Individual Retirement Savings Accounts (IRAs)

By: Qin Zhang

General Information

Generally, retirees need approximately 70% of their pre-retirement income to maintain a similar llifestyle.

One in three chance that individuals over the age of 65 will need long-term care.

Investors will need to rely on retirement accounts as a means to maintain an acceptable standard of living.

Small Business Job Protection Act (SBJPA) effective for IRA account since 1997.

Tax Code’s IRA Provisions

Contributions can only be made if there is “earned income.”

The actual contributions do not have to be “traced” to the source of earned income.

No money may be contributed during or after the calendar year in which the participant reaches 70 ½ years old.

Total deductibility of annual contributions, up to $2000, for each employee and non-working spouse not covered by pensions plans, regardless of income.

Tax Code’s IRA Provisions (cont.)

Total deductibility for whose who are covered by a qualified plan (Keogh, pension, profit-sharing, etc.) but whose modified adjusted gross income (MAGI) falls below certain levels.

Partial deductibility is available if single, a participant in a qualified plan and income is between $31000 and $41,000, $51,000 to $61,000 if married and one spouse is covered by another plan, and $150,000 to $160,000 if married and both spouses are covered by a company plan.

Tax Code’s IRA Provisions (cont.)

The spouse not covered by an employer retirement plan can deduct a full contribution ($2,000 per person) if the modified adjusted gross income of the couple is below $150,000 and a partial deduction if joint income is between $150,000 and $160,000.

The opportunity to contribute nondeductible money.

Deferral of any incomer tax liabilities on all interest, dividends and capital gains earned in IRAs until money is taken out.

Tax Code’s IRA Provisions (cont.)

Distribution may begin when one is 59 ½, but it has to begin no later than the calendar year after age 70 ½ is reached.

When distribution begins, taxes are due at ordinary rates on all the money that’s taken out. If one has made both deductible and nondeductible contributions, distributions will be partly taxable and partly nontaxable, according to an IRA formula.

Tax Code’s IRA Provisions (cont.)

Withdrawals from an IRA can be made at anytime, but 10% IRA penalty if before 59 ½. In addition, such withdrawals are fully taxable and there is no credit or offset for any IRS penalty.

Penalty-free withdrawals prior to age 59 ½ can be made if the money is used for certain medical or medical insurance expenses, a series of equal payments over life, expectancy, or if the money is used for higher education costs for the client, the client's child ore grandchild.

Example of IRA Deductibility

Example 1: An individual or married couple has earned income of $1 billion for the calendar.

If both of them are working, then each of them may contribute to an IRA, based on the formula “ 100% of net earned income or $2,000, whichever is less.”

Example of IRA Deductibility (cont.)

Example 2: A married couple, one or both have a qualified retirement plan through work, and the year is 1999.

IRA contributions fully deductible if their net income is less than $51,000.

Example of IRA Deductibility (cont.)

Example 3: A single person has MAGI of $32,000 and is covered by a plan through work.

20 cents of the IRA deductibility is lost for every $1 of AGI above $31,000.

Same principle applies when deal with married couple – 20 cents is lost for every $1 of AGI above certain limit.

Example of IRA Deductibility (cont.)

Example 4: A person has a 1999 MAGI above $41,000 ($61,000 if married and filing a joint return) and is covered by a qualified plan through work.

Up to $2,000 of contribution can still be made, but it is nondeductible. The only benefit would be tax-deferred growth.

IRA Investment Considerations

Rollover: An IRA investor requests a check from the first fund family and has 60 days in which to reinvest it with another. Once a year per account is permitted. 20% withholding unless the rollover is directly transferred to an IRA or other eligible plan.

Transfer: The first fund group sends a check directly to one or more other financial institutions, by passing the client altogether.

Distributions

Withdrawal Before 59 ½ Generally, a 10% penalty in addition to income

tax on any such withdrawals.Some exceptions:

• Leaving a job and rollover or transfer the money to an IRA

• Nondeductible contributions

• Equal payments based on life expectancy

• Medical expenses exceed 7.5% of the individual’s MAGI

• Etc.

Distributions (cont.)

Withdrawals from 59 1/2 to 70 ½No 10% penaltyMany firms permit employees to roll over the

money in their retirement plan into an IRA of their own choosing once they reach 59 ½, even while they continue to work there.

As a general rule, during this period, individuals should let the money in their retirement plans continue to grow tax-deferred as long as they can.

Distributions (cont.)

The post 70 ½ yearsThe penalty equal to half of what an

investor was supposed to take in any year, but did not.

