One important element is missing from this simple definition of an annuity. It is the one distinguishing factor that
separates life insurance companies from all other financial institutions. While anyone can set up an annuity and
pay income for a stated period of time, only life insurance companies can guarantee income for the life of the
annuitant.

Because of their experience with mortality tables, life insurance companies are uniquely qualified to combine
an extra factor into the standard annuity calculation. Called a survivorship factor, it is very similar to the mortality
factor in a life insurance premium calculation. Thus, it provides insurers with the means to guarantee annuity
payments for life regardless of how long that life lasts.

Annuities versus Life Insurance

It is important to realize that annuities are not life insurance contracts. In fact, it can be said that an annuity is a
mirror image of a life insurance contract. They look alike but are actually exact opposites. The principal function
of a life insurance contract is to create an estate (an "estate" being a sum of money) by the periodic payment of
money into the contract. However, an annuity's principal function is to liquidate an estate by the periodic payment
of money out of the contract. Life insurance is concerned with how soon one will die while life annuities are
concerned with how long one will live.

It is easy to see the value of annuities in fulfilling some important financial protection needs. Their role in
retirement planning should be obvious: guaranteeing that an annuitant cannot outlive the payments from a
life annuity and the peace of mind that comes with that. Annuities can play a vital role in any situation where a
stream of income is needed for only a few years or for a lifetime.

 

An annuity is a cash contract with an insurance company that includes a free-look period as well as nonforfeiture benefits. Unlike life insurance products where policy issue and pricing are based largely on mortality risk, annuities are primarily investment products. Individuals purchase or fund annuities with a single-sum amount or through a series of periodic payments. The insurer credits the annuity fund with a certain rate of interest which is not currently taxable to the annuitant. In this way, the annuity grows. The ultimate amount that will be available for payout is a reflection of these factors. Most annuities guarantee a death benefit payable in the event the annuitant dies before payout begins. However, it is usually limited to the amount paid into the contract plus interest credited. Surrender charges are used to discourage withdrawals and exchanges in an annuity.

The death of an annuity contract owner will generally trigger a payout to the beneficiary. A spouse as beneficiary may continue the contract with deferred taxation as contingent owner. When filling out an annuity contract application, the owner names his own beneficiary and also the annuitant's beneficiary. The owner and the annuitant can be each other's beneficiary (which simplifies matters); no one can be his or her own beneficiary.

With any annuity, there are two distinct time periods involved: the accumulation period and the payout (or annuity)
period. The accumulation period is that time during which funds are being paid into the annuity. Payments
are made by the contract holder and interest earnings are credited by the insurer.The accumulation period of an
annuity normally may continue after the purchase payments cease.If an annuitant dies during the accumulation period, his or her beneficiary will receive the greater of the accumulated cash value or the total premium paid. The payout (or liquidation) period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments at regular intervals. Typically, benefits are paid out monthly. Quarterly, semiannual, or annual payment arrangement can also be structured. The policyowner is the only one who can surrender an annuity during the accumulation period.

Annuities are flexible in that there are options available to purchasers to which enable them to structure and
design the product to best suit their needs. These options include:

► Funding method- Single lump-sum payment or periodic payments over time

► Date annuity benefit payments begins- Immediately or deferred until a future date

► Investment configuration- A fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return

► Payout period- A specified number of years, or for life, or a combination of both

Funding Method

An annuity begins with a sum of money called the principal sum. Annuity principal is created (or funded)
in one of two ways:  1) immediately with a single premium, or 2) over time with a series of periodic
premiums.

Single Premium

Annuities can be funded with a single lump-sum premium, in which case the principal sum is created immediately.
For example, individuals nearing retirement whose financial priority is retirement income could surrender their whole
life policies and use the cash value as a lump sum premium to fund an annuity.

Periodic Payments

Annuities can also be funded through a series of periodic premiums that will eventually create the annuity principal
fund. At one time, it was common for insurers to require that periodic annuity premiums be fixed and level, much
like insurance premiums. The purpose of this type of funding is to create a certain amount of periodic annuity
income. In other words, the contract defines what premium is required to generate a specified amount for a
specified period of time upon contract maturity. Today, it is more common to allow annuity owners to make
flexible premium payments. A certain minimum premium may be required to purchase the annuity. After that, the
owner can make premium deposits as often as is desired. With flexible premium annuities, the benefit is expressed
in terms of accumulated value. For instance, a contract might specify that it will provide for guaranteed lifetime
monthly payments of $5.06 per $1,000 at the annuitant's age 65. This means that a contract that has grown to
$100,000 upon the annuitant's age 65 would generate $506 a month for life.

