Guide to Insurance

Guide to

Life & Annuity

Insurance

This guide:

Explains the basics

of life insurance.

Explains annuity

contracts and their

purpose.

Mike DeWine

Governor

Jillian Froment

Director

Jillian Froment

Director

Mike DeWine

Governor

Table of Contents

L ife Insurance

Life Insurance Basics ............................................ 3

Important Things to Consider .................................. 3

Buying Life Insurance.......................................... 3

Identifying the Right Kind of Insurance.......................... 4

Term Life Insurance............................................ 4

Cash Value Life Insurance ...................................... 4

Life Insurance Illustrations ..................................... 6

Finding a Good Value in Life Insurance ......................... 6

What About the Policy You Have Now? ......................... 7

How Much do You Need? ...................................... 7

Questions to Ask When Shopping for Life Insurance ............. 8

Answers to Common Questions About Life Insurance ........... 9

Consumer Complaints........................................... 12

Glossary......................................................... 28

Table of Contents

Disclaimer notice:

The information included in this publication is meant to serve as a

guide and is not a substitute for legal or professional advice. Please

be certain to check with a professional if you have questions. Updated

June 1, 2012. May change without notice.

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

Table of Contents

Annuity Contracts

Annuity Basics .................................................. 13

Many Options Available ....................................... 13

What is an Annuity? ........................................... 14

Annuity Words & Phrases ...................................... 14

Choices When You Buy .......................................... 15

How You Pay for an Annuity.................................... 15

Fixed Rate vs. Variable Annuities ............................... 16

When You Start Receiving Benets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

How Long Benet Payments Continue ......................... 17

Using Pre-Tax vs. After-Tax Dollars.............................. 19

Common Provisions............................................. 20

Administrative Fees ........................................... 20

Withdrawal Privilege .......................................... 20

Surrender Charge ............................................. 20

Contract Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Return of Principal Guarantee.................................. 20

Guaranteed Settlement Option Rates .......................... 21

Bailout Provision .............................................. 21

Medical Bailout................................................ 21

Death Benet ................................................. 22

Account Value Enhancement (Bonus) .......................... 22

Types of Annuities............................................. 22

Equity-Indexed Annuity ....................................... 22

Types of IRAs.................................................... 23

Variable Annuities .............................................. 24

Two-Tiered Annuity............................................ 24

Variable Annuity .............................................. 24

Employer Group Annuities ...................................... 25

Market-Value Adjusted Annuity ................................ 25

Employer Group Annuities..................................... 25

Questions to Ask Before You Buy ................................ 26

Glossary .......................................................... 27

Private Rating Firms .............................................. 30

Jillian Froment

Director

Mike DeWine

Governor

Important Things to Consider

1. Review your own insurance needs and

circumstances. Choose the kind of policy that

has benets that most closely t your needs.

Ask an agent or company to help you.

2. Be sure that you can handle premium

payments. Can you aord the initial premium?

If the premium increases later and you still

need insurance, can you still aord it?

3. Don’t sign an insurance application until you

review it carefully to be sure all the answers are

complete and accurate.

4. Don’t buy life insurance unless it ts with your

plan. It may be very costly if you cancel during

the early years of the policy.

5. Be careful with oers of free or low cost

premium nancing. Be sure to have any such

oer reviewed by your legal counsel.

6. Don’t drop one policy and buy another without

a thorough study of the new policy and the

one you have now. Replacing your insurance

may be costly.

7. Read your policy carefully. Ask your agent or

company about anything that is not clear to

you.

8. Review your life insurance with your agent

or company every few years to keep up with

changes in your income and your needs.

Buying Life Insurance

When you buy life insurance, you want coverage that

ts your needs.

First, decide how much you need — and for how

long — and what you can aord to pay. Keep in

mind the major reason you buy life insurance is to

cover the nancial eects of unexpected or untimely

death. Life insurance also can be one of many ways

you plan for the future.

Next, learn what kinds of policies will meet your

needs and pick the one that best suits you.

Then, choose the combination of policy premium

and benets that emphasizes protection in case

of early death, or benets in case of long life – or a

combination of both.

An agent can help you review your insurance needs

and give you information about the available

policies. If one kind of policy doesn’t seem to t your

needs, ask about others.

This guide provides only basic information. You

can get more facts from a life insurance agent or

company or from your public library.

Life Insurance Basics

This guide can help you when you shop for life insurance. It discusses how to:

• Find a policy that meets your needs and ts your budget

• Decide how much insurance you need

• Make informed decisions when you buy a policy

Questions about life insurance?

The Ohio Department of

Insurance can help!

Go to www.insurance.ohio.gov or

call toll-free: 1-800-686-1526.

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

All policies are not the same. Some cover you for

your lifetime and others for a specic number of

years. Some build up cash values and others do not.

Some policies combine dierent kinds of insurance,

and others let you change from one kind of

insurance to another. Some policies may oer other

benets while you are still living. Your choice should

be based on your needs and what you can aord.

There are two basic types of life insurance: term

insurance and cash value insurance. Term insurance

generally has lower premiums in the early years, but

does not build up cash values that you can use in the

future. You may combine cash value life insurance

with term insurance for the period of your greatest

need for life insurance to replace income.

Term Insurance

Term insurance covers you for a term of one or more

years. It pays a death benet only if you die in that

term. Term insurance generally oers the largest

insurance protection for your premium dollar. It

generally does not build up cash value.

You can renew most term insurance policies for one

or more terms even if your health has changed. Each

time you renew the policy for a new term, premiums

may be higher. Ask what the premiums will be if

you continue to renew the policy. Also ask if you will

lose the right to renew the policy at some age. For

a higher premium, some companies will give you

the right to keep the policy in force for a guaranteed

period at the same price each year. At the end of that

time you may need to pass a physical examination to

continue coverage, and premiums may increase.

You may be able to trade many term insurance

policies for a cash value policy during a conversion

period — even if you are not in good health.

Premiums for the new policy will be higher than you

have been paying for the term insurance.

Cash Value Life Insurance

Cash value insurance is a type of insurance where

the premiums charged are higher at the beginning

than they would be for the same amount of term

insurance. The part of the premium that is not used

for the cost of insurance is invested by the company

and builds up a cash value that may be used in a

variety of ways. You may borrow against a policy’s

cash value by taking a policy loan. If you don’t pay

back the loan and the interest on it, the amount

you owe will be subtracted from the benets when

you die, or from the cash value if you stop paying

premiums and take out the remaining cash value.

You can also use your cash value to keep insurance

protection for a limited time or to buy a reduced

amount without having to pay more premiums. You

also can use the cash value to increase your income

in retirement or to help pay for needs such as a

child’s tuition without canceling the policy. However,

to build up this cash value, you must pay higher

premiums in the earlier years of the policy.

Cash value life insurance may be one of several

types: whole life, universal life and variable life. These

types of policies are described on the next page.

Right Insurance

Identifying the Right Kind of Life Insurance

Jillian Froment

Director

Mike DeWine

Governor

Whole life insurance covers you for as long as you

live if your premiums are paid. You generally pay the

same amount in premiums for as long as you live.

When you rst take out the policy, premiums can

be several times higher than you would pay initially

for the same amount of term insurance. But they are

smaller than the premiums you would eventually

pay if you were to keep renewing a term policy until

your later years.

Some whole life policies let you pay premiums for

a shorter period such as 20 years, or until age 65.

Premiums for these policies are higher since the

premium payments are made during a shorter

period.

Universal life insurance is a kind of exible policy

that lets you vary your premium payments. You

can also adjust the face amount of your coverage.

