Insurance World

As summer draws to a close, around 10,000 UK bikers start to think about laying up their motor bikes for the winter months. From the end of October through until Easter, the thought of motor biking is not so appealing and there is little point in taxing and insuring the bike. Bikes are winterised and stored away at the back of the garage awaiting the better weather. Sadly, thieves are aware of this and so some 600 bikes are stolen every month.

Obviously if you have totally cancelled your policy you will be unable to claim for this theft. You can, however, reduce the cover to a minimum for fire and theft and this is worth considering.

If you’re more used to insuring cars than motor bikes, you’ll find some of the features of bike insurance very odd. For instance, it’s not possible to accumulate bonuses over time, as with a car. Occasionally you may find an insurer who will give you some discount if you don’t claim for a certain period with the same insurer, but this is not the norm.

There are various policies. Specified Bike Policy, Specified Rider Policy, Comprehensive and Third Party Insurance. With a specified bike policy you are covering the bike and not the rider. This means you could insure a number of riders on the same bike.

A specified rider policy covers the rider, but not the bike. This means the rider is covered on any motor bike up to the size specified on the policy.

Comprehensive and third party insurance are more familiar terms. Comprehensive is the most expensive. Apart from paying for repairs to the bike in the case of accidental damage, it may offer some extras such as breakdown cover. In the event of a claim, you will only pay the excess as stated on the policy. With third party you simply buy the minimum legal insurance. This means you are covered for any property you may damage or people you might injure. You would not be reimbursed for your bike or anything else and an excess would still be payable. Third party is the cheapest form of insurance.

Younger riders will be charged higher premiums for their policies due to their inexperience and the increased risk of motor cycling. There is a frighteningly high accident rate and statistics tell us they are much more likely to be involved in an accident than more mature riders. Damage caused to themselves is often costly and lifelong.

The more hours spent on the road, the higher the risk and riders using their bikes to travel from one location to another as far as their work is involved will be likely to be charged higher premiums. Claims made in recent years for driving-related accidents will have an adverse effect on your premium too.

Other factors that will influence the premium will be the power and make of the bike. There are some very expensive bikes around and obviously this will mean a higher premium will be charged. If you have any penalties for speeding or dangerous driving your premium will rise and if you were to be disqualified for a length of time, insurance would be extremely expensive when your licence was re-instated.

To try and get the cost of premiums down, consider security devices such as immobilisers, alarms and steering locks. It may also be possible to get discounts for any training courses you have completed.

Be completely honest with your insurance company. Failure to disclose something which the company later discovers can invalidate your insurance. Not only would you not receive payment for any claim, but you could be prosecuted for driving without insurance.

An internet broker will be able to offer you plenty of advice when it comes to choosing an insurer. They’ll find a choice of policies to suit your circumstances and their experience will be invaluable. There are internet-only deals and discounts which they’ll be able to offer too.

Keep insured and safe.

What is a fixed annuity, a variable annuity?

Simply put, both a fixed annuity and a variable annuity are amounts payable annually. More specifically, they are contracts offered by insurance companies which allow you to accumulate funds for retirement on a tax-favored basis and then, if you choose, receive a guaranteed income payable for life or for a period certain such as five, ten or twenty years. Usually the payments are made monthly, but many companies offer to make the payments quarterly, semi-annually, or annually. Most of this discussion will focus on the fixed annuity.

How do they work?

Both a fixed annuity and a variable annuity are vehicles for accumulating retirement savings. You pay a premium to an insurance company and they promise to pay you interest. Unlike other retirement savings instruments, as long as you keep your money with the insurance company, you are not required to pay income tax on your gains.

This is what is known as ‘tax deferral.’ Only when you decide to withdraw your funds are your gains subject to income tax. A fixed annuity also differs from other retirement savings plans in another important way. When you decide to withdraw your funds, the insurance company will give you the option to receive a guaranteed income for as long as you live.

What are the advantages?

All fixed annuity variations have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income for Life.

Who offers fixed annuity products?