Date Annuity Income Payments Begin

Annuities can be classified by the date in which the income payments to the annuitant begin. Depending on the
contract, annuity payments can begin immediately or they can be deferred to a future date.

Immediate Annuities

An immediate annuity is designed to make its first benefit payment to the annuitant at one payment interval from
the date of purchase. Since most annuities make monthly payments, an immediate annuity would typically pay its
first payment one month from the purchase date. Thus, an immediate annuity lacks an accumulation period.

As you might guess, immediate annuities can only be funded with a single payment and are often called
single-premium immediate annuities (or SPIAs) and is intended for liquidation of a principal sum. An annuity
cannot simultaneously accept periodic funding payments by the annuitant and pay out income to the annuitant.

Deferred Annuities

Deferred annuities accumulate interest earnings on a tax-deferred basis and provide income payments at some
specified future date (normally within a minimum of 12 months after date of purchase). Unlike immediate annuities, deferred annuities can be funded with periodic payments over time. Periodic payment annuities are commonly called flexible premium deferred annuities (FPDAs). Deferred annuities can also be funded with single premiums, in which case they're called single-premium deferred annuities. The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals. Benefit payments are initiated after the contract becomes annuitized.

Most insurers charge contract owners a back-end load for liquidating deferred annuities in the early years of the
contract. These surrender charges cover the costs associated with selling and issuing contracts as well as costs
associated with the insurer's need to liquidate underlying investments at a possibly inappropriate time. Many deferred annuity contracts waive the surrender charge when the annuitant dies or becomes disabled. Surrender charges for most annuities are of limited duration, applying only during the first five to eight years of the contract. However, for those years where charges are applicable, most annuities provide for an annual "free withdrawal", which allows the annuity owner to a certain percentage, usually 10%, of the annuity account with no surrender charge applied. Additionally, some annuities may offer a "bailout" provision, which allows the annuity owner to surrender the annuity without surrender charges if interest rates fall below a stated level within a specified time period.

Annuity Payout Options

Just as life insurance beneficiaries have various settlement options for
the disposition of policy proceeds, so too do annuitants have various
income payout options to specify the way in which an annuity fund is
to be paid out. In fact, selecting any of the life income options as a
life insurance settlement is the same as using the policy proceeds to
purchase a single-premium immediate annuity and selecting an annuity income option.

There are a number of annuity income options available: straight life income, cash refund, installment refund, life
with period certain, joint and survivor, and period certain.

Straight Life Income Option

A straight life income annuity option (often called a life annuity or a straight life annuity) pays the annuitant a
guaranteed income for the annuitant’s lifetime. When the annuitant dies, no further payments are made to anyone.
If the annuitant dies before the annuity fund is depleted, the balance is forfeited to the insurer. This annuity guarantees protection against exhaustion of savings due to longevity. When a life annuitant outlives life expectancy, the funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy.The straight life annuity typically pays the largest monthly benefit to a single annuitant because it is based only on life expectancy. However, it creates a risk that the annuitant may die early and forfeit much of the value of the annuity to the insurance company.

Cash Refund Option

A cash refund option provides a guaranteed income to the annuitant for life. If the annuitant dies before
the annuity fund (principal) is depleted, a lump-sum cash payment of the remaining balance is made to
the annuitant's beneficiary. Thus, the beneficiary receives an amount equal to the beginning annuity fund less the
amount of income already paid to the deceased annuitant. A cash refund option provides for payments to the
annuitant for life and, if the annuitant dies before the principal fund is depleted, the remainder is to be paid in a
single cash payment to the annuitant's beneficiary. Thus, the total annuity fund is guaranteed to be paid out.