Increases may require proof that you qualify for

the new death benet. The premiums you pay (less

expense charges) go into a policy account that earns

interest. Charges are deducted from the account. If

your yearly premium payment plus the interest your

account earns is less than the charges, your account

value will become lower. If it keeps dropping,

eventually your coverage will end. To prevent that,

you may need to start making premium payments,

or increase your premium payments, or lower your

death benets. Even if there is enough in your

account to pay the premiums, continuing to pay

premiums yourself means that you build up more

cash value.

Variable life insurance is a kind of insurance where

the death benets and cash values depend on the

investment performance of one or more separate

accounts, which may be invested in mutual funds

or other investments allowed under the policy. Be

sure to get the prospectus from the company when

buying this kind of policy and STUDY IT CAREFULLY.

You will have higher death benets and cash value

if the underlying investments do well. Your benets

and cash value will be lower or may disappear if

the investments you chose didn’t do as well as you

expected. You may pay an extra premium for a

guaranteed death benet.

Right Insurance

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

Right Insurance

Life Insurance Illustrations

You may be thinking of buying a policy where cash

values, death benets, dividends or premiums may

vary based on events or situations the company

does not guarantee (such as interest rates). If so, you

may get an illustration from the agent or company

that helps explain how the policy works.

The illustration will show how the benets that are

not guaranteed will change as interest rates and

other factors change. The illustration will show you

what the company guarantees. It will also show you

what could happen in the future.

Remember that nobody knows what will happen

in the future. You should be ready to adjust your

nancial plans if the cash value doesn’t increase

as quickly as shown in the illustration. You will be

asked to sign a statement that says you understand

that some of the numbers in the illustration are not

guaranteed.

Finding a Good Value in Life Insurance

After you have decided which kind of life insurance

is best for you, compare similar policies from

dierent companies to nd which one is likely to

give you the best value for your money. A simple

comparison of the premiums is not enough. There

are other things to consider. For example:

• Do premiums or benets vary from year to year?

• How much do the benets build up in the

policy?

• What portion of the premiums or benets is not

guaranteed?

• What is the eect of interest on money paid and

received at dierent times on the policy?

You should also consider other factors:

• How quickly does the cash value grow? Some

policies have low cash values in the early years

that build quickly later on. Other policies have

a more level cash value build-up. A year-by-

year display of values and benets can be very

helpful. (The agent or company will give you a

policy summary or an illustration that will show

benets and premiums for selected years.)

• Are there special policy features that particularly

suit your needs?

• How are non-guaranteed values calculated?

For example, interest rates are important in

determining policy returns. Some companies

increases reect the average interest earnings

on all of that company’s policies regardless of

when issued. For other companies, the return

for policies issued in a recent year, or a group

of years, reects the interest earnings on that

group of policies. In this case, the amounts paid

are likely to change more rapidly when interest

rates change.

Jillian Froment

Director

Mike DeWine

Governor

Right Insurance

What About the Policy You Have Now?

If you are thinking about dropping a life insurance

policy, here are some things you should consider:

• If you decide to replace your policy, don’t cancel

your old policy until you have received the new

one. You then have a short time to review your

new policy and decide if it is what you wanted.

• It may be costly to replace a policy. Much of

what you paid in the early years of the policy

you have now paid for the company’s cost of

selling and issuing the policy. You may pay this

type of cost again if you buy a new policy.

• Ask your tax advisor if dropping your policy

could aect your income taxes.

• If you are older or your health has changed,

premiums for the new policy will often be

higher. You will not be able to buy a new policy

if you are not insurable.

• You may have valuable rights and benets in

the policy you now have that are not in the new

one.

• If the policy you have now no longer meets your

needs, you may not have to replace it. You might

be able to change your policy or add to it to get

the coverage or benets you now want.

• At least in the beginning, a new policy may not

pay benets for some causes of death covered

by your current policy.

In all cases, if you are thinking of buying a new

policy, check with the agent or company that issued

you the one you have now. When you bought your

old policy, you may have seen an illustration of

the benets of your policy. Before replacing your

policy, ask your agent or company for an updated

illustration. Check to see how the policy has

performed and what you might expect in the future,

based on the amounts the company is paying now.

How Much do You Need?

Here are some questions to ask yourself:

• How much of the family income do I provide? If I

were to die, how would my survivors, especially

my children, get by? Does anyone else depend

on me nancially, such as a parent, spouse,

grandparent, brother or sister?

• Do I want to set aside money for my children to

nish their education in the event of my death?

• How will my family pay nal expenses and repay

debts after my death?

• Do I have family members or organizations to

whom I would like to leave money?

• Will there be estate taxes to pay after my death?

• How will ination aect my future nancial

needs?

As you gure out what assets you have to meet

these needs, count the life insurance you have now,

including any group insurance where you work or

veteran’s insurance. Don’t forget Social Security and

pension plan survivor’s benets. Add other assets

you have: savings, investments, real estate and

personal property. Which assets would your family

sell or cash in to pay expenses after your death?

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

Term Life Insurance

Term insurance can be the easiest to shop and

compare because it is the simplest form of life

insurance. But you should still ask yourself and the

agent a lot of questions. Here are some suggestions.

• Decide how much insurance you need (the

amount of the death benet)

Level benet - the benet will not increase or

decrease

Decreasing benet - Your premiums will remain

level but your death benet declines over

time (this is a good choice if you want to cover

only a specic debt that decreases, such as a

mortgage)

• Decide how long you want the insurance to

cover you (the length of the term)

1, 5, 10, 15, or 20 years or to age 100

Level or increasing premium

• Compare premiums

Go to www.insurance.ohio.gov for a list of

Ohio-authorized life insurance companies

• Ask your agent to provide you with quotes

• Find out if policy fees are built into the

premiums

• Ask if the policy is renewable

• Find out if it is convertible to whole life,

regardless of your health at that time

• Ask if participating policies are available

(potential for dividends)

Where do I Purchase Term Life Insurance?

Most life insurance agents will sell you a term policy,

although some prefer to oer only whole life or

some other form of life insurance. Some companies

market term insurance through the mail without

agents.

Term quotations and sales are also available online.

Some rms quote more than 100 dierent policies

and even take your application online.

Cash Value Life Insurance

The more complicated the policy gets, the more you

will nd yourself relying on an agent to explain it. It

is often dicult to compare whole life or universal

policies because they are complex. Here are some

basic questions to ask about a whole life or universal

life policy to guide you.

How much will I pay each year for each part of the

policy? Factors to consider:

• Cost of insurance or “mortality charge”

• Sales commissions

• Administrative fees

• Future insurance (cash value)

• The Technical and Miscellaneous Revenue Act

of 1988 (TAMRA law) — prevents policyholders

from paying large single premiums to purchase

life insurance, and then borrowing the cash

value, tax-free

Are there penalties for early surrender?

• How much?

• How long do I have to hold the policy before the

penalties are waived?

Do I understand the policy’s illustration?

• What’s guaranteed and what is not?

• Interest rates: declared monthly or annually;

simple or compounded?

• Does it still make sense after the agent has left?

• Did it sound too good to be true?

• How long do I plan to keep it? Decades? Only a

few years (consider term!)?

Answers to Questions

Questions to Ask When Shopping for Life Insurance

Jillian Froment

Director

Mike DeWine

Governor

Will I Benet by Buying Life Insurance

Through an Agent?

A good agent can guide you by explaining the

options and identifying those that best match your

personal needs. However, a dishonest agent can

confuse you with a pitch designed for high sales

commission with little regard for the impact on

you. While most agents are very professional and

honest, it is good to report any suspicious activity or

incident to the Department of Insurance Fraud and

Enforcement Division by calling us at 1-800-686-

1527.

Do Agents Need to be Trained and

Licensed?

