Annuities (chapter 5)
Owner
The purchaser of the annuity contract, but not necessarily the one who receives the benefits.
Nonforfeiture
a deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuization (100% of the premium paid, less any prior withdrawals and related surrender chargers)
Multiple Life Annuities
cover TWO or more lives.
Accumulation Period (pay-in period)
is the period of time over which the owner makes payments (premiums) into an annuity. It is the period of time during which the payments earn interest on a tax-deferred basis.
In contrast with life contingency benefit payment options, annuities certain are _____ that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.
short-term annuities
The owner of the annuity has all of the rights
such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be ca corporation, trust, or other legal entity.
What is the principal use of annuities?
to provide income for retirement
Single Life Annuities
cover ONE LIFE and annuity payments are made with reference to one life only. Contributions can be made with a single premium or on a periodic premium bases with subsequent values accumulation until the contract is annuitized.
A _____ to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation
disadvantage
What are Life Contingency Options?
1. Pure life 2. Life with Guaranteed Minimum
Annuity Products-Investment Options
Annuities may be classified as fixed or variable based on how the premium payments are invested.
Surrender Chargers
The purple of the surrender charge is to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity
Does the indexed annuity have a guaranteed minimum interest rate?
yes
What are 3 characteristics of variable annuities>
1. underlying investment 2. interest rate 3. license requirements
Annuities DO NOT pay a _____ upon the death of the annuitant. The payments STOP upon the death of the annuitant. Annuities use mortality tables, but these tables reflect a longer life expectancy that the mortality tables used for life insurance. Mortality tables indicate the number of individuals within a specified group )male, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age.
face amount
In fixed annuities, the insurer bears the investment risk. Future interest rates actually paid by an insurer are based upon the performance of the insurance company. However, the rate may not drop below a policy's _____.
guaranteed minimum (typically 3%)
Retirement annuities may offer a _____ option to the annuitant. With this option, the annuitant can withdraw a maximum percentage of his/her investment annually until the initial investment has been recovered. This option protects the annuitant against investment losses.
guaranteed minimum withdrawal benefit
Single Premium Immediate Annuity
is one that is purchased with a single lump sum payment and provides income payments that start within 1 year from the date of the purchase. Typically, an immediate annuity will make the first payment as early as 1 month from the purchase date
Equity Indexed Annuities are _____ risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.
less
fixed-amount installments
the annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. This options pays a specific amount until funds are exhausted, whether or not the annuitant is living.
Installment refund option
when the annuitant dies, the annuitant's beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.
Fixed Annuity provides the following features:
1. guaranteed minimum rate of interest to be credited to the purchase payments 2. income (annuity) payments that do not vary from one payment to the next 3. the insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant
License Requirements
a variable annuity is considered SECURITY and is regulated by the securities exchange commissions in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be property registered with FINRA.
During the _____ phase, the insurer will invest the principal or accumulation and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher. The _____ rate is the LOWEST rate that the principal contractually earn.
accumulation minimum
An annuitant whose life expectancy is longer will have smaller income installments. For example:
all other factors being equal., a 65 year old male will have higher annuity income payments than a 54 year old male or than a 65 year old female
Education Funds
annuities can be used to accumulate funds for college education. An annuity can provide saving on a tax-deferred basis for the education expenses of the annuitant.
What is the difference between cash refund and installment refund?
cash refund is lump-simm payment
What is the general account mostly comprised of?
conservative investment like bonds. These investments are secure enough to allow the insurance company to guarantee a specified create of interest, as well as assure the future income payments that the annuity will provide.
In a lump-sum settlement a person may purchase a single premium immediate annuity which will do what?
convert lump sum into a series of periodic payments, providing a stream of income for the annuitant
How may an annuity be used?
for any accumulation of cash or simply to liquidate an estate
Fixed annuity premiums are deposited into the life insurance company's _____.
general account
Because of the various uses of annuities, agents should always assess _____
how well a recommended product will meet the applicant's needs and resources- the SUITABILITY of a product.
Qualified retirements annuities can be _____ (such as individual retirement accounts- IRAs) and _____ (such as tax-sheltered annuity - TSA or profit sharing pension plans).
individual group
Interest Rate
issuing insurance company does not guarantee a minima interest rate.
Now distributions can be used to pay for _____care premiums and in many cases, eliminate the taxes on the annuity gains. As a result, many insurers now offer a hybrid annuity with a long-term care feature. These policies provide for income, long-term care, or both.
long-term
With _____, also known as life-only or straight life, this payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs).
pure life
Upon annuitilization, the accumulation units are covered to _____. The income is then paid to the annuitant based on the value of the annuity units. The number of annuity units received remains level, but the unit values will fluctuate until actually paid to the annuitant.
annuity units
Indexed (or equity indexed) annuities
are fixed annuities that invest on a relatively aggressive basis to aim for higher returns.
Deferred Annuity
is an annuity that either is purchased with a single lump sum (single premium defer annuities) or is purchased through periodic payments (flexible premium deferred annuities). Deferred annuities are unique in that they grow tax deferred. Under a deferred annuity, the income payments begin sometime after one year from the date of purchase (10 years, 20 years, at age 65).
Annuitant
the person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but the ANNUITANT MUST BE A NATURAL PERSON.
With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called _____
level benefit payment amount
Underlying investment
the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio and is not subject to the restrictions that are applicable to the insurer's own general account.
The annuity income amount is based upon the following:
1. the amount of premium paid or cash value accumulated 2. the frequency of the payment 3. the interest rate 4. the annuitant's age and gender
What is an example of a surrender charge?