Income tax on the sum not withdrawn – no part of the 50% penalty is deductible.

Calculating Withdrawals

Mandatory distributions from IRAs must begin no later than April 1 of the year following the year in which the owner reaches ago 70 ½.

“Individual Retirement Arrangements”Two-step process:

– Determining the retirement account balance as of Dec. 31 of the year prior to the one when a distribution will occur.

– Dividing the balance by the appropriate life expectancy found in the IRS actuarial tables.

Spousal IRAs

A spousal IRA allows income-earning married individuals to make contributions to an IRA for their spouse, provided the spouse is not earning income and did not attain the age of 70 ½ before the end the their taxable year. Furthermore, they must file a joint income tax return for the taxable year.

Roth IRA

Single: contribution up to $2,000 per year if MAGI below $95,000. If MAGI between $95,000 and $110,000, partial contribution is allowed.

Married with Joint return file: MAGI < $150,000, each can make an annual contribution of up to $2,000, even if one spouse is not working. If joint income between $150,000 and $160,000, each spouse can make a partial contribution.

The Roth IRA

Unlike a traditional IRA, contributions can be make after age 70 ½ is reached provided there is earned income and MAGI is within limits.

Contributions are never deductibleAll withdrawals are 100% tax-free if the

account has been in existence for at least 5 calendar years and the client is over 59 ½.

Contributions can be withdrawn without penalty after 59 ½.

IPA Choices

For 1998 and beyond, there are three IRA choices:Start contributing to a Roth IRA for tax-free

earnings (but not deduction).Open or continue contributing to a traditional

IRA.Contribute to both types of IRAs, as long as total

annual contributions do not exceed the less of 100% of net earned income or $2000 if single ($4,000 if married filing jointly).

Traditional IRA vs. Roth IRA Eligibility

– Under age 70 ½ and earned income. Non-working spouse also qualifies

Tax Advantage– Tax-deferred growth. Contributions

deductible based on income limit & whether participating another qualified plan.

Contributions– Maximum $2,000 per person or

100% of earnings, whichever is less, per tax year.

Eligibility– Any age and earned income.

Income limit for single filers is $95,000 for a full $2,000 contribution.

Tax advantage– Tax-free growth. Contributions

not deductible.

Contributions– Maximum $2,000 per person or

100% of earnings, whichever is less, per tax year, subjected to income limits.

Traditional IRA vs. Roth IRA

Withdrawals– Must start at age 70 ½.

Penalty-free withdrawals for qualifying higher education, medical or first home purchase ($10,000 maximum).

Tax due on withdrawals– Earnings and deductible

contributions are taxed on withdrawal.

Withdrawals– No mandatory withdrawals.

Penalty-free withdrawals for qualifying higher education, medical or first home purchase ($10,000 maximum).

Taxes due on withdrawals– None, if Roth is 5 calendar

years old and (a) age591/2 or (b) pre-59 ½ but owner is first time homebuyer, becomes disabled or dies.

Converting a Traditional IRA to a Roth

Converting assets to a Roth Conversion IRA makes sense because future earnings and withdrawals can be tax-free.

Anyone whose AGI < $100,000 in the year of conversion can convert assets form a traditional IRA to a Roth Conversion IRA. Married couples filing separately are not eligible.

Converting a Traditional IRA to a Roth

Income taxes must be paid on the earnings and deductible contributions made if there is a conversion.

Tax liability considerationWhen is conversion a good ideaWhen is conversion a bad idea

Roth IRA technical Corrections

On July 16, 1998, President Clinton sighed H.R. 2676 into law, making some technical corrections for Roth IRA.

Tax-Free vs. Tax-Deferred

Calculation shows that: Roth IRA provides the highest “total after tax

withdrawals during retirement” and “value of lump-sum withdrawal at retirement” for 10, 20, and 30 years;

Deductible IRAs in which annual tax savings (e.g. $560 per year) are invested (e.g. at 8%) provide the highest “pretax value when you retire” for all three periods.

Ch 10 Qualified Retirement Plans

Introduction- Pension- Keogh- 401(k)

To be qualified, a retirement plan’s purpose must be to defer receipt of compensation beyond the year in which it is earned.

Qualification

There are numerous requirements set by the IRS in order to be qualified.

- a written plan established by the employer.

- must be communicated to the employees.

- meet vesting requirements- funded by the employer or the employees, or both

Exclude employees who are not at least 21 years of age and do not work at least 1,000 hours per year.

