640 Class 11 - Class 11 Insurance and Risk Management...

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Class 11 Insurance and Risk Management George D. Krempley Bus. Fin. 640 Winter Quarter 2008
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Tax Advantages of Retirement Plans A qualified plan receives tax advantages Main tax features: Contributions are not taxable as personal income until the benefits are received Earnings on assets are not taxed until they are received Together ==>employee can earn the before-tax rate of return in a qualified plan
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Comparing Different Methods of Saving Consider amount received after-tax from investing $1 of before-tax wages • for T years • in an account that earns r percent annually • for a person with a constant tax rate t – Outside of a qualified plan: (1-t) [1 + r(1-t)] T – In a tax deferred account: (1-t)(1+r) T - t[(1+r) T -1] (investment earnings are not tax as earned) – In a qualified plan: (1-t)(1+ r) T
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Comparing Different Methods of Saving $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 1 4 7 10 13 16 19 22 25 28 31 returns and contributions tax deferred returns tax deferred fully taxable
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Exhibit 14.1 Power of Tax- Deferred Growth
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Individual Annuities An annuity is a periodic payment that continues for a fixed period or for the duration of a designated life or lives The person who receives the payments is the annuitant An annuity provides protection against the risk of excessive longevity The fundamental purpose of an annuity is to provide a lifetime income that cannot be outlived
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Individual Annuities Large and growing part of life insurance business The major types of annuities sold today include: Fixed annuity Variable annuity Equity-indexed annuity
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Uses of Annuities 1. Risk management perspective Tax advantaged method of saving - Implicit returns are tax deferred 1. Savings perspective Protection against outliving resources
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Annuity Vs. Life Insurance Life Insurance Creates an immediate estate Protects against dying too soon Annuity Provides a lifetime income that cannot be outlived Protects against living too long
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Types of Annuities Fixed Variable Equity-indexed
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Fixed Annuities A fixed annuity pays periodic income payments that are guaranteed and fixed in amount During the accumulation period prior to retirement, premiums are credited with interest The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity The current rate is based on current market conditions, and is guaranteed only for a limited period A bonus annuity pays a higher interest rate initially The liquidation period is the period in which funds are paid out, or annuitized
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Fixed Annuities Fixed annuity income payments can be paid immediately, or at a future date: An immediate annuity is one where the first payment is due one payment interval from the date of purchase Provides a guaranteed lifetime income that cannot be outlived A deferred annuity provides income payments at some future date
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This note was uploaded on 07/17/2008 for the course BUSFIN 640 taught by Professor Krempley during the Winter '08 term at Ohio State.

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640 Class 11 - Class 11 Insurance and Risk Management...

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