Installment Refund Option

Like the cash refund, the installment refund option guarantees that the total annuity fund will be paid to the
annuitant or to the annuitant's beneficiary. The difference is that under the installment option, the fund
remaining at the annuitant's death is paid to the beneficiary as annuity payments, not as a single lump sum. Under
either the cash refund or installment  refund option, if the annuitant lives to receive payments equal to the principal
amount, no future payments will be made to a beneficiary.  The installment refund option guarantees payments to
the annuitant for life. If the annuitant dies before the principal fund is depleted, the same annuity payments will
continue to the beneficiary until the fund is paid out.

Life with Period Certain Option

Also known as the life income with term-certain option, this payout approach is designed to pay the
annuitant an income for life, but guarantees a definite minimum period of payments. For example,
if an individual has a life and 10-year certain annuity, the individual is guaranteed payments for life or
10 years, whichever is longer. If the individual receives monthly payments for six years and then dies,
the individual's beneficiary will receive the same payments for four more years. Of course, if the
annuitant died after receiving monthly annuity payments for 10 or more years, the annuitant's
beneficiary would receive nothing from the annuity.  The life with period certain annuity option provides
income to the annuitant for life but guarantees a minimum period of payments. Thus, if the annuitant dies
during the specified period, benefit payments continue to the beneficiary for the remainder of the period.
For example, suppose an individual has a 15-year life with period-certain annuity. The annuitant receives
monthly benefit payments for 11 years and then dies.  The individual's beneficiary will then receive the
same payments for the remainder of the period certain (four years).

Temporary Annuity Certain

Under a temporary annuity certain, the payments are guaranteed to be made for a specified number of years. Since this income is guaranteed, if the annuitant dies before receiving payments for the full specified period of time, the annuitant's beneficiary will receive the payments for the remaining number of years.

Joint and Full Survivor Option

The joint and full survivor option provides for payment of the annuity to two people. If either person dies,
the same income payments continue to the survivor for life. When the surviving annuitant dies, no further
payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A
two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays
one-half of the original joint benefit.

There are other joint arrangements offered by many companies:

► Joint and two-thirds survivor. This is the same as the joint
and full survivor arrangement, except that the survivor's
income is reduced to two- thirds of the original joint income.

► Joint and one-half survivor. This is the same as the joint and
full survivor arrangement, except that the survivor's income is
reduced to one-half of the original joint income.

Period Certain Option

The period certain income option is not based on life contingency. Instead, it guarantees benefit payments
for a minimum number of years, such as 10, 15, or 20 years, regardless of when the annuitant dies.  
At the end of the specified term, payments cease.

Investment Configuration

Annuities can also be defined according to their investment configuration, which affects the income benefits
they pay. The two classifications are fixed annuities and variable annuities. Fixed annuities provide a fixed,
guaranteed accumulation or payout. Variable annuities attempt to offset inflation by providing a benefit linked
to a variable underlying investment account. Equity indexed annuities, a form of fixed annuity, are fairly new
but have become quite popular.

Fixed Annuities

Fixed annuities provide a guaranteed rate of return. During the period in which the annuitant is
making payments to fund the annuity (the accumulation period), the insurer invests these payments in
conservative, long-term securities (typically bonds). This allows the insurer to credit a steady interest
rate to the annuity contract. The interest payable for any given year is declared in advance by the insurer
and is guaranteed to be no less than a minimum specified in the contract. In this way, a fixed annuity has
two interest rates: a minimum guaranteed rate and a current rate. The current rate is what the insurer
credits to the annuity on a regular schedule (typically each year). The current rate will never be lower
than the minimum rate, which the insurer guarantees. In this way, the accumulation of funds in a fixed
annuity is certain and the contract owner's principal is secure. The investment risk is borne by the insurer.
When converted to a payout mode, fixed annuities provide a guaranteed fixed benefit amount to the
annuitant, typically stated in terms of dollars per $1,000 of accumulated value. This is possible because
the interest rate payable on the annuity funds is fixed and guaranteed at the point of annuitization.

The amount and duration of benefit payments are guaranteed. Because they provide a specified benefit
payable for life (or any other period the annuitant desires), fixed annuities offer security and financial peace
of mind. However, since the benefit amount is fixed, annuitants may see the purchasing power of their
income payments decline over the years due to inflation. For many, a variable annuity is preferable.