Ohio requires all insurance agents to be licensed. The

state’s minimum standards for a life insurance agent

include the following:

• Successful completion of at least 40 hours on

the fundamentals of life and health insurance

• Passing grade on the state licensing exam

• Payment of an annual licensing fee

• Complete at least twenty-four hours of

continuing education in each license renewal

period

Many agents have extensive education beyond the

bare minimum required for a license. These agents

may use initials after their names to let you know

you are dealing with a well-trained professional.

Examples:

CLU: Chartered Life Underwriter

ChFC: Chartered Financial Consultant

FLMI: Fellow of Life Management Institute

CFP: Certied Financial Planner

What is the Dierence Between Captive

and Independent Agents?

All insurance agents represent insurance companies.

Before an agent can sell for any company, the

company must appoint the agent as its legal

representative.

A captive agent represents one company only, much

like a company employee. This agent might show

you dierent kinds of policies, but each will be with

that same company. An independent agent may

represent numerous companies and sell you a policy

from any of those companies.

What Guidelines Must Agents Follow?

By law, an agent must follow certain rules and

guidelines. As such, an agent is not allowed to:

• Be the beneciary of a life insurance policy the

agent has sold you, unless the agent is a family

member or a funeral director

• Misrepresent any aspect of the policy being sold

or a policy you already own

• Encourage you to put incorrect information on

your application

• Accept an application with blank spaces, and

then ll them in with incorrect or misleading

information (called clean sheeting)

• Represent life insurance as anything other than

life insurance — the agent should not lead you

to believe that life insurance coverage, in and of

itself, is an investment

Please note: The Ohio Department

of Insurance DOES NOT rate or

recommend insurance companies!

Although agents represent insurance

companies, a good agent can be your

best ally and advocate if you have a

problem with the company.

Answers to Questions About Life Insurance

Answers to Common Questions About Life Insurance

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

Answers to Questions

What Should I Look for When Choosing an

Insurance Company?

The most important thing to know is whether the

company you buy insurance from today will be able

to pay death benets when you die. Make sure the

company is licensed to sell insurance in Ohio. To

check Ohio-authorized companies:

• Visit the Department of Insurance online at

www.insurance.ohio.gov

• OR call the Department of Insurance Consumer

Services Division at 1-800-686-1526

Private rating rms

Several private agencies specialize in evaluating the

nances and services of insurance companies. Each

of these organizations has its own methods and

standards and gives grades to companies based on

their judgment of how well the company is doing.

The phone numbers and website addresses below

will connect you with some of the most popular

rating rms.

The grading systems for each rm may vary; for

example, one rm may use “A+” as its top grade,

while another may go all the way up to “A+++.” Make

sure you understand what a rating means before you

rely on it.

A.M. Best Company

(908) 439-2200

www.ambest.com

Fitch Investor’s Service

(212) 908-0500

www.tchibca.com

Moody’s Investor Service

(212) 553-0377

www.moodys.com

Standard & Poor’s

(212) 438-1000

www.standardandpoors.com

I’ve Heard of Viatical or Life Settlements.

What are They?

If you no longer want or need a life insurance policy,

one option you have is to sell it in a transaction

known as a viatical if you’re chronically or terminally

ill, or as a life settlement if you are not. A life

settlement company will evaluate your age, health

and the type of policy you own, then will oer you

a lump sum of money that is usually more than the

policy’s cash surrender value. The company then

sells your policy to an investor who will take over

the payment of premiums and receive the proceeds

of the policy when you die. You will need to provide

investors with personal data, medical records and

regular updates about your health status. The Ohio

Department of Insurance regulates all viatical and

life settlements.

What is STOLI?

Stranger originated life insurance (STOLI)

schemes take advantage of life settlements. STOLI

transactions are designed to “manufacture” life

insurance policies for the benet of investors.

Typically, investors will pay you a fee or provide

you with limited-time, free premium nancing

to purchase life insurance you otherwise would

not buy. The investors then pay the premiums in

exchange for being named the beneciary. These

transactions are illegal in Ohio.

Jillian Froment

Director

Mike DeWine

Governor

An About Life Insurance

Who Makes Sure that Companies Stay

Financially Sound?

The rst responsibility of the Ohio Department of

Insurance is monitoring the nancial stability of

the hundreds of companies that sell insurance in

Ohio. State law requires insurance companies to le

nancial reports every year and the Department

conducts regular risk assessment reviews.

When a company gets into nancial trouble, the

Department can take stronger actions.

• Limit or prohibit new sales in Ohio

• Stop the company from renewing policies that

are not guaranteed renewable

• Declare the company insolvent and ask a court

to order liquidation of its assets

What does Liquidation Mean?

Liquidation is much like bankruptcy. When the state

liquidation oce takes over a failed company, it sells

the assets and pays claims and death benets. Some

benets may be paid in full, but there often is not

enough money to pay everyone. That’s why Ohio

established Ohio Life and Health Insurance Guaranty

Association (OLHIGA).

What is the OLHIGA?

Ohio established the Ohio Life and Health Insurance

Guaranty Association (OLHIGA) in 1990. Every state

has a similar association. All companies licensed to

sell life or health insurance in Ohio are required to

belong to the OLHIGA.

When a member company is in nancial trouble, the

OLHIGA collects money from each of its members

and then pays part or all of the unpaid claims.

Does the OLHIGA Provide 100% Protection?

No, the OLHIGA does not provide 100% protection.

Dierent kinds of policies have dierent limits.

• Annuity: $250,000 — even if you have more than

one annuity, the OLHIGA will pay you no more

than a total of $250,000

• Life policy (death benet): $300,000

• Life policy (cash surrender): $100,000

• Health policy: $100,000

Does the OLHIGA Protect Me if I Move to

Another State?

No. The OLHIGA protects only Ohio residents

and their beneciaries, regardless of where the

policy was purchased or where the company has

its headquarters. If you bought coverage in Ohio

but now live in another state, you are probably

protected by a guaranty association in that state.

To be sure, check with the agency responsible for

regulating insurance in the state where you live now.

www.insurance.ohio.gov

facebook.com/OhioDepartmentofInsurance

@OHInsurance

Try Solving the Dispute Yourself

Insurance is a very competitive business. If you

give the company a chance, you will generally nd

someone that is willing if not eager to straighten out

problems.

• Start with the agent

• If you are not satised, contact the company’s

customer service oce.

• If customer service falls short of your

expectations, ask to speak with a supervisor

about the company’s procedures for appealing

decisions

If You’re Still Not Satised, Call the Ohio

Department of Insurance

If your self-help eorts fail, your next stop should

be the Consumer Services Division of the Ohio

Department of Insurance (ODI).

Call us at

1-800-686-1526

• Ask to speak with a life insurance analyst

• The analyst will answer questions over the

phone and explain any additional steps you

should take to resolve your own problem

• Our sta will give you honest, unbiased answers

— if it sounds as if the company has done

nothing wrong, we’ll tell you

ODI & Complaints

• If your issue requires follow up with the

company, we’ll send you a complaint form and

instructions for ling a written complaint

• We generally will send the company a copy of

your complaint and ask them to resolve it or

explain their side of the story

• By law, companies must respond to the

Department of Insurance — most companies do

so in a timely manner

• We will review all the facts to make sure the

company has upheld its contract with you and

has followed insurance rules and laws

Counting Complaints

Every year, Consumer Services at the Ohio

Department of Insurance receives hundreds of

complaints about life insurance.

• If your complaint raises questions that cause

us to contact the agent or company, we will

• A complaint means a customer has been

unhappy with the company or agent

• It does not necessarily mean the law has been

broken or that anyone did anything wrong

Consumer Complaints

Insurance Dispute Tip

You can help avoid delays by providing

complete, correct information to your

insurance company and ling your

claims as soon as possible.

For consumer complaint

records, lists of authorized

companies and more...

