Since no one addressed this directly, and I need a few more posts to get to 10, I might as well...
Without any moonlight philosphy lol can anyone honestly provide a direct, accurate response for each objection to close the annuity sale ie...
Client questioning a tax deferred fixed annuity, 12% bonus, 5% fixed interest rate, lifetime income rider,American Equity
1. How does the insurance company profit from an annuity sale when they offer 12% bonus and 5% fixed interest rate
When you deposit money into a FIA, the insurance company puts most of the money in its general account, which generally contains various types of bonds. The remaining funds are used to pay commissions and other expenses, plus buy call options on whatever index the contract is tied to. The insurer also has a profit built in there somewhere.
A few things to note in your question; the bonus is largely smoke and mirrors. It isn't vested until 14 years, and since the insurance company knows they gave a bonus, they will simply impose a slightly lower cap rate and minimum guaranteed rate throughout the lifetime of the contract in order to recapture the bonus. It's a sales tool, no more, no less. Secondly, the 5% is likely not a fixed interest rate (at least not these days), but an income base roll up. If it were a fixed interest rate, it's surely lower than that now (I don't think 5% MGRs ever existed). If it's an income base roll up, it's not ever actually credited to the contract, but simply used to calculate the annual income that is guaranteed for the lifetime of the contract owner.
So back to the EIA contract you put in $100K. The insurance company puts...
$90,000 into it's general account, where it buys bonds (averaging, say, 4%).
$5,000 to the agent, for commissions.
$2,000 it keeps for profits and to cover expenses.
$3,000 it uses to purchase call options on the S&P 500 (or whatever index the contract credits interest based on).
Now 3 things can happen; the S&P 500 can go up, down, or stay the same.
If it goes UP, the insurer must give the policyholder 5% interest that year (suppose it's capped at 5%). It can do so because the call options it purchased have appreciated significantly.
If it stays the SAME or goes DOWN, the insurer only has to pay the Minimum Guaranteed Rate, which is probably 1%. It's call options will have expired worthless, so it will pay the interest from the $90K in its general account, that is yield 4% (which, over 14 years, at a net of 3% interest, exceed the original $100K deposit, plus any minimum interest guaranteed in the contract).
That's how the contract works, and where the money goes. You could "make" a DIY EIA contract using bonds and call options on eTrade if you wanted to (but you couldn't replicate the tax-deferral).
Bonuses on ALL annuity contracts, are smoke and mirrors. They simply lower the interest rate/cap/whatever in future years to get their bonus back.
If you don't hold the contract through the whole surrender period, they chargeback commissions, and charge the client, and possibly even have a market value adjustment (MVA) to account for losses incurred on their bond portfolio, plus you surrender the bonus.
2. If a customer invests $100K, how long do the annuity payments continue....
Depends if you're talking about a lifetime income rider or annuitization. If you're talking about a lifetime income rider, the payments will continue for the policyholders lifetime (and the spouse, if you chose a spousal rider), and any cash value will be paid out to beneficiaries. If you're talking about annuitization, it could last for the policyholders lifetime, the policyholder and the spouses lifetime, or either of those with a period guaranteed (5, 10, 20 years, etc.). You can also annuitize and guarantee that at least the original deposit is paid out, regardless of when the policyholder dies. The more lives you cover, and the longer you ensure the payments go, the lower the initial payout will be.
3. At time of death, the beneficiaries receive the "Full Contract Value." What exactly is this?
In the case of a lifetime income rider, suppose the income base is $100K because of 10% guaranteed increases in the income base, but the actual contract value is still at the original deposit (say, $50K) because the market hasn't caused any interest to be credited. The client can walk away with $50K, not $100K. But if they start lifetime income benefits, the income amount (say 5% per year for life) will be based on $100K, or $5K per year.
So suppose the person starts lifetime income, and then dies after 1 year. The $5K comes out of the contract value, which was $50K (and is now $45K). Upon the clients death, his beneficiaries would get $45K. Suppose the client lives 30 years, but the contract never gets any interest because the stock market goes down 30 years in a row. The client will still get $5K a year, for all 30 years, even though he ran out of money after 10 years ($50K minus $5K, for ten years, without getting any interest).
In the case where the client runs out of money in the contract like the above scenario, the beneficiaries get zero.
4. I assume that three above categories should somehow sum to $100K + interest earned over the years + the upfront 12% bonus.
That's how it works, assuming you don't surrender the contract early.
5. How much of the proceeds go to # 1 and # 2 (the customer and the beneficiaries) and then how much goes to # 3 (American Equity).
This varies by product and by company. It also depends on how the market performs, and how long the client lives.
6. I need to know how this company makes their money and how much they make versus how much the customer and beneficiearies receive.
You can see how they make their money, but their profit depends on several factors, which you'll never know. As long as the client doesn't surrender the contract early (surrender charges), the client (or their beneficiaries) will always get back all their money, plus the minimum guaranteed rate in the contract, plus the bonus (unless of course they annuitize the contract, which they can only make the decision to do).