Variable Annuities


As with variable life insurance, variable annuities shift the investment risk from the insurer to the contract
owner. If the investments supporting the contract perform well (as in a bull market), the owner will
probably realize investment growth that exceeds what is possible in a fixed annuity. However, the lack of
investment guarantees means that the variable annuity owner can see the value of the annuity decrease in
a depressed market or in an economic recession. Variable annuities invest deferred annuity payments in
an insurer's separate accounts, as opposed to an insurer's general accounts (which allow the insurer to
guarantee interest in a fixed annuity).  Because variable annuities are based on non-guaranteed
equity investments (such as common stock), a sales representative who wants to sell such
contracts must be registered with the Financial Industry Regulatory Authority (FINRA) as
well as hold a state insurance license. Not only can the value of a variable annuity fluctuate in response
to movements in the market, so too will the amount of annuity income fluctuate even after the contract has
annuitized. It was for that reason the product was developed in the first place. In spite of inevitable dips
in the amount of benefit income, the theory is that the general trend will be an increasing amount of income
over time as inflation pushes up the price of stocks. Generally, this theory has held true.

To accommodate the variable concept, a new means of accounting for both annuity payments and annuity
income was required. The result is the accumulation unit (which pertains to the accumulation period) and the
annuity unit (which pertains to the income payout period).

Accumulation Units

During the accumulation period, contributions made by the annuitant (less a deduction for expenses) are
converted to accumulation units and credited to the individual's account. The value of each accumulation
unit varies depending on the value of the underlying stock investment. For example, assume that the
accumulation unit is initially valued at $10 and the holder of a variable annuity makes a payment of $200.
This means she has purchased 20 accumulation units. Six months later, she makes another payment of $200,
but during that time, the underlying stocks have declined and the value of the accumulation unit is $8. This
means that the $200 payment will now purchase 25 accumulation units.

The value of one accumulation unit is found by dividing the total value of the company's separate account by
the total number of accumulation units outstanding. Thus, if a company had $20 million in its separate account,
and a total of 4 million accumulation units outstanding, the value of one accumulation unit would be $5. As the
value of the account rises and falls, the value of each accumulation unit rises and falls.

Annuity Units

Once variable annuity benefits are to be paid out to the annuitant, the accumulation units in the participant's
individual account are converted into annuity units. At the time of initial payout, the annuity unit calculation is
made. From then on, the number of annuity units remains the same for that annuitant. The value of one annuity
unit can and does vary from month to month, depending on investment results. For example, suppose an
annuitant has 1,000 accumulation units in her account by the time she is ready to retire and these units have
been converted into 10 annuity units. She will always be credited with 10 annuity units and that number does
not change. What does change is the value of the annuity units, in accordance with the underlying stock.
Assume when she retired, each annuity unit was valued at $40. That means her initial benefit payment is $400
(10 x $40). As long as the value of the annuity unit is $40, her monthly payments will be $400. But what if the
value of the stock goes up and her annuity unit value becomes $45? Her next monthly payment will be
$450 (10 x $45).

The theory has been that the payout from a variable annuity over a period of years will keep pace with the cost
of living and thus maintain the annuitant's purchasing power at or above a constant level. As with fixed annuities,
the variable annuity owner has various payout options from which to choose. These options usually include the
life annuity, life annuity with period certain, unit refund annuity (similar to a cash refund annuity), and a joint and
survivor annuity.

Equity Indexed Annuities

A fairly recent innovation, equity indexed annuities (EIA)  are a type of fixed annuity  that offer the potential for higher credited  rates of return than their traditional counterparts but also guarantee the owner's principal. The interest credited to an EIA is tied to increases in a specific equity or stock index (such as S&P 500), which results in long-term inflation protection. Underlying the contract for the duration of its term is a minimum guaranteed rate (ordinarily 3 or 4%), so a certain rate of growth is guaranteed. When increases in the index to which the annuity is linked produce gains that are greater than the minimum rate, that gain becomes the basis for the amount of interest that will be credited to the annuity. At the end of the contract’s term (usually five to seven years) the annuity will be credited with the greater of the guaranteed minimum value or the indexed value.