Visit www.insurance.ohio.gov

or call Consumer Services

at 1-800-686-1526.

Jillian Froment

Director

Mike DeWine

Governor

Annuity Contracts

This section can help you when you shop for annuity contracts. It discusses:

• Reasons to buy an annuity

• Types of annuities

• Common provisions with annuities

Many Options Available

This section is primarily about the choices you

can make when buying an individual annuity.

Employer group annuities oer certain tax

advantages, but you may have fewer options

because the contract is negotiated by your

employer. See page 25 for more about group

annuities you may be able to purchase, depending

on where you are employed.

You’ll have many decisions to make when buying

an individual annuity, which should depend on

your goals for retirement income the contract will

provide. You may want sustainable income for

yourself and your spouse. Or you might want to

ll a gap in earnings between retirement and the

start of a pension plan. There may be other reasons

to buy, but annuities are most appropriate in

providing a retirement income.

Choosing the right annuity is like building a house.

You select your home’s location, the number of

bedrooms and bathrooms, and other choices that

will suit you and your family. In the same way, you

can build the annuity contract that is best for your

needs.

If you have a question about a specic

contract, ask your agent or the insurance

company. If it’s still not clear, call the

Consumer Services Division at the Ohio

Department of Insurance at 1-800-686-1526.

www.insurance.ohio.gov

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@OHInsurance

What is an Annuity?

Annuity Basics

When you are considering an annuity contract, your

options could include:

How you pay premiums

•SingleLump-SumPayment

•Single-PremiumDeferredAnnuities(SPDA)

•PeriodicPayments

Type of contract

•Fixedorvariable

•Individualorgroup

When benet payments start

•Immediate

•Deferred

How long you receive benets

•Aslongasyoulive

•Someotherdenedperiod

Tax status of premiums

•Moneyhasbeentaxedasincome

•Moneyhasnotbeentaxed

Depending on the kind of annuity you buy, some of

your decisions can be delayed until after you buy the

contract.

What is an Annuity?

An annuity is a series of income payments made

to you at regular intervals in return for premiums

you have paid. The most appropriate use of income

payments from an annuity is for retirement. Income

payments are generated through a contract with a life

insurance company. These payments are funded by

principal (the premiums you pay) and earnings (which

accumulate on the invested principal).

An annuity has some advantages over other types of

investment products:

•Earningsonaccumulatedfundsaretax-deferred.

•Thecontractguaranteesanincomeyoucan

receive for life

•Youcanoftenchoosealump-sumpayment

instead of periodic payments

•Yourcontractmayallowyoutoborrowfromthe

annuity

Not Life Insurance

Annuity contracts are usually sold by life insurance

companies, but annuities are not life insurance. They

do not provide life insurance protection.

Life insurance provides benets to your family if

you die. An annuity helps you accumulate money

for future income needs. Don’t buy an annuity as a

savings account or for any short-term purpose. The

most appropriate use for income payments from an

annuity contract is to fund your retirement.

Annuity Words & Phrases

If you pay the premiums for an annuity, you are the

contractholder or owner. A person who receives

annuity income is known as the annuitant. The

annuitant and contract holder are often the same

person.

The period between the purchase of the contract and

receipt of income is called the accumulation phase.

You may be able to pay premiums in a lump sum or

over a period of time.

Income payments are made to you during the

annuity phase or payout phase. You choose how

benets are paid, according to the options in your

contract. You may want regular payments for as long

as you live or some other specied period of time.

Choosing regular income payments for life or some

other dened period is called annuitization. If your

contract provides it, you can select a lump sum

payment instead. Once you decide how you want

to receive benet payments and the payments have

started, you most likely will not be able to change

your mind.

Jillian Froment

Director

Mike DeWine

Governor

Choices When You Buy

There are many ways to fund an annuity. You

purchase an annuity with premium payments. Your

total benet amount may depend on:

•Theamountofpremiumspaid

•Thelengthoftheguaranteedbenetpayment

period

•Theearningsonyourpremiums

•Theinsurer’sexpenses

You can pay premiums in one of three ways:

•Withasinglepremium

•Withperiodiclevel(equal)amounts

•Withperiodicexible(unequal)amounts

How You Pay for an Annuity

Single Premium

You can buy either an immediate or a deferred

annuity (see page 16) with a single premium

payment.

Recent retirees who have a need for income might

purchase a single-premium immediate annuity with

money from a savings account, prot-sharing, the

sale of a house, or an employer’s retirement plan.

You might choose a single-premium deferred

annuity if you have the money to invest and you

anticipate a need for regular income payments in the

future.

An identical single premium should produce larger

benet payments for a deferred annuity than it

would for an immediate annuity. That’s because the

premium on a deferred annuity earns interest for

some time before benets are paid. An immediate

annuity begins its payout phase right away and does

not have the same chance to earn interest.

Periodic Level Premiums

If you choose to make xed periodic level payments,

you will pay equal amounts at regular intervals. Your

premium payments continue until benets begin or

some other date specied in the contract.

Any periodic premium annuity is always deferred

- meaning the benets begin at a future date. The

contract can specify a guaranteed benet amount

you will receive when the payout phase begins.

Periodic Flexible Premiums

Payments for a periodic exible premium annuity are

made over time and the annuity is always deferred.

This feature lets you vary the premium amount.

In fact, you might not be required to make a

payment every year. The contract can specify a

minimum and a maximum amount of premium.

If your income changes greatly from year to year,

such a contract may be an option for you. Perhaps

the annual premium amount you can guarantee

paying is not enough to provide you with sucient

benets. By paying more in high-income years, your

total premium payments could fund an annuity that

meets your needs.

The nal guaranteed benet amount for this contract

cannot be determined in advance. Although you can

contact the company to nd out the approximate

amount at any time during the accumulation phase.

Ohio law says if you buy a single

premium deferred annuity you must

sign a disclosure form. This form helps

protect you by explaining that your

income payments won’t start right

away. The agent must give you the

form when you buy and the completed

form becomes part of your application.

Choices When You Buy

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Some contracts let you take a lump

sum payment after the annuity

matures. But a lump sum could total

fewer dollars than annuitization,

which is a series of income payments.

Read your contract. Find out if a lower

interest rate is credited for a lump

sum

payment than if you annuitize.

Fixed Vs. Variable

Fixed Rate vs. Variable Annuities

At the time you buy an annuity contract, you’ll select

between xed rate and variable. This determines how

earnings are credited in your contract.

Fixed rate annuities increase in value by earning

interest. Choosing a xed rate contract guarantees

you will receive a return on your premium. Keep in

mind that:

•Olderxedrateannuitiesgenerallyincrease

through a xed guaranteed interest rate

•Newercontractsmayhaveaminimumxed

guaranteed rate, and could receive additional

interest rate credits based on the company’s

earnings

•Creditedratescanbeguaranteedforaspecic

period of time, such as one or more years

•Generally,thelongeracreditedrateisguaranteed,

the higher it will be

In a variable annuity no interest rate is guaranteed:

•Youshareintheriskofinvesting

•Yourreturncanbehigherthanwithaxedrate

annuity, but it can also be lower

When You Start Receiving Benets

At the time you purchase a contract you may be able

to choose when benet payments begin. You’ll select

between an immediate or deferred annuity.

Immediate Annuities

Immediate annuity contracts require a single premium

payment. Benet payments normally must begin

within one year after the annuity is purchased.

Let’s say you’ve decided you want benet payments

from your immediate annuity every month. You can

usually get your rst payment one month after you

pay the premium.

If you want annual payments, your benets generally

will start one year after you pay the single premium.

You might buy an immediate annuity just before

retiring if you want to guarantee a stream of payments

over your lifetime.