Vesting

An employer makes contributions for the employee, the qualified plan must include a vesting schedule.

Vesting is the right an employee has to receive employer-contributed benefits on their behalf.

The vesting schedule is usually based on length of service with the company and is subject to restrictions.

Tax Advantages

Employers are willing to offer the plan because they receive a deduction for their contributions.

Distributions

Plan begin on April 1of the calendar year following the calendar year in which the employee reaches age 70 ½.

However, they may begin when the employee reaches age 59 ½ . Take the form of an annuity or a lump-sum distribution.

Lump-sum distributions must be paid upon the employee’s death, disability, or separation from service.

Cont..

Before the age of 50 ½- it will be subject to 1 10% excise tax in

addition to ordinary income taxes.Reach age 59 ½

- five-year forward averaging for lump-sum distributions may be elected, but it may only be elected once.

Cont…

1997, an employee does not have to start making minimum withdrawals from the employer’s qualified retirement plan as long as the employee is working for that employer, unless the employees is a 5% or more owner of that business.

However, people with an IRA or other qualified retirement plans are still required to begin taking minimum distributions after reaching 70 ½

Rollovers

Unemployment Compensation Amendments in 1992 added restrictions.

- the taxable portion of any distribution can still be rolled over tax-free into an IRA or another qualified plan or annuity.

- Periodic payments, such as an annuity, are not allowed tax-free rollovers.

- The largest change imposes a 20% withholding requirement on lump-sum distribution for the plan to the employee regardless of the employee’s intention to roll over the cash.

Cont..

To avoid the complications as well as the 20% withholding, the rollover should be completed by direct trustee-to trustee transfer to a qualified plan or IRA. This removes the employee as the middleman and ensures a 100% rollover that would be tax-free

Death Benefits

1996, if a plan participant dies, the first $5,000 of the lump-sum distribution that results is subject to income tax when received by the estate or the beneficiaries.

Loans

- participants can borrow from their account against their vested benefits. But only borrow up to the lesser of $50,000 or one-half of the account’s current balance.

Top Heavy Plans

For defined benefit plan,s if the accrued benefits of key employees exceed 60% of the present value of accrued benefits of all plan participants, the plan is considered top-heavy.

It is more common in small business.

Defined Benefit Plans

Guarantee a specified benefit after the participant reaches a certain age.

Employers will contribute to the plan each year and invest assets to meet the plan’s goals.

Employees will accrue and vest the right to contributions made on their behalf based on the length of participation in the plan.

Defined Contribution Plans

Provide an individual account that receives annual contributions for each participant.

Based on employee’s salary, or a combination of factors .

The amount available to the employee for future distribution depends upon the performance of the plan investments.

Cont..

Profit Sharing Plans- allow plan contributions to be paid out of profits. - Employer determine the contribution amounts

each year.- Employer’s contribution matches the employee’s

contribution.- Employees to withdraw funds that have been in

the plan for two years and to withdraw all funds if the participant has been at least 5 years.

Cont..

Money Purchase Plans- contribution are based on a set percentage

of the employee’s salary.- The number can’t be changed, regardless

of corporate profits or losses

Cont..

Combination or “Hybrid Plans”- for people who are self-employed and non-

incorporated.- The participant can maximize his

contribution while still maintaining a certain degree of flexibility.

-

Cont..

401(k) Plans- allow employees to voluntarily contribute

up to $10,000 of their salary to the plan.- Contribution is tax-deferred income.- Employees who wish to defer salary to

avoid current income taxes while increasing the amount in their retirement fund.

403(b)Plans

Limited group can participate in a 403(b) plan.

Only be used by public schools or non-profit organization.

Allow employees to contribute up to the lesser of $10,000 or 25% of their compensation multiplied by the individual years of service.

Keogh Plans

Self-employed individuals who operate unincorporated business and whose earned income comes from personal services.

Contribute up to $30,000 and must be fully vested at all times.

Simplified Employee Psnsions

Allow employers to make tax-deductible contributions to employees’ individual retirement accounts.

Employees are allowed to deduct up to the lesser of $24,000 or 15% of compensation.

Salary Reduction SEPs

Give employees the option of investing part of their income on a pre-tax basis through salary reduction contributions.

It is available only to businesses with fewer than 26 employees.

Simple IRAs

Employer with 100 or fewer employees earning $5,00 or more a year will be allowed to establish simplified IRAs which are free from nondiscrimination testing and top-heavy rules.