Market Value Adjusted Annuities

Another fixed annuity product with a market-driven aspect is the market value adjusted (MVA) annuity. Instead of having the annuity’s interest rate linked to an index as with the equity-indexed annuity, an MVA annuity’s interest rate is guaranteed fixed if the contract is held for the period specified in the policy. The market-value adjustment feature applies only if the contract is surrendered before the contract period expires. Otherwise, the annuity functions the same way a fixed annuity does.

If an MVA annuity owner decides to surrender the contract early, a surrender charge and a market-value adjustment will apply. If interest rates decreased during the contract period, the market-value adjustment will be positive and may add to the surrender value of the contract. However, if interest rates increased over that period, the market-value adjustment will be negative, which would increase the contract’s surrender charge. The effect of the market value adjustment is to shift some of the investment risk to the owner.

Guaranteed Lifetime Withdrawal Benefit

This is a rider on a variable annuity that allows minimum withdrawals from the invested amount without having to annuitize the investment. The guaranteed lifetime withdrawal benefit normally requires a fee, but it ensures that the income benefit will be paid for life without actually annuitizing the contract.

Taxation of Annuities

Annuity   benefit payments are a combination of principal and interest. Accordingly, they are taxed in a manner
consistent with other types of income. The portion of the benefit payments that represents a return of principal
(i.e., the contributions made by the annuitant) are not taxed. However, the interest  earned  on  the
declining  principal  is taxed as ordinary income. The result is a tax-free return of the annuitant's investment
and the taxing of the balance.

Though a detailed discussion of how to compute the taxable portion of an annuity payment is beyond the scope
of this text, the basics are not difficult to understand. A simple formula called the exclusion ratio is used to
determine the amount of annual annuity income exempt from federal income taxes. The formula is the
investment in the contract divided by expected return.

The owner's investment (cost basis) in the contract is the amount of money paid into the annuity (the premium). The expected return is the annual guaranteed benefit the annuitant receives multiplied by the number of years of the annuitant's life expectancy. The resulting ratio is applied to the benefit payments, allowing the annuitant to exclude
from income a like-percentage from income tax.

Deferred annuities accumulate interest earnings on a tax-deferred basis. While no taxes are imposed on the
annuity during the accumulation phase, taxes are imposed when the contract begins to pay its benefits. To
discourage the use of deferred annuities as short-term investments, the Internal Revenue Code imposes a
penalty (as well as taxes) on early withdrawals and loans from annuities. Partial withdrawals are treated
first as earnings income and are thus taxable as ordinary income.  Only after all earnings have been taxed are
withdrawals considered a return of principal. Furthermore, a 10% penalty tax is imposed on withdrawals
from a deferred annuity before age 59 1/2. Withdrawals after age 59 1/2 are not subject to the 10% penalty
tax, but they are still taxable as ordinary income.

►The nonforfeiture value of an annuity prior to annuitization is all premiums paid, plus interest, minus any
withdrawals and surrender charges

► If the annuitant dies before the annuity start date, the beneficiary receives the premiums paid plus interest earned

1035 Contract Exchanges

As discussed earlier, Section 1035 of the Internal Revenue Code provides for tax-free exchanges of certain
kinds of financial products, including annuity contracts.  Recall that no gain will be recognized (meaning no
gain will be taxed) if an annuity contract is exchanged for another annuity contract. The same applies when a
life insurance or endowment policy is exchanged for an annuity contract. An annuity contract cannot be
exchanged tax-free for a life insurance contract. This is not an acceptable exchange under Section 1035.

Annuities have a variety of uses. They are suited to a variety of circumstances that require a large sum of money
to be converted into a series of payments over a set time, particularly a lifetime. Next, we will look at some of
the common uses of annuities.

Individual Uses

The principal use of an annuity is to provide income for retirement. The structured, guaranteed life income provided
by annuities for retirement purposes is the primary reason annuities are so popular. Many individuals, especially
those in retirement, may be reluctant to use the principal of their savings fearing it may become depleted. However,
if they choose to conserve the principal, they run the risk of never deriving any benefit from it at all and ultimately
are obliged to pass it on to others at their deaths.