This type of annuity is simply a way to convert a sum

of money into a steady ow of income over a period

of time.

Deferred Annuities

When you choose to start the payout phase at some

future date, you have a deferred annuity.

You might buy a deferred annuity during your

working years to provide retirement income. You

could schedule benets to begin on the date you

anticipate retiring.

You can usually alter the date when benet payments

begin. The contract will specify what you must do to

make such a change, but any change in the date will

likely also change each benet payment amount.

Deferred xed annuities specify that you will earn

interest on funds held by the company during the

deferral period.

The contract will usually guarantee a minimum

interest rate, but the actual credited interest rate

will vary and be declared by the company from time

to time. Declared rates can never be lower than the

guaranteed minimum rate specied in the contract.

Jillian Froment

Director

Mike DeWine

Governor

Choices When You Buy

How Long Benet Payments Continue

When choosing an annuity, you select a length of

time during which you are guaranteed to receive

benets.

An annuity certain is a xed term annuity that makes

payments for a specied length of time no matter

whether the annuitant lives or dies. A temporary life

annuity pays benets until the end of a specied

period of time or the death of the annuitant,

whichever happens rst. A life annuity provides

benets at least until the annuitant’s death. These

basic types have many variations.

Some contracts let you take a lump sum payment

after the annuity matures. But a lump sum could

total fewer dollars than annuitization, which is a

series of income payments. Read your contract. Find

out if a lower interest rate is credited for a lump

sum payment than if you annuitize.

Annuity Certain

An annuity certain provides a xed number of

benet payments of a xed amount. The specied

time over which benets are paid is called the period

certain.

Even if you are alive at the end of the period certain,

the payments stop. If you should die before the

period certain ends, your beneciary would receive

the rest of the annuity payments.

Such a contract can help if you have the need for

an income that will last for a limited period of time

only. An annuity certain can provide income until

some other source of income - such as a pension -

becomes available.

Generally, you should not consider an annuity

certain as a sole source of retirement

income.

Temporary Life Annuity

A temporary life annuity pays benets until the

end of a specied period of time or the annuitant’s

death, whichever happens rst. When either of these

events takes place, the benets stop. No beneciary

is named with this type of contract.

As an example, if you were to buy a 10-year

temporary life annuity, the contract would pay

benets for a maximum of 10 years only. If you were

to die six years after the annuity payments begin,

benets would stop. People who buy an annuity of

this kind often use the payments to ll an expected

gap in income. For instance, you may need an

income between the end of an earning period and

the start of a pension.

A temporary life annuity pays for a limited period

of time. Individual benet payments are generally

larger than with an annuity that has a longer payout

period and is purchased for the same premium at

the same age.

What is Replacment?

Replacement is buying an annuity to take

the place of one you already had. Ohio law

requires you to sign a replacement form,

which the agent must give you when you

buy. If the new contract is with a dierent

company, the agent must notify the old

company. The old company has the right to

try and persuade you not to switch. Once

you’ve received the new contract, you’ll

have 30 days to decide if you want to keep it.

These rst 30 days make up what is known as

the free look period.

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Types of Annuities

Life Annuities

A life annuity contract guarantees benets will

be paid for at least as long as you live. Your life

expectancy is considered when premium and

benet amounts are calculated. Usually, only life

insurance companies can sell life annuities.

Insurers that issue annuities use annuitant mortality

tables to determine rates. These are similar to life

insurance mortality tables but show an important

dierence when compared to life insurance tables. In

general, people who buy annuities are expected to

live longer.

You can choose from many types of life annuity

contracts.

•Straightlife

•Lifeincomewithperiodcertain

•Lifeincomewithrefund

•Jointandsurvivor

Straight Life Annuity

With a straight life annuity, you receive benet

payments for as long as you live. This contract does

not provide for a beneciary — payments stop when

you die. You are assured you cannot outlive benet

payments — the payments continue for as long as

you live.

Since this contract pays nothing after the death

of the annuitant, it requires a lower premium than

other types of life annuities with the same benet

amount.

Of the life annuity options available, straight life

may produce the largest benet payment for your

principal. That’s because you could live longer

than the mortality tables indicate. People who

need a high retirement income and do not have

any dependents may be most likely to purchase a

straight life annuity.

Life Income Annuity With Period Certain

A life income annuity with period certain guarantees

payments under two circumstances:

•Annuitybenetsarepaidaslongasyoulive

•Paymentsaremadeforatleastaspeciedperiod

of time (period certain), even if you die before

the end of that time

You select the guaranteed period available under

the contract (such as 5 or 10 years) and you name a

beneciary.

If you die before the period certain ends, your

beneciary receives the annuity payments for the

remainder of the period. If you are alive at the end

of the period, payments continue for the rest of your

life.

Due to the guaranteed period, the insurer must

make at least a minimum number of payments

with this contract. This means premiums are usually

higher than for a straight life annuity with the same

benet amount and purchased at the same age.

Life Income With Refund Annuity

This contract pays benets for life and guarantees

benets will at least equal the annuity’s purchase

price. It may be known simply as a refund annuity.

Benet payments are made as long as you live. If you

die before the total benet paid equals the purchase

price, your beneciary receives a refund.

The amount of the refund is the dierence between

what has been paid in benets and the contract’s

purchase price.

The beneciary generally can receive the refund in

either a lump sum or a series of payments.

A refund annuity guarantees a minimum benet

amount, so premiums are usually higher than for a

straight life annuity with the same benet amount

and purchased at the same age.

Jillian Froment

Director

Mike DeWine

Governor

Types of Annuities

Joint and Survivor Annuity

The joint and survivor annuity provides for payments

to two or more people. Benets continue until all of

the annuitants have died.

Married couples are likely to purchase these

contracts. After one spouse dies, benet payments

continue to the remaining spouse for the rest of his

or her life.

Jointandsurvivorannuitiescanspecifythatbenet

payment amounts stay the same throughout

the payout phase. Contracts that decrease the

amount after the death of the rst annuitant are

also available. Premiums will generally be less for a

contract that decreases the benet amount.

There is a better chance of a long payout phase

when more than one life is covered. So joint and

survivor annuities generally have higher premiums

than comparable life income annuities issued to one

person.

Using Pre-Tax Dollars vs. After-Tax Dollars

In general, tax rules depend on the type of annuity

you have. Consult your personal tax advisor for your

specic situation.

Individual Annuities

Earnings are subject to taxes anytime you receive

money from an annuity (except with a Roth IRA, see

page 23).

As long as you do not remove money during the

accumulation phase, earnings credited to your

annuity are tax-deferred. Taxes will apply, however,

if you take a loan, a partial withdrawal, or surrender

the contract.

Money you receive during the accumulation phase

is regarded as fully taxable, until all the interest you

have earned to that point is considered withdrawn.

You then begin to receive what is regarded as return

of principal, which may or may not be taxable.

During the payout phase, benet payments are

considered part principal and part earnings.

With life annuities, your life expectancy is calculated

to determine the portion of earnings in each

payment. You pay taxes on this percentage of the

benet only.

If you outlive that life expectancy, the principal

portion of all your benet payments will equal the

premiums you paid. Every payment you receive after

that is considered 100% earnings and is fully taxable.

Employer Group Annuities

If you paid premiums with pre-tax payroll

deductions, you will pay taxes on money you receive

from the annuity at any time.

Earnings and principal both will be taxed whenever

you receive money.

Your contract may not allow distributions during

the accumulation phase. If your contract does allow

withdrawals or loans, however, all the money you

receive could be taxable.

Once the payout phase begins, all the money in each

benet payment is fully taxable.

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Common Provisions

Dierent annuity options meet the needs of

dierent people. Other than the provisions

described on the previous pages, annuities have

additional positive and negative features you

should consider. The provisions described here

are all common but each one is not available in

every contract. Also note the descriptions here are

examples only — any features included in your

contract will be dened in the contract.

