Analysis of Sample Annuities

Properly Annuitized Payment Schedule

On 5/1/96, Mr. Smith, age 60, purchased a $100,000 annuity with a 15 year period certain. The payment schedule is represented below. According to the life expectancy table, the 15 year guarantee period does not exceed Mr. Smith’s 18.42 year life expectancy. Monthly payments are fixed, equal and monthly but may reflect reasonable, annual cost-of living increases (i.e. less than or equal to 5%).

Amount Invested = $100,000 Rate of Return = 5.00% Guarantee Period = 15 Years

Level Payments		3% Annual Increase	5% Annual Increase
Year	Annual Payment	Annual Payment	Annual Payment
1	$9,634.23	$7,981.13	$7,000.00
2	$9,634.23	$8,220.57	$7,350.00
3	$9,634.23	$8,467.18	$7,715.50
4	$9,634.23	$8,721.20	$8,103.38
5	$9,634.23	$8,982.83	$8,508.54
6	$9,634.23	$9,252.32	$8,933.97
7	$9,634.23	$9,529.89	$9,380.67
8	$9,634.23	$9,815.79	$9,849.70
9	$9,634.23	$10,110.26	$10,342.19
10	$9,634.23	$10,413.57	$10,859.30
11	$9,634.23	$10,725.97	$11,402.26
12	$9,634.23	$11,047.75	$11,972.38
13	$9,634.23	$11,379.19	$12,570.99
14	$9,634.23	$11,720.56	$13,199.54
15	$9,634.23	$12,072.18	$13,859.52
Total Pmts	$144,513.43	$148,440.38	$151,049.95

Improperly Structured Payment Schedule

On 5/1/96, Mr. Smith, age 60, purchased a $100,000 annuity. The payment schedule for the 20 year period certain annuity is represented below. According to the life expectancy tables compiled by the Actuary of the Social Security Administration, the 20 year guarantee period exceeds the 18.42 year (18 years and 5.04 months) life expectancy of the annuitant. In this situation there may be a disqualifying transfer as of the date the annuity was purchased (or the date the payment plan was established, whichever is most recent). Follow regular procedures in determining if a period of ineligibility must be determined.

To determine the amount that was transferred for less than adequate consideration, determine the percentage of the original purchase price which was transferred to fund the payments that exceed the life expectancy on the Secretary’s tables as of the date of purchase or the date the payment plan was established, whichever was the most recent.

Amount Invested = $100,000 Rate of Return = 5.00% Guarantee Period = 20 Years

Level Payments		3% Annual Increase	5% Annual Increase
Year	Annual Payment	Annual Payment	Annual Payment
1	$8,024.26	$6,263.79	$5,250.00
2	$8,024.26	$6,451.70	$5,512.50
3	$8,024.26	$6,645.25	$5,788.13
4	$8,024.26	$6,844.61	$6,077.53
5	$8,024.26	$7,049.95	$6,381.41
6	$8,024.26	$7,261.45	$6,700.48
7	$8,024.26	$7,479.29	$7, 035.50
8	$8,024.26	$7,703.67	$7,387.28
9	$8,024.26	$7,934.78	$7,756.64
10	$8,024.26	$8,172.82	$8,144.47
11	$8,024.26	$8,418.01	$8,551.70
12	$8,024.26	$8,670.55	$8,979.28
13	$8,024.26	$8,930.66	$9,428.25
14	$8,024.26	$9,198.58	$9,899.66
15	$8,024.26	$9,474.54	$10,394.64
16	$8,024.26	$9,758.78	$10,914.37
17	$8,024.26	$10,051.54	$11,460.09

Level Payment Sample

Step	Action	Calculation
1.	Determine the Life Expectancy of the annuitant based on the life expectancy tables at the end of this chapter.	18 years, 6 months
2.	Determine the original purchase price of the annuity. (Review the original annuity document for the purchase price.)	$100,000
3.	Determine the sum of all the annuity payments that will be paid. (Add all annuity payments together.)	$160,485.20
4.	Determine the sum of all the annuity payments that will be paid beyond the life expectancy. (Add all annuity payments scheduled to be paid beyond the number of life expectancy years together.) Annuity is scheduled to pay 1 year, 6 months beyond Life Expectancy.	20th year = $8,024.26 6 months of 19th year = $4,012.13 Total = $12,036.39
5.	Determine the percentage of payments that will be paid beyond the life expectancy. (Step 4 divided by Step 3.)	12,036.39 divided by 160,485.20 = .075 (7.5%)
6.	Determine the percentage of the original annuity purchase price that will be considered a transfer for less than adequate consideration. (Step 2 times % in Step 5.)	$100,000 x 7.5% = $7,500
7.	Use the amount determined in Step 6 to establish a period of ineligibility (POI), if the individual/spouse is in LTC.	$7,500.

3% Annual Increase Sample

Step	Action	Calculation
1.	Determine the Life Expectancy of the annuitant based on the life expectancy tables at the end of this chapter.	18 years, 6 months
2.	Determine the original purchase price of the annuity. (Review the original annuity document for the purchase price.)	$100,000
3.	Determine the sum of all the annuity payments that will be paid. (Add all annuity payments together.)	$168,310.33
4.	Determine the sum of all the annuity payments that will be paid beyond the life expectancy. (Add all annuity payments scheduled to be paid beyond the number of life expectancy years together.) Annuity is scheduled to pay 1 year, 6 months beyond Life Expectancy.	20th year = $10,983.59 6 months of 19th year = $5,331.84 Total = $16,315.43
5.	Determine the percentage of payments that will be paid beyond the life expectancy. (Step 4 divided by Step 3.)	16,315.43 divided by 168,310.33 = .097 (9.7%)
6.	Determine the percentage of the original annuity purchase price that will be considered a transfer for less than adequate consideration. (Step 2 times % in Step 5.)	$100,000 x 9.7% = $9,700
7.	Use the amount determined in Step 6 to establish a period of ineligibility (POI), if the individual/spouse is in LTC.	$9,700.

5% Annual Increase Sample