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CHAPTER 6

Annuities Not Held by Natural People Annuities may be held by entities, rather than natural people. How- ever, for tax purposes, any deferred annuities would not be treated as annuities and, thus, wouldn’t be tax-deferred. Any gain made on the annuity would be taxed to the owner as ordinary income. This includes any annuities held by corporations, charitable remainder trusts, and certain other entities. This doesn’t include annuities held by an estate because the owner has died, any annuities held by trusts or other entities acting on behalf of a natural person, annuities within qualified retirement plans, tax-sheltered annuities, or IRAs and immediate annuities.

Expense Charges Annuities, both fixed and variable, may have a management or expense charge associated with them. This charge is levied by the insurer and is an annual fee, which is usually billed on a quarterly basis. These charges can be contract charges, which generally are fixed for the life of the contract, and operating expenses, which may vary from period to period. Contract charges protect the insurer from excess mortality and expenses charges, which may include administrative and sales costs, risk charge for death benefits, and insurer profits. The operating expense charge covers the cost of investment management fees and administrative costs of managing the particular subaccount funds available. Fees vary from annuity to annuity and between com- panies. All applicable fees will be disclosed in your annuity contract.

Surrender Charges Finally, annuities will have some sort of sales or surrender charge. This can be an up-front sales charge or a back-end load. If the insurer deducts a charge when the premium is paid, thus resulting in a lower amount of money being invested, this is a front-end load. However, insurers generally impose a surrender charge, rather than charge the investor up front. Surrender charges are generally charged only if the owner takes more than 10 percent of the annuity value out during a calendar year for the first few years of the annuity contract, like 7 or 10. Many variable annuities allow you to take the earnings out, which may be a larger number than 10 percent. Surrender charges are levied

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