Administrative Fees

Every insurer that sells annuities charges fees which

are connected to the contract. These fees cover the

company’s costs of administering the annuity.

Withdrawal Privilege

Many deferred annuities oer limited withdrawal

privileges during the accumulation phase.

This feature generally allows the owner - after the

rst year - to take out a small percentage (such as

10%) of the annuity fund each year without penalty.

In other words, you would not pay a surrender

charge. If you withdraw a larger percentage than the

contract allows, however, you will pay surrender

charges.

Although the insurance company will not charge

you for limited withdrawals as specied in the

contract, you may be required to pay tax penalties

on at least a portion of the money. (Review Using

pre-tax vs. after-tax dollars on page 19.)

Surrender Charge

Most deferred annuities carry a surrender charge.

A typical contract could have a surrender charge

in eect over the rst 10 years, but decreasing in

amount each year. Read your contract - it will explain

how the surrender charge applies to your annuity.

A deferred annuity is a long-term investment. The

surrender charge encourages growth of your fund.

It also allows the insurer to cover the expense of

selling and issuing you the contract.

The charge is usually a percentage of either the

fund’s accumulated value or the total premiums you

paid. Surrender charges are generally waived under

certain circumstances:

•Thedeathoftheannuitant

•Disabilityoftheannuitant

•Annuitization

Contract Loans

A loan provision may be included in an annuity

contract. In general, this feature allows you to

borrow up to a specied amount of the annuity’s

accumulated value. Since it is a loan, interest

will accumulate and it most likely will be to your

advantage to repay it.

Like the withdrawal privilege, a loan provision can

give some liquid features to an annuity.

A contract loan normally will be subject to current

taxes. (Review Using pre-tax vs. after-tax dollars on

page 19.)

Return of Principal Guarantee

Surrender of the contract should be avoided

whenever possible, but circumstances may leave

you no choice.

If you must surrender your annuity, this feature

assures you that the company will pay you no less

than the total dollars you’ve paid in premiums -

minus any prior partial withdrawals you’ve taken. It

applies even if the amount is greater than the cash

surrender value dened by the contract.

Common Provisions

Jillian Froment

Director

Mike DeWine

Governor

Guaranteed Settlement Option Rates

Nearly every annuity oers guaranteed settlement

option rates for the available payout choices (see

How long benet payments continue on pages 17-

19). These rates are fairly low.

At the time you annuitize, most companies will

pay current (higher) settlement option rates. Other

companies may oer the rates currently available on

their single premium immediate annuities.

Bailout Provision

Some xed annuities include a bailout provision

which waives the surrender charge if the contract’s

declared renewal interest rate falls below a point

called the bailout rate. This feature protects you and

helps force companies to oer competitive rates.

If the declared renewal rate drops below the bailout

rate, you can surrender the contract for the full

annuity value without paying a surrender charge.

The time during which a waiver of surrender charge

applies could be:

•Foraspeciedperiodoftimeafterthedeclared

renewal rate falls below the bailout rate

•Untilaninterestrateexceedingthebailoutrate

is declared

•Foraslongasyouholdthecontract

Medical Bailout

If your annuity contract has a medical bailout, any

surrender charge is waived in the event you are

conned to a nursing home or other long-term care

facility. This feature may also waive the surrender

charge if you are diagnosed as terminally ill.

No annuity is “risk free” or “guaranteed

safe.” A contract is only as sound as the

company that sells it. The Ohio Life and

Health Insurance Guarantee Association

(OLHIGA) provides some protection if your

insurance company goes out of business.

OLHIGA pays part or all of the company’s

unpaid claims. The limit paid for annuities

is $250,000. That’s the total amount you

could collect from OLHIGA no matter how

many annuities you had purchased from

that company.

Note: Variable products are not covered.

Read your contract!

Your contract will list all its features

and provisions. Read and understand

its terms and conditions. If you

don’t understand something in the

contract, ask for help from the agent,

the company, or your attorney.

OLHIGA

Common Provisions

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Common Provisions

Death Benet

Annuities usually include a death benet feature.

This provision applies if the annuitant or the contract

owner dies before the payout phase starts.

The death benet provided by an annuity contract

is not like that in a life insurance policy. An annuity’s

death benet returns the premiums (less any

withdrawals and company charges) to the beneciary.

If the contract’s accumulated value is greater than

the total premiums paid, the beneciary receives the

accumulated value.

If the annuitant dies after benet payments have

started, further payments depend on the payout

option that was selected.

Account Value Enhancement (Bonus)

While not a common feature, some contracts oer

enhancements to the account value.

These enhancements can include:

•Anannuitizationbonus:encouragesyoutokeep

your funds with the company at maturity

•Apersistencybonus:encouragesyoutokeep

your funds with the company regardless of

annuitization

•Alargeaccountvaluebonus:encouragesyouto

make larger payments to the annuity

Types of Annuities

Equity-Indexed Annuity

The equity-indexed annuity earns interest or provides

benets which are linked to an external stock or bond

index.

Equity-indexed contracts combine two features not

found together in other annuity types: a guaranteed

minimum interest rate and the potential for higher

earnings based on the performance of the external

index.

In general, equity-indexed annuities have several

features in common, including:

•Contractsaredividedintoperiodsoftimeorterms

•Certainfeaturescanberenewedfromonetermto

the next

•Yourgaineachtermislimitedtoapercentageofthe

index’s increase or a dollar amount

•Thecompanymaycalculateyourearningsinmany

dierent ways

The value of any index varies from day-to-day and

cannot be predicted. When you buy an equity-

indexed annuity, you own an insurance contract. You

are not buying shares of any stock or index.

Note: Companies can tie

their equity-income annuity

contracts to many dierent

stock and bond indices. One

that is commonly used is the

Standard & Poor’s 500 Index

also called the S & P 500.

Jillian Froment

Director

Mike DeWine

Governor

Types of IRAS

IRAs

A common vehicle for funding retirement is an

Individual Retirement Annuity (IRA). Banks and other

nancial institutions can sell IRAs. Only an annuity

contract sold through an insurance company can

provide annuitization, or a stream of income for

life.

Traditional IRAs

A traditional IRA permits you each year to contribute

a set dollar amount (or 100% of your earned income,

whichever is less) and deduct a portion from your

taxable income. You can contribute an additional

amount for a non-employed spouse.

You may be able to deduct all or part of your

contribution to a traditional IRA when you le taxes.

Your income level and whether certain retirement

saving plans are available through your employer

determine if and how much you can deduct.

If you contribute to a traditional IRA before April 15

and are eligible, you can deduct all or part of the

amount from your taxable income for the previous

year. Money used to make IRA contributions in this

way will be taxed when you withdraw from the fund.

The accumulating interest in your traditional IRA

account isn’t taxable until you withdraw money. In

general, you should not take money from the fund

until you’ve retired.

But new regulations permit you to withdraw a

limited amount before age 59 1/2 without penalty if

you use the money to pay for a rst home or higher

education.

Other withdrawals you make before age 59 1/2 are

usually fully taxable. They also are generally subject

to a 10% nondeductible penalty tax. You must start

distribution by April 1 the year after you reach age

70 1/2 - or you’ll be subject to a 50% penalty tax.

Roth IRAs

A Roth IRA oers dierent tax incentives and more

exible features than traditional IRAs. However, it

is available only to people within certain income

limits. As is the case with any annuity contract you

consider, you should consult a tax expert about your

particular situation.

Contributions to your Roth IRA can not be deducted

from your taxable income. But if you keep a Roth

IRA for at least 5 years, all distributions you receive

including earnings, are considered tax-free. You can

make cash contributions to a Roth IRA even after

you’ve reached age 70 1/2.