An annuity is designed to liquidate principal, but in a structured, systematic way that guarantees it will last a lifetime.
Besides being able to guarantee a lifetime income, annuities make excellent retirement products because they are
conservative in nature, reliable, and flexible enough to meet nearly all needs. As accumulation vehicles, they offer
safety of principal, tax deferral, diversification, competitive yields (enhanced by tax deferral), and liquidity. As
distribution vehicles, they offer a variety of payout options, which can be structured to conform to certain payment
amounts or certain payment periods. They can cover one life or two. They can be arranged so that a beneficiary
will receive a benefit if the annuitant dies before receiving the full annuity principal.

While annuities are designed to create and accumulate income for retirement, they can be used for other purposes
as well. For example, they can be used to create and accumulate funds for a college education. Annuities serve a
variety of purposes for which a stream of income is needed for a few years or a lifetime.

 

Qualified Annuity Plans

A qualified plan is a tax-deferred arrangement established by an employer to provide retirement benefits for
employees. The plan is qualified because of having met government requirements. A qualified annuity is an
annuity purchased as part of a tax-qualified individual or employer-sponsored retirement plan, such as an
individual retirement account (IRA).

A tax-sheltered annuity, or TSA, is a special type of annuity plan reserved for nonprofit organizations and
their employees. It's also known as a 403(b) plan or a 501(c) (3) plan because it was made possible by
those sections of the Tax Code.  For many years, the federal government, through its tax laws, has
encouraged specified nonprofit charitable, educational, and religious organizations to set aside
funds for their employees' retirement. Regardless of whether the money is actually set aside by the
employers for the employees of such organizations or the funds are contributed by the employees through
a reduction in salary, such funds may be placed in TSAs and can be excluded from the employees' current
taxable income.

Upon retirement, payments received by employees from the accumulated savings in tax-sheltered annuities
are treated as ordinary income. However, as the total annual income of the employees is likely to be less
after retirement, the tax to be paid by such retirees is likely to be less than while they were working.
Furthermore, the benefits can be spread out over a specified period of time or over the remaining lifetime
of the employee. This allows the amount of tax owed on the benefits in any one year to be generally small.
In  addition  to  TSAs  and  IRAs,  annuities  are  an  acceptable  funding mechanism for other qualified
plans, including pensions and 40l (k) plans.

 

Structured Settlements

Annuities are also used to distribute funds from the settlement of lawsuits or the winnings of lotteries and other
contests. Such arrangements are called structured settlements. Court settlements of lawsuits often require the
payment of large sums of money throughout the rest of the life of the injured party. Annuities are perfect vehicles
for these settlements because they can be tailored to meet the needs of the claimant. Annuities are also suited for
distributing the large awards people win in state lotteries. These awards are usually paid out over a period of several
years, usually 10 or 20 years. Because of the extended payout period, the state can advertise large awards and then
provide for the distribution of the award by purchasing a structured settlement from an insurance company at a
discount. The state can get the discounted price because a one million dollar award distributed over a 20-year
period is not worth one million dollars today. Trends indicate that significant growth can be expected from
both these markets for annuities.

Annuity Investments and Senior Citizens

State Legislatures have established standards and procedures for recommendations made to senior consumers
relating to annuities. This law applies to any recommendation to purchase or exchange a fixed or variable annuity
whether the product is classified as an individual or group annuity. A senior consumer is any person age 65 or older.
In cases of a joint purchase by more than one party, a purchaser is a senior consumer if any one party is age 65 or
older. An agent must have an objectively reasonable basis for believing that the recommendation is suitable for the
senior based upon the facts disclosed regarding the senior's investments, other insurance products, and the senior's
financial situation. An agent is required to make reasonable efforts to obtain information concerning the
senior's financial status, tax status, and risk tolerance, among other specified information relevant to
determining suitability. An agent is not responsible for any transaction wherein a consumer refuses to provide
relevant information required by the agent, fails to provide accurate or complete information, or decides to enter
into a transaction that is not based on the agent's recommendation.  However, by law, the agent must make all
reasonable efforts to obtain the consumer's age. If the consumer refuses to provide relevant information requested
by the agent, the agent must obtain a signed verification from the consumer that the consumer has refused to
provide the requested information and may be limiting projections regarding the suitability of the sale.

Agents are required to maintain procedures that are reasonably designed to detect or prevent violations
of this law. Agents are also required to maintain records relating to such transactions for five years. The insurer
may maintain these records on behalf of the agent.