Fixed annuities are offered only by insurance companies licensed to underwrite life insurance and annuities by the state in which you reside. Most insurance companies are subject to financial requirements specifying the minimum reserves the company must maintain on its policies.

Who sells them?

Only agents licensed by the states to sell life insurance may sell you a fixed annuity. This includes every licensed life insurance agent in your state as well as most financial planners and stock brokers.

Why is Guaranteed Income for Life an advantage?

Annuities are the only savings vehicle which offer a guaranteed income for life. With every other type of accumulation plan you can never be sure your income will continue for as long as you live. The insurance company calculates a guaranteed income payment based on your age, life expectancy and interest rates it will credit. That payment is guaranteed for as long as you live.

Most insurance companies will also offer a guaranteed fixed rate of income for a specific period such as five to twenty years. The guaranteed lifetime income may be based on your life only, or based upon the life of both you and a joint annuitant, typically your spouse. In the event of a joint annuitant, the monthly income from your fixed annuity will continue until the last survivor dies.

What does Tax Deferral mean?

A tax-deferred fixed annuity receives special tax advantages. Under existing tax laws, any interest or gain is not taxable until you begin to actually receive the income, i.e. the tax payable on the gain is deferred. Therefore, since you pay no taxes while your money is compounding, you earn interest in three ways - interest on your principal, interest on your interest and interest on the taxes you would have paid if it had not been tax deferred. This results in increased earnings capacity of a deferred annuity over a bank CD or other fully taxable earnings.

Why is Probate Avoidance an advantage?

The other primary advantage over most other investment vehicles common to all annuities is the ability to pass on the proceeds upon your death directly to a beneficiary. Probate is a judicial process to establish the validity of a will. Assets in an estate typically cannot be passed on to heirs until the probate court has established the validity of the will and authorized the executor to distribute them. Because probate is a judicial process, the process can take anywhere between six and twelve months to conclude, and the legal expenses can be significant.

Proceeds from annuities and life insurance, on the other hand, are not subject to probate and may be passed to your designated beneficiary directly without going through probate.
What is required of the insurance company in order to meet its obligations?

To safeguard the funds of its contract holders or policyowners, an insurance company has to meet strict financial requirements. Most importantly these requirements include the establishment of a reserve which at all times must be equal to the withdrawal or surrender value of their total block of variable and fixed annuity policies or contracts.

In other words, the insurance company must set aside funds equal to the surrender value (principal plus interest less early withdrawal or surrender charges) of every annuity contract in force. In addition to these reserve requirements, state laws also require certain levels of capital and surplus to further protect their contract holders or policyowners.

Immediate Annuity

An immediate annuity provides for fixed annuity payments to begin immediately after the date of purchase. Payments may be scheduled monthly, quarterly, semiannually or annually according to prior agreement.

Often the proceeds from a life insurance policy or the sale of a home are used to fund an immediate annuity. Such annuity payments provide immediate, regular income for a period certain (5, 10, 15, 20 years) or for life, depending on the choices made by the immediate annuity owner.

Deferred Annuity

A deferred annuity provides for payments to begin on a future date known as the maturity date. A deferred annuity has an accumulation period and a payout or distribution period.
For example, a middle-aged wage earner could provide for an income supplement in their retirement years by purchasing a deferred fixed annuity. Lump sum or regularly scheduled payments would be contributed to the annuity account as it accumulates, then at age 65 when the annuity matures, additional income would be available through scheduled annuity payments.

Single Premium Annuity

A fixed annuity may be purchased with a single premium in which one cash payment establishes the contract.

The most common sources of such lump sums are proceeds from a life insurance death benefit, the sale of a home or winning the lottery.

Flexible Premium Annuity

A fixed annuity may be funded over time with an initial premium plus additional flexible premiums.
Both premium amounts and frequency may be flexible, thus accommodating convenient funding plans such as payroll deduction over several years of employment as well as changes in the owner’s financial situation.

What is a Fixed Indexed Annuity?