You are not required to take distributions during

your lifetime. This allows a continuation of Roth IRA

funds between generations.

Provided your Roth IRA has existed for ve years

or more, distributions as described below are

considered free from federal income tax:

•Toyouifyouhavereachedage591/2

•Toyouifyoubecomedisabled

•Toyourbeneciaryintheeventofyourdeath

A withdrawal from your Roth IRA to pay for a rst

home or certain higher education expenses is also

tax-free. Distributions under any other circumstances

are fully taxable and subject to a 10% penalty.

Types of IRAS

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Variable Annuities

Two-Tiered Annuity

Some companies oer what is known as a two-tiered

annuity. The contract credits you with a favorable

interest rate during the accumulation phase, a rate

that compares well with other annuities.

But a two-tiered annuity could pay much less. If you

make a partial or total surrender, or choose a short

payout phase, you will earn a lower rate. You could

be charged a substantial amount for a withdrawal.

Such features allow this annuity to pay a competitive

rate during the accumulation phase. You will earn

and receive the higher rate only if you annuitize.

When comparing a two-tiered annuity with other

annuity contracts, don’t get confused! Look at

the rates to be paid in both tiers of the two-tiered

contract.

Variable Annuity

Unlike xed annuities, variable annuities and

multifunded annuities might not guarantee benet

payment amounts. The annuity owner shares some

part of the investment risk with the insurance

company. The benet amounts paid reect the

company’s investment gains or losses.

Such contracts are considered securities, so they can

be sold only by agents who are registered with the

National Association of Securities Dealers (NASD).

The agent must provide a prospectus either before

or at the time of the sale.

Variable annuities provide contract values that can

change according to the investment performance of

a special fund called a separate account. The insurer

normally puts money directly into separate account

investments such as stocks, mutual funds, real estate,

etc., according to the investment guidelines.

The company keeps track of each annuity’s value

within the separate account fund. Your shares in the

fund are called accumulation units.

The number of accumulation units you can buy

depends on the separate account’s fund value at

any given time. If the value is high, the value of an

accumulation unit is also high. When this is the case,

your premium will purchase less units than when the

fund’s value is low.

Accumulation units buy annuity units, which provide

a specied benet amount. Before the initial payout,

the number of annuity units you can purchase is

determined. Once the payout phase begins, this

number does not change.

Each benet payment amount depends on the

number of annuity units you own and the value

of each unit. Annuity units are revalued regularly,

based on the separate account fund investment

value.

A variable annuity’s disadvantage

is the lack of a guarantee, which

leaves you open to risk. The

advantage is your sharing risk

gives you a chance for higher

earnings than with a xed annuity.

Benet payments can vary with

the annuity units’ value or can

remain xed, possibly at your

option. Generally, variable annuity

payout methods are the same as

those available for xed annuities.

Jillian Froment

Director

Mike DeWine

Governor

Employer Group Annuities

Market-Value Adjusted Annuity

In a contract of this type, your surrender value

during an interest rate guarantee period is altered

by both a surrender charge and a market value

adjustment. The market value adjustment reects

changes in the interest rate level from the start

of the period through the time you surrender the

contract.

These contracts generally have long current interest

rate guaranteed periods, such as 3-10 years. There is

no market value adjustment when the period ends,

but there may still be a surrender charge.

Some annuities of this type have capped market

value adjustment formulas so the adjustment

amount is limited in both directions, up and down.

Employer Group Annuities

One method employers use to provide retirement

income for their workers is the group annuity.

Such a contract might be paid in full by either the

employer or the employee, or the cost may be split.

Some familiar methods may include: 401(k) - if your

employer oers one for this purpose. Another is a

403(b), also known as a Tax Sheltered Annuity or TSA

- if you work for certain tax exempt organizations

such as churches, hospitals, and schools.

The kind of annuity your employer oers may

govern whether any contributions you make to an

IRA can be deducted from your taxable income.

A group annuity builds with non-taxable earnings

during the accumulation phase, like all annuities.

But employer group contracts can oer an extra

tax advantage over some other annuities. While

you may have already paid income tax on money

used to purchase certain contracts, employer group

annuities are usually funded with pre-tax payroll

deductions.

This means your current taxable income is reduced

by the amount you pay in premiums each year.

(Note: Social Security taxes are withheld regardless.)

Many employer group contracts won’t let you make

early withdrawals until you reach age 59 1/2, retire,

quit your job, or become disabled.

If you annuitize you can select from the payout

options available under the group annuity. Your

employer has chosen the range of options, but they

are generally like those in individual annuities.

When you receive benet payments through this

type of contract, taxes will be due on both the

principal and the earnings. Since you will likely be in

a lower income bracket after you’ve retired, your tax

on the principal should be less than if you had paid

income taxes on the money when you were working.

www.insurance.ohio.gov

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@OHInsurance

Questions to Ask

Questions to Ask Before You Buy

Ask Yourself

•HowmuchretirementincomewillIneedinadditiontoSocialSecurity,pension,

savings, and any other income or investment sources?

•WillIneedincomeformyselfonlyorforsomeoneelseaswell?

•HowmuchcanIaordtopayinpremiums?

•Howwilltheannuitycontracttinwithmytotalnancialplanning?

•HowlongcanIleavemoneyintheannuity?

•WhenwillIneedincomepayments?

Ask the Agent or Company

•Isthisasinglepremiumorinstallmentpremiumcontract?

•Areanyadministrativechargesdeductedfrommypremiumorcontractvalue?

•Howistheinterestratedetermined?

•Isthereaguaranteedminimuminterestrate?

•Howlongisthecompany’scredited(current)interestrateguaranteed?

•Howoftendoesthecompanychangethecreditedrate?

•Whatisthecompany’shistoryregardingrenewalofthecreditedrate?

•AretheresurrenderchargesorotherpenaltiesifIwanttoendthecontractearly?

•CanIgetapartialwithdrawalwithoutpayingfeesorlosinginterest?

•ArechargeswaivedforlargerwithdrawalsifIamconnedtoanursinghomeor

diagnosed with a terminal illness?

•Isthereadeathbenetandhowdoesitwork?

•Whataretheoptionsforbenetpayments?

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@OHInsurance

Accumulation phase: The period of time prior to

annuitization.

Administrative Fee: Charges some policies

deduct from cash value accumulation each year.

Administrative fees are often highest in the rst few

years after you buy the policy.

Annuitant:

A person who receives benet payments

from an annuity.

Annuitize: A method of receiving annuity benets

through a series of income payments for life or some

other dened period of time.

Annuity: A contract purchased through an

insurance company, usually in order to accumulate

funds that can be used after retirement. After a

specied age, the insurance company promises to

pay you monthly (annuity) payments. The company

is taking the risk that you could live longer than

expected, meaning the company would pay you

more than you had invested.

Back-end load:

Company expenses that are

charged at the time benets begin.

Beneciary: The person you designate to be paid a

death benet when you die. A policy may have one

or more beneciaries.

Cash Value: The “savings” portion of a life policy .

When your premium payments are more than the

cost of insurance, the excess goes into a cash value

account and draws interest.

Commission: The portion of your premium

payments that goes to the insurance agent

who sells the policy. Agents typically receive a

percentage of each premium payment you make.

The percentage may be highest in the rst year you

buy the policy.

Contractholder:

A person who pays premiums for

an annuity. Often the same person as the annuitant.

Conversion: Changing a term life policy to some

other form. This can be done only when the policy

is described as convertible.

Cost of Insurance: The amount a company

calculates that it needs to insure your life. Although

your insurance premiums may never change, the

cost of insurance goes up every year because

you are unavoidably getting closer to death. And

each year an increasing amount of your premium

payment for a cash value policy is used to pay for

insurance - and less goes to cash value.

