed lifetime income for thelife (lives) of the annuitant(s) is the appropriate product.(2) In the current low interest environment, laddering purchases of immediatelife annuities without inflation protection is another common approach.6. Immediate variable annuitiesa. Immediate variable annuities are a hybrid product that combines the guarantee ofcontinuing payments with the potential for increasing payments if the underlyinginvestments outperform the assumptions.(1) The client will generally have some options with regard to the choice ofinterest assumption.(2) Choosing a lower assumption will mean lower initial payments, but createsa better potential for increasing payments over time.(3) Assuming that the client chooses an investment portfolio that includes asignificant exposure to equities the product is also considered an indirect7.15