Small Business- Job Protection Act of 1996

Change that affect retirement plan distributions

- tax on excess distributions- required distributions- Averaging distributions- Rollover notice penalties

Cont..

Change affect qualified plans and 403(b) programs- highly compensated employees- Family aggression- Compensation- Self-employed plans- Contributions for disabled employees- Minimum participation- Combined testing- Veteran’s re-employment rights

Ch 11 Retirement Calculator

Step 1 retirement resources- Social Security- assumptions: retirement at age 65

maximum contributions made.- Company pension- assumptions: average pension

benefit estimated at payout of 35% of income needed at retirement; average salary increases of 6% ; retirement at age 65

- Personal saving/investment

Cont..

Step 2 what is needed to retire

- financial representatives project that at least 70% to 80% of your current annual income will be required to fund a comparable lifestyle at retirement.

Cont..

Step 3 retirement income gap- to determine the estimated retirement

income gap are based on conserviative assumptions of inflation and income growth.

- Step 4 if a gap is discovered.

Ch12

Determining College Costs

Introduction

The U.S. department of Agriculture says the average family earning $55,000 or more will spend over $300,000 to feed, clothe and shelter a child to age 22.

The cost of child rearing is high not because the basic expenses have changed, but because the price of education have gone through the roof.

Four Steps to decide the education fee for children

Step 1: Set Your Target

- Estimate the price of the child’s educationStep2 : Monthly Investment NeededStep3 : Minimizing Taxes

- Working on the investment will provide

the best return after taxes.

Four Steps to decide the education fee for children

Step 4 : The Right Investment

- Consider three factors

1. The approximate cost of the child’s

education.

2. The age of the child and the degree of

acceptable investment risk.

3. Tax consequences.

CH 13

The Cost of Owning CDs

Introduction

Historically, CDs produced poor long-term investment result (5.1% Avg compound annual return while inflation Avg 3.9%)

Consider, tax obligations, it’s easy to see why these investment provided negative return

Example

If you has $1000,000 in asset which plane to place in CD at local bank

At rate 5%, you will receive $4,250 per yr($417 monthly less 15% for tax) or $354 per month after tax.

Let’s look next 20yr, assumes that inflation rate constant at 3% and CD rate Avg 5%

Yaer Monthly Cost of Goods Cumulative Decrease in End CD income & Service w 5% inflation your stand of Living

1 354$ 364$ -3%2 354$ 376$ -6%3 354$ 387$ -9%4 354$ 398$ -11%5 354$ 410$ -14%

10 354$ 474$ -26%15 354$ 552$ -36%20 354$ 641$ -45%

•Purchasing power of CD income decrease by 45%

•Price of commodity jumped by 81%

Conclusion

Medical breakthroughs have increased the danger of outliving one’s asset.

Even 3% inflation can be devastating to fixed-income investor’s income.

Some capital growth is necessary in virtually every investor’s portfolio.

Taxes

The first cost is annual income taxes paid on dividends.

Tax effect is equivalent to reducing the account value by the amount of the tax

If you pay the tax from another source, taxes are equivalent to an increase in principal investment.

Inflation

Purpose of saving account is to accumulate money until reach target amount.

Unfortunately target is movingWhile investing & dividends bring them

closer to target, inflation moves the target further away.

Price increase are not deducted from value of the account

Opportunity

It’s difference between the account value of saving &potential account value had the money been invested in alternative such as an equity mutual fund.

The risks of “playing it Safe”

To avoid investment risk, place money in guaranteed fixed account.

This is prudent for short-term needs, but for long-range goals.

Principal will not be lost in guaranteed investment, but its purchasing power can be diminished as result of inflation

Retirement and Health Care

During the 1980s U.S. saw health care cost in this country sky rocket-inflating at double-digit rates.

One of the best ways to prepare for expenses associated with old age is to start saving & investing now.

$250 a month, Compounded Monthly at Annual rate of 10%

start at age result at age 65

25 1,594,200$ 35 569,800$ 45 191,400$ 55 51,600$

The good Old Days

Often time you hear investor wish that they could go back in time & get the types of returns money market account were yielding in very early 1980s.

The brief section show why those “good old days” were somewhat of an illusion

Ch 14Five Investment Fundamentals

To examine different investment choices, one must develop a context: specifying financial needs, and understanding and incorporating five investment fundamentals.

These fundamentals should be continuously considered as one examines the series of investment choices

Trade of Between Risk and Return

Generally, investments that provide higher return also have higher risk.