Death Benet: The money that a life insurance

policy promises to pay your beneciary when you

die and/or

a provision in certain annuity contracts

that pays the beneciary when the annuitant dies

before the payout phase begins.

Deferred annuity: A contract that begins the

payout phase at some future date.

Dividends: When a company collects more money

from policyholders than is needed to cover the

cost of insurance, prot and other expenses, the

company may return some of the money as a

dividend. Dividends are paid only if you have a

“participating” policy. You generally can choose to

receive the dividend as a cash payment, apply it to

your premium payments, buy more insurance, or

add it to the policy’s cash value. Dividends are like a

bonus. There is no guarantee that the company will

pay dividends.

Glossary

How does the company dene life

insurance terms?

This glossary gives common meanings

for life insurance words and phrases. The

insurance company may dene the terms

dierently. Read the policy’s denitions

section and ask questions about anything

you don’t understand.

Jillian Froment

Director

Mike DeWine

Governor

Glossary

Equity-indexed annuity: A contract that combines

a guaranteed minimum interest rate with earnings

linked to the performance of an external stock or

bond index.

Face Amount: The sum a policy promises to pay

when the insured person dies, or at the maturity of

the contract.

Fixed rate annuity:

A contract that species

your funds will earn a specied interest rate and

guarantees a return on your premium.

Flexible premium annuity: A contract in which the

amount of each premium payment you

make can vary.

Front-end load: Company expenses that are

charged at the beginning of a premium

payment period.

Free look: A period specied in the contract (such

as 10 days) during which you can decide whether to

keep an annuity or return it for a full refund of your

premium. Your free look period is 30 days when you

buy an annuity contract to replace one you already

had.

Guaranteed interest rate: A minimum rate of

interest specied in a xed annuity. The actual rate

the insurance company credits your contract at any

given time may be higher but can never be lower.

Illustration: An insurance company’s explanation

of how the life insurance policy will work. An

illustration projects the policy into the future,

showing each year’s premium payment and death

benet, plus any guaranteed interest payments and

the company’s description of additional benets that

might be paid if the company does well.

Immediate annuity: A contract that begins the

payout phase within one year after you pay

the single premium.

In Force: A policy is “in force” when all conditions

have been met to establish or maintain the

company’s obligation to pay if you die.

Level premium annuity: A contract in which the

amount of each premium payment you make stays

the same.

Liquidation: Similar to bankruptcy. A state ocial

serves as the company’s liquidator, and attempts to

meet the company’s scal obligations (e.g., paying

claims) by “liquidating” its assets.

Loan: If your policy has accumulated cash

value, you may borrow part of it. Interest rates

are generally better than bank rates. The

amount you borrowed will be deducted from

your death benet until you have repaid it. If

your loan and accumulated interest add up to

more than the cash value, the policy will lapse.

Loan provision: A feature in certain annuity

contracts that allows you to borrow up to a

specied percentage of the value. Contract loans are

usually subject to taxes.

Mortality Tables: Statistics that project one’s life

expectancy based on many variables.

Ohio Life and Health Insurance Guaranty

Association (OLHIGA):

A state-authorized,

non-prot corporation established to protect

cash values and pay death benets of

companies that have nancial problems or

become insolvent (bankrupt). Every company

selling life and health insurance in Ohio must

belong and members contribute relative to

company size.

Payout phase (also called the annuity phase):

The period of time when benet payments are being

made to the annuitant.

Premium: The amount you

pay the insurance

company for insurance (also called outlay).

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Glossary

Glossary Continued..

Refund Annuity: Refunds part or all of the

premiums paid if the insured dies before the

start of the liquidation period.

Stranger-Owned Life Insurance (STOLI):

A life insurance settlement, illegal in Ohio, in which

a person buys ownership of a policy on another,

unrelated person — someone with no “insurable

interest” to the purchaser — and which was

arranged prior to the insurance company issuing the

policy.

Surrender charge: A fee the insurance company

will charge you if you cash in (surrender) an annuity

before the payout phase begins, or if you make a

withdrawal larger than specied in the contract.

TAMRA: Technical and Miscellaneous Revenue Act.

A 1988 federal law that created a new class of life

insurance contracts. These contracts’ policy loans

and surrender payments are subject to taxation rules

similar to deferred annuities.

Term Life: The simplest form of life insurance, it

generally oers no cash value feature. You pay a

premium and the company promises to pay your

beneciary if you die. The policy lasts for a specic

length of time or “term,” such as 1, 5, 10 or more

years, or to a designated age such as 65 or 100. If

you are living at the end of the term, the policy

expires unless the company agrees to renew it.

Renewal premiums are based on your attained age.

Sometimes called temporary insurance.

Universal Life: A exible-premium life insurance

contract which accumulates values and pays a

death benet. You choose the policy’s premium

and face amount, and you can adjust these as long

as the policy is in eect. It is possible that the cash

value will earn more than the guaranteed minimum

interest rate. It is also possible that the cash value

will grow faster than is needed to cover the cost of

insurance.

Variable annuity: Traditionally, a contract with

no minimum guarantee (some newer products do

include guarantees). Because the benet amount

depends on the insurance company’s investment

gains or losses, you share some part of the

investment risk with the insurer.

Variable Life: A type of whole life insurance in

which the face amount and cash value rely on the

investment performance of a special fund. Reserves

are placed in investment accounts that are separate

from the company’s general account. Most policies

guarantee a minimum face amount, but a cash value

minimum is rarely guaranteed.

Viatical Settlement: An agreement between

the owner of a life insurance policy who has a life

expectancy of less than 24 months and another,

unrelated person, who becomes both the owner

and beneciary of the policy. Viatical settlements

are legal and regulated by the Ohio Department of

Insurance.

Whole Life: Life insurance with a savings feature.

Premiums generally are the same (level) every year.

When you are young, your premiums are more

than the cost of insuring your life at that time. The

excess amount accumulates and resembles a savings

account, called cash value. This excess is used by the

company to insure you later in life, when your level

premium is no longer enough to cover you.

Withdrawal privilege: A provision in many annuity

contracts that allows you to withdraw an amount

less than the surrender value, without paying a

surrender charge. Any withdrawal may be subject to

taxes and penalties.

Jillian Froment

Director

Mike DeWine

Governor

Private Rating Firms

Many private rms specialize in rating the nances and services of insurance companies. Each

has its own rating methods and grades companies based on the rm’s judgement of how

well the insurer is doing. The rms use various grading systems, so you must understand the

system used before you put your faith in any report.

Some of the more popular rms are shown here along with a phone number and web address.

You may be charged for the reports you get.

A.M. Best Company

(908) 439-2200

www.ambest.com

Fitch Inc.

(800) 753-4824

www.tchratings.com

Moody’s Investor Service

(212) 553-0377

www.moodys.com

Standard & Poor

(212) 208-1527

www.standardandpoor.com

Private Rating Firms

Note: It’s a good idea to make sure the

insurance company is licensed in Ohio.

You can visit the Ohio Department of

Insurance online at www.insurance.ohio.

gov or call Consumer Services at 1-800-

686-1526.

Contact ODI

To request consumer publications

or ask questions about insurance, please call the

Ohio Department of Insurance consumer lines:

Medicare issues ..................1-800-686-1578

Other types of insurance .........1-800-686-1526

Fax ..............................(614) 644-3744

TDD/TTY phone users, please call Ohio Relay Service 9+711

For many Department services and

publication updates, please visit our website

www.insurance.ohio.gov

The Ohio Department of Insurance is an

Equal Opportunity Employer.

June 2012

50 West Town Street

Suite 300

Columbus OH 43215

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