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HELP! I’M RUNNING OUT OF MONEY

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funds, due to participation rates being less than 100 percent, possible interest rate caps, and because equity indices usually don’t include dividends paid on common stocks in the index. Rather, they are indices of the market prices of stocks.

EIAs are just like other annuities. They can grow on a tax- deferred basis and all interest and gain on the annuity contract is taxed at ordinary income tax rates once distributions have begun. For nonqualified EIAs, the principal amount comes out tax-free to the owner. (Other taxes may apply.) But, all taxes must be paid once withdrawals begin, and for those who are younger than 591/2, there may be an IRS penalty of 10 percent.

GENERAL ANNUITY FEATURES

Beneficiaries Annuity contracts allow the owners to name beneficiaries. One of the reasons that annuities are attractive to investors is because they have a built-in death benefit. Just like the EIA has a minimum guaranteed value, an annuity contract states that if the value of the contract is less than the original premium, minus any withdrawals or loans, the owner’s beneficiary upon the owner’s death shall receive the original premium amount. However, if the annuity is valued at more than the original premium amount, the beneficiary will receive that larger amount. For example, James Client invests $100,000 in a deferred variable annuity. Four years later, Mr. Client dies. Prior to his death, he hadn’t taken any money out of the annu- ity. His beneficiary for the annuity, his daughter, claims the annu- ity, which is now valued at $89,000. Because Mr. Client hadn’t taken any money out of the annuity, his daughter receives $100,000—the original premium amount.

Original lump-sum premium = $100,000 Withdrawals = $0 Value of death = $89,000 Beneficiary receives = $100,000

(All amounts are hypothetical.)

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