For example: common stocks have provided one of the highest returns, but also have been one of the most volatile investment

Diversification Benefits

Spreading one’s portfolio across a number of different asset classes is the best way to reduce the chance of loss

Placing a portion of one’s portfolio in each of the major asset classes goes a long way toward reducing the risk of the entire portfolio

Long-term Investing and Compounded Returns

By holding an investment for a long period of time, the final outcome becomes both more predictable and favorable

The longer the investment period, the stronger this relationship becomes, especially for common stocks

Liquidity and Marketability Consideration

Highly liquid investments are easy to sell, like U.S. Treasury bills and bonds or money market funds

By contrast, real estate and rare paintings are illiquid because they are difficult to sell due to lengthy sales period and highly sales cost

Tax-Deferral Benefits

Federal taxes usually consume from 28 to 33% of investors’ return.

Therefore, one should consider opportunities the government offers to defer tax payments, such as IRAs, Keoghs and 401(k) plans

Ch 15 Annuities vs. Mutual Funds

Common Features and Their Values

Both are easy to invest: can start as little as $250Both are easy to monitor:

Outstanding track recordRegular reportEasy-to-follow tax formToll-free telephone numbers to call for general and

investment information

Common Features and Their Values

Money can be added to or taken out at any timeDollar-cost averaging programSystematic withdrawal plans for people who

need monthly incomeContribution plans on regular basic

The ability to switch within a family of fund at no or little cost

Common Features and Their Values

Both provide professional managementProfessional Money Managers can

be completely objectiveHighly trainedTime commitment

Outperform the Index and average

Differences: Commission

Most mutual funds charge some type of commission up to 8.5%

Commission is normally subtracted from investment so not all investment is going to work

Return rate must be higher than commission to make profit

Most annuities do not charge a commission so 100% investor’s money goes to work

The same is true for any contributions added

But the financial advice expenses are recouped over time

Differences: Taxation

3 potential source of income tax:

Dividends or interest thrown off by the securities in the portfolio

Capital gains by selling stocks or bonds

Profits from selling your shares of mutual fund or changing within mutual fund family

Money grows and compound tax-deferred indefinitely

Paying tax only when a withdrawal is made and only on the withdrawal that is considered accumulated growth or interest

Return of principal is not taxable

Performance

The track records of the best-performing variable annuities often exceed those of the top mutual funds because the portfolio managers of variable annuities are overseeing a smaller pool of assets than their mutual fund counterparts.

Performance..cont..

Most mutual funds, due to their size, are forced to buy stocks and bonds that may not be their first chose because SEC requires a diversified mutual fund to follow certain rules.

A variable annuity can load up whatever the investor wants.

Performance..cont..

Mutual funds keep a certain amount of assets in cash as reserves to satisfy investors’ demands for partial or complete liquidations.

Since fixed and variable annuity withdrawals are much less frequent, annuities can fully invested

.

Performance..cont..

General speaking, equity accounts within variable annuities have outperformed their mutual fund counterparts by about 1% to 3% annually.

Performance..cont

Performance compared to market index

Comparison mutual funds and annuities, there is a fault and make the result are not correct.

1) Transaction cost : no one can buy and sell a stock or bond without a cost. Typically, the cost for such transaction range from 1% to 5%, with 3% average.

2) Convenience feature

3) Management expenses

Performance.cont..

Morningstar Study

Conducted a series of studies based on performance and operating expense differences between mutual funds and variable annuities to see if variable annuities were “ better” than mutual funds.

Assumption1) A variable annuity and mutual fund average a 15%

annual return.

2) Investor is in a 37.4% tax bracket

3) No surrender charges for the annuity owner or mutual funds owner

4) Money is no penalty tax by for the annuity owner.

5) Money is distributed from the annuity by annuitization or when the contract owner is in a 21.4% tax bracket

Performance.cont..

Morningstar Study

Variable annuities fare so well across the board because mortality costs are modest once you factor in the cheaper management and administrative expenses compare to “clone” mutual funds.

Performance.cont..

Morningstar Study

Withdrawal Options

Mutual funds allow you to make withdrawals or complete liquidations at any time as well as annuities. But, only annuities offer “lifetime options” cannot outlive the income stream

Investment Choices

Investing in mutual funds will limited investment options and management style.

Variable annuities offer you a choice of many different management styles within the same contract.

Safety

Mutual funds are prohibited from guaranteeing a rate of return or the safety of the principal.

A fixed-rate annuity, you know exactly what the rate of return will be for each period. Variable annuities offer the guaranteed death benefit.

