Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Insurance
Reexamination Certificate
1999-07-02
2003-08-26
Dixon, Thomas A. (Department: 3629)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Insurance
C705S400000
Reexamination Certificate
active
06611808
ABSTRACT:
BACKGROUND
1. Field of the Invention
The present invention relates to a method and apparatus for determining benefits and costs associated with annuities. Among other things, the present invention relates to a method and apparatus for determining additional benefits and costs related to tax payments with respect to the death benefit of an annuity contract.
2. Background
Annuities have become a more attractive option for retirement savings. Once, considered noncompetitive and inflexible, annuities have become more popular as annuity providers have introduced products with a variety of flexible tax deferred savings options.
An annuity is a tax-deferred savings vehicle packaged as an insurance product. In most cases when an annuity is bought, its earnings are tax-deferred until the beginning of withdrawal of the interest or other income earned. Because the owner is not paying taxes along the way, the owner has the chance to earn gains on untaxed money, which may grow more quickly than a taxable account does.
There are two broad types of annuities: deferred and immediate. A deferred annuity, allows the owner to wait a while and let the annuity earn money before withdrawing from it; the immediate annuity, begins paying the owner within the first year. The owner may also be permitted to convert the annuity from a deferred to an immediate annuity type.
A deferred annuity has two phases: the accumulation phase and the distribution phase. During the accumulation phase, the owner can contribute as much as he or she wants, subject to Internal Revenue Service restrictions on certain qualified accounts and the earnings in the annuity grow tax-deferred. During the distribution phase, the owner can elect to receive a lump sum or the owner can elect a settlement option.
A settlement option, also known as annuitization, means the owner turns the annuity into a stream of periodic payments for life or for a chosen certain period of time. If the payout phase of an annuity is for life, it pays the owner during his or her entire lifetime. The payments cease when he or she dies. If an annuity's payout is “certain,” it pays the owner for a specified period, and if the owner dies before the period ends, then a beneficiary receives the payments until the certain term ends. In other words, if the annuity owner has a certain term, such as 7 years for an annuity but receives only 5 years of payments before dying, then the owner's beneficiary will receive payments for another 2 years, and then after the additional 2 years the payments would cease. An annuity can also be a combination of life and certain terms. For example, the owner can purchase an annuity for “life,” but with a certain period of ten years. If the owner lives longer than the ten-year period, the annuity continues to pay throughout the owner's lifetime, and at the owner's death, the payments cease. If the owner dies before the certain term expires, the owner's beneficiary will receive payments until the certain term ends. The security of knowing the owner will get income for a specified period, or for his or her life, is one of the real advantages of electing annuitization. The gains distributed through settlement option payments and withdrawals are generally subject to the income tax. (Typically, with annuitizations only a percentage of each payment is taxable.)
Annuities are further classified as either fixed and variable. A fixed annuity provides a set minimum guaranteed rate of return backed by an insurance company, much as a bank provides a stated rate of return on a certificate of deposit. Although the rate of return varies somewhat depending on the prevailing interest rates, the minimum rate of return adds more stability than a variable annuity. A variable annuity may invest in stocks, bonds, or money market funds, depending upon the type of subaccount chosen. Usually, the subaccount is selected based on the level of risk and return wanted in the annuity, just as when purchasing a mutual fund. The amount of return depends on the actual return of the subaccount investment.
An annuity will vary depending upon the parameters of the “product design.” The product design defines the terms of the annuity, including, whether it is fixed or variable, whether the annuity's term is for a certain period or based on the life of the annuitant, whether it is deferred or immediate, the annuity's death benefit (if any), and surrender charges (if any).
Many annuities are set up so that the beneficiaries of the annuity may receive money from the annuity when the owner dies. For example, with a deferred annuity, if the annuitant dies while the annuity is still in the accumulation phase (the phase before the payout phase), the annuitant's beneficiaries will receive whatever amount has accumulated in the annuity. The heirs will need to pay income taxes on any gains, not to mention estate taxes, if the entire estate amounts to more than the current limit (which is currently $650,000). In other words, if $50,000 was contributed to an annuity, and it has grown to $150,000, the heirs would receive the principal plus $100,000 as taxable income if the owner died before the payout phase began. Additionally, in some cases, the insurance company may guarantee to pay the owner's beneficiary the principal amount of the investment if it is greater than the annuity's cash value. As noted before with a “certain” annuity when the payout phase has begun, and the owner dies during the certain period, the owner's beneficiary will receive payments until the end of the certain period.
In the case of annuities that provide a death benefit, a major problem of the heirs or beneficiaries of the annuity after the death of the owner of the annuity is the payment of income taxes; as the beneficiaries are responsible for paying taxes on the gain in the annuity contract. Many heirs and beneficiaries receive the death benefit and have a large portion of it be consumed by income taxes.
SUMMARY OF THE INVENTION
The present invention provides a way for dealing with the tax payment for the beneficiaries of a death benefit of an annuity contract.
The present invention provides a method to determine the additional benefits that may be needed for dealing with the tax payments, funeral expenses and the like associated with the death benefit of an annuity contract.
In one embodiment of the present invention, a method for determining additional income tax benefits with respect to an annuity contract, is provided with the annuity contract being stored in a computer system. The method comprises generating data corresponding to an annuity contract, with at least a portion of the data corresponding to information indicating whether an additional death benefit payment has been selected. If the additional death benefit payment has been selected, an additional death benefit is calculated.
In another embodiment of the present invention, a method that determines the benefits and costs of an annuity contract comprises determining whether an annuity contract includes a beneficiary rider and if the beneficiary rider has been selected, calculating an additional death benefit value.
In an additional embodiment of the present invention, an apparatus for calculating the benefits and costs of an annuity contract comprises a storage device and a processor coupled to the storage device. The storage device stores instructions that are utilized by the processor. The instructions comprise a receive instruction that instructs the processor to receive data comprising an annuity contract; a determine instruction that instructs the processor to determine whether the annuity contract includes a beneficiary rider; and a calculate instruction that instructs the processor to calculate an additional death benefit value, if the annuity contract includes the beneficiary rider.
Additional embodiments of the present invention include methods and apparatus for calculating costs associated with additional death benefits for the payment of taxes, funeral expenses and the like
Dady Donald James
Preti Charles Paul
Dixon Thomas A.
Legacy Marketing Group
Thomas Kayden Horstemeyer & Risley LLP
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