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funds, due to participation rates being less than 100 percent, possible interest rate caps, and because equity indices usually don t include dividends paid on common stocks in the index Rather, they are indices of the market prices of stocks EIAs are just like other annuities They can grow on a taxdeferred basis and all interest and gain on the annuity contract is taxed at ordinary income tax rates once distributions have begun For nonqualified EIAs, the principal amount comes out tax-free to the owner (Other taxes may apply) But, all taxes must be paid once withdrawals begin, and for those who are younger than 591/2, there may be an IRS penalty of 10 percent

Beneficiaries Annuity contracts allow the owners to name beneficiaries One of the reasons that annuities are attractive to investors is because they have a built-in death benefit Just like the EIA has a minimum guaranteed value, an annuity contract states that if the value of the contract is less than the original premium, minus any withdrawals or loans, the owner s beneficiary upon the owner s death shall receive the original premium amount However, if the annuity is valued at more than the original premium amount, the beneficiary will receive that larger amount For example, James Client invests $100,000 in a deferred variable annuity Four years later, Mr Client dies Prior to his death, he hadn t taken any money out of the annuity His beneficiary for the annuity, his daughter, claims the annuity, which is now valued at $89,000 Because Mr Client hadn t taken any money out of the annuity, his daughter receives $100,000 the original premium amount

Original lump-sum premium = $100,000 Withdrawals = $0 Value of death = $89,000 Beneficiary receives = $100,000 (All amounts are hypothetical)

Original lump-sum premium = $100,000 Withdrawals = $0 Value of death = $122,000 Beneficiary receives = $122,000 (All amounts are hypothetical)

If the beneficiary of the annuity owner is the surviving spouse, that person is entitled to treat the annuity as his or her own under the current tax law The spouse would become the new owner of the annuity Recently, annuity issuers have come up with different ways to calculate the minimum guaranteed death benefit, which help out the owner s beneficiary One example is the reset death benefit, which has a five-year standard So, using our previous example, if Mr Client invests his $100,000 in the variable annuity on July 1, 2001, the value would be reassessed on July 1, 2006, again on July 1, 2011, and so forth, for the life of the contract as long as Mr Client didn t annuitize it The highest of these amounts, including the original premium, becomes the new guaranteed death benefit The benefit can always go higher, but not lower Another calculation method for the death benefit is a step-up or ratchet basis The step-up basis works the same way the reset death benefit does, except instead of waiting five years between reevaluations, there is only a one-year wait Therefore, the value of the contract would be reassessed on July 1 of every year, rather than every five years Some variable annuities that offer the step-up basis do so on a quarterly time frame, thus increasing the chance of an even higher death benefit Finally, some insurers offer a certain escalation of death benefit amounts, which may be three to five percent per year This type of roll-up death benefit works this way: When the annuity owner dies, the beneficiary receives the greatest amount of either the total premium paid, the current contract value, an assumed three percent annual return, or the top death benefit on a specified anniversary date