Questions

Are annuities always a better choice than mutual funds?

No. variable annuities are an alternative to mutual funds, just as fixed-rate annuities are an alternative to investing in a bank CD. It all depends on what your clients are trying to do with their money.

Questions

Why is there more information on mutual funds than annuities?

First, mutual funds are easier to understand. Popular publications emphasize the performance and features of mutual funds with much greater frequency. Second, the brokerage industry can make more money selling mutual funds than annuities. Third, the insurance industry does not spend as mush money promoting annuities as fund executives spend promoting mutual funds.

Questions

Are there as many fund managers to choose from if I invest in an annuity rather than a mutual fund?

There are not as many portfolio managers who fall under the annuity umbrella. However, you can usually find a fund manager with a solid track record who manages according to your investment objective. Also, as stated, annuity managers enjoy a better overall performance record than mutual fund managers.

Questions

How can I compare mutual fund results to annuity results on a regular basis?

Financial publications such as The Wall Street Journal, Barron’s and specialty services such as VARDS and Morningstar all provide fund and sub account performance results you can use to compare and contrast specific fund and annuity accounts.

Ch 16 Annuities in the Financial Plan

There is no single best investment. Indeed, every legitimate investment is appropriate for some investor during certain periods of their lives.

Growth or Income?

Everyone is trying to do something with his or her money.

- Growth- Current income- Some growth and some income

Risk Level

How much risk they can accept. They are conservative, moderate, or aggressive.

- a loss would probably not be permanent- The recovery time needed to make up a loss

could be as little as three months or as long as three years.

- Returns become more predictable as the expected holding period become longer.

Time Horizon

Short-term include bank CDs, money market funds, short-term global income funds, and bonds that are going to mature in just a few years.

Intermediate-term include tax-free or taxable bonds that mature in less than a decade, mutual funds or variable annuities that are balance or total return, growth an incomes stocks, foreign securities, growth stock, and high-yield bonds.

Long-term include municipal bonds, government securities, variable annuities, and mutual funds.

Blending Investments

Invest for one time period but that some can be left in for a different period of time.

How much should be Invested in Annuities?

Annuities are the ideal chocie for someone who is in the moderate or high tax bracket, but expects to be in a lower tax bracket when payout begins and is looking for a way to shelter current income or growth over a long period of time.

Annuity vs.IRA

Not everyone can open an IRA but everyone can purchase a fixed-rate or variable annuity.

IRA contributions may be taxdeductible,

Commonly asked questions?

What if my client’s financial plan or goals change?

- a good financial plan should always be flexible enough to take into account different scenarios.

Commonly asked questions?

How often should I move my client’s assets around?

- often, investor or their advisor see table that list the 10 best mutual funds or variable annuities and want to rush out and invest in these portfolio.

-

Commonly asked questions?

Is it important to invest in several different categories of mutual funds and annuities?

- because no one know what the next bestperforming investment category will be, diversification is key to a healthy portfolio and investment plan.

Ch 17Life Insurance

Introduction - in all major nations, the largest domestic corporations are life insurance companies - the size in the US=13 trillion outstanding - the annual premium payment=405 trillion - the average policy size of the US householder is $165,800.

Life InsuranceThe 1st life insurance co. in the US was found

in 1759.In 1859, the first state insurance department,

in New York, was established.In the US now we have 1,620 Insurance

corporation.31 oldest firms control over 40% of life

insurance assets.93% of companies are stock holder owned.

Life Insurance

Universal Life Insurance(UL)UL is a flexible contract that allows for

permanent protection and cash value buildup.

Cash values accumulated through interest crediting may be borrowed from the policy.

The key expense is mortality charges. UL policies are guaranteed by the issuing

insurance company and avoid probate upon death.

Ch 18 Guaranteed Investment Contracts

IntroductionIt was first introduced in the US in the mid-

1970s.GICs are issued by insurance companies,

which guarantee the GIC investor both given interest rate for a certain period of time and the return of the principle.

Guaranteed Investment Contracts

Benefits of GICsA GIC guarantees a rate of interest for a set

period of time and its principle doesn’t fluctuate.

It usually provide yields higher than short-term investment options such as money market funds.

GIC buyers become policy holders of the insurer.

Guaranteed Investment Contracts

GIC/insurance companies are rated.GIC may fail, and the GIC holders lose

their money.About 60% of all investors in major 401K

plans invest in GICs.GICs typically yield 0.75% to 1.75% more

than money market funds, and about 0.5% more than similar duration US government paper.