A fixed indexed annuity (also called an index annuity, an indexed annuity or an equity indexed annuity) is a fixed annuity with an upside earning capacity and a guarantee against downside loss of principal. Its earnings are linked to a stock or equity market index such as the Standard & Poor’s 500 Composite Stock Price Index or, simply, the S&P 500. Fixed indexed annuities (FIAs) have four guarantees:

1. Initial premium is guaranteed

2. Minimum rate of return

3. Take credit for increases (ups) in market, not corrections (downs)

4. Gains are locked in every year

How do they differ from other fixed annuities?

The primary difference between a fixed indexed annuity and other fixed annuities is in the way the annuity rate or earnings are credited to your account. A traditional fixed annuity credits interest with an annuity calculator that is set in the contract and may or may not be subject to market adjustments. A fixed indexed annuity leads to an interest crediting formula based on changes in the equity market to which it is linked. This formula spells out how interest is calculated, credited, how much additional interest you get, and when you get it.

The insurance carrier issuing the fixed indexed annuity also promises to pay a guaranteed minimum rate of interest. Even if the indexed earnings are lower, the minimum guarantee will apply and your account value will not fall below the guaranteed minimum. Both flexible premium and single premium deferred annuity contracts guarantee a minimum interest rate, often in the range of 1.5% to 3% based on between 90% and 100% of paid premium. The insurance company’s annuity calculator will adjust account values at the end of each term.

What are the contract features or ‘Moving Parts’?

The amount of additional interest that may be credited to a fixed indexed annuity is influenced most by the Indexing Method and the Participation Rate working together like form and function.

The INDEXING METHOD is the design by which the amount of change in the index is measured. For example, a method that measures the difference in the starting index level and the level on the one-year anniversary is an annual point-to-point. If this design “ratchets” up the account value (new principal) with each annual gain, the indexing method includes an Annual Reset feature. Currently, the industry’s best selling equity indexed annuity is the MasterDex Annuity series from Allianz, which incorporates the more progressive design of a “monthly” point-to-point together with an annual reset. Functional differences in indexing methods will be explained in greater detail below.

Like a faucet, the PARTICIPATION RATE determines how much of the increase in the index will flow into the annuity account value. Let’s say the fixed annuity calculator shows a 12% increase in the index, but your participation rate limits you to 70% of the gain. Your annuity rate of increase would be 70% of 12%, or 8.4%. Participation rates are variable and may be guaranteed only for a specific period or guaranteed not to be adjusted below a given minimum or above a specified maximum. One of the most popular fixed indexed annuities is the Keyport Index Multipoint from Sun Life Financial, which guarantees a 100% participation rate for the full contract term.

Some fixed indexed annuities place a CAP or ceiling on the annuity rate, establishing the upper limit the annuity may earn. An annuity earning an index-linked interest rate of, say, 9% may have a cap of only 7%, which would be the amount of increase credited.

Some annuities use AVERAGING to smooth out the highs and lows of the linked equity market index. Monthly averaging, for example, would use an annuity calculator which combines each month-to-month index closing value divided by 12.

Some annuities reduce the index-linked interest rate by subtracting a SPREAD, a MARGIN, or a FEE and crediting the balance. A positive change in the index of 11%, for example, with an administrative fee of 2.5%, would yield a net increase of 8.5%. Of the carriers who sell annuity products with spreads, margins or fees, such amounts will be subtracted only if the remaining index change is a positive earnings rate.

Indexing Methods

Annual Reset: Yield is determined each year by comparing the index value at the end of the contract year with the index value when the contract year began. The positive difference, if any, is the yield your fixed indexed annuity earns for the year. Any new positive (not negative) account value resets to become the new starting point for the upcoming year. Contrast this formula to owning a variable annuity or a direct equity investment in a bear market. With variables and stocks the owner may have a deep valley to climb out of before getting back to zero.

High-Water Mark: Yield is determined by the rise in index value at the contract annual anniversary points during the term. The positive difference, if any, is determined by comparing the highest index value and the index value at the start of the term.
Point-to-Point: Yield, if any, is determined by comparing the difference between the index value at the end of the term with the index value at the beginning of the term. The positive difference is added to your annuity account value at the end of the term.