Assume that the annuity owner paid $700 in premium, which accumulated a total $35 of interest, and a surrender charge is $70. If the annuity is surrendered prematurely, what will the annuity value be at surrender? The answer is $665. ($700 premium + $35 interest) - $70 surrender charge = $665 value of the annuity
The annuity period (annuitization, liquidation period or pay-out period)
is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter.
The _____ annuity will pay a specific amount for the remainder of the annuitant's life.
life
Level Benefit Payment Amount During the _____ phase of a fixed annuity, the amount of benefit is also guaranteed. With the fixed payment in times of inflation, the benefit will have LESS purchasing power and in time of deflation that benefit payment will have MORE purchasing power
payout
If the annuity is surrendered in the 8th year or after there would be NO further surrender charge. At surrender, the owner gets the _____
premium, plus interest (the value of the annuity), minus the surrender charge.
This option _____ for an individual annuitant. Under this option, while the annuity payments are guaranteed for the lifetime of the annuitant, there is no guarantee that all the proceeds will be fully paid out.
provides the highest monthly benefits
Consumer Protection It is a producer's responsibility to evaluate the consumers suitability information, which includes the following:
1. age 2. income 3. financial situation and financial experience 4. needs and objectives 5. intended use of annuity 6. risk tolerance 7. tax status
Death Benefits
If ann annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either THE CASH or THE TOTAL PREMIUMS PAID, whichever is greater. If a beneficiary is not named, the benefit will be paid to the annuitant's estate.
Lump-sum Settlements
annuities may serve as an ideal financial vehicle for someone who comes into a large lump sum of money, such as inheritance, lottery, award of damages from a lawsuit, proceeds from a sale of business, or a lump-sum distribution from a qualified pension plan.
Life with period Certain
is another life contingency payout option. Under this option, the annuity payments are guaranteed for the lifetime of the annuitant and for a specified period of time for the beneficiary. For example: A life income with a 20 year period certain option would provide the annuitant with an income while he is living (for the entire life). If however, the annuitant dies shortly after payment begin, the payment will be continued to a beneficiary for the remained of the period (for a total of 20 year).
Beneficiary
The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity is paid out.
Annuity
is a contract that provides income for a specified period of years or for life. An annuity protects a person against outliving his/her money. Annuities are NOT life insurance but rather a vehicle for the accumulation of money and the liquidation of an estate. Annuities are marketed by life insurance companies. Licensed life insurance agents are authorized to sell some types of annuities.
Joint LIfe
is a payout arrangement where 2 or more annuitants a receive payments until the first death among the annuitant and then payments stop.
Variable Annuity
serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.
Long-Term Care Needs
under the pension protection act of 2006, annuitants are allowed to transfer money from an annuity to pay for long-term care insurance premiums, tax free.
Cash refund option
when the annuitant dies, the annuitant's beneficiary receives a refund of the principal or the original amount paid into the annuity minus benefit payments already made to the annuitant. This guarantees the return of the amount to purchase the annuity but it does not guarantee to pay any interest.
Insurance aspects of annuities
Annuities are NOT life insurance; they DO NOT pay a face amount upon the death of the annuitant. In most cases, the payment phase stops upon the death of the annuitant. Annuities do use a mortality table but this table reflects a longer life expectancy than the table used in life insurance. A deferred annuity does grow tax-deferred.
Since annuities are a popular mean to provide retirement income, they are often used to fund _____, which means they meet the IRS guidelines to receive favorable tax treatment
qualified retirement plans
The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500. For example:
Generally, insurance companies reserve the initial returns for themselves but pay the excess to the annuitant. For example, the company may keep the first 4% earned for itself, but any accumulation in execs of 4Q% discredited to the annuitant's account. So if the interest is earned is 12%, the company keeps 4% and credits the clients account with 8%.
fixed-period installments
the annuitant selects the time period for the benefits and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays f for a specific amount of time only, whether to not the annuitant is living
In a single Premium Deferred Annuity (SPDA)
the annuity is purchased with a single payment, but the benefit is not paid until after one year or more has elapsed
Under the _____ settlement option, if the annuitant dies before the principal amount has bee paid out, the remainder of the principal amount will be refunded to the beneficiary. This option is also called _____.
life with guaranteed minimum refund life- guarantees that the entire principal amount will be paid out.
Deferred Annuities are of often used to accumulate funds for _____. In a deferred annuity the owner will receive the _____ or the _____, whichever is higher. If a deferred annuity is surrendered prior to age 591/2 in come tax must be paid on the gain and a 10% penalty will be imposed on the taxable portion.
retirement current interest rate guaranteed interest rate
Flexible Premium Deferred Annuity (FPDA)
the annuity is purchased with multiple payments that can vary from year to year (a portion each paycheck) and the benefit payments begin sometime after one year from the date of purchase (payouts start at age 65)
Waiver
Annuity contracts provide for a waiver of surrender chargers if the annuitant is confined to a long-term care facility for at least 30 days.
What are the two types of refund life annuities?
1. cash refund 2. installment refund
What are the most common multiple life annuities?
1. joint life 2. joint and survivor
Bail-Out Provision
A bail out provision is found in some annuity contracts. It allows the contract holder, in the event that interest rates drop a specified amount within a specified time frame, to surrender the contract without charge.
Variable Premiums purchase _____ in the find, which is similar to buying shares in a mutual fund. Accumulation units represent ownership interest in separate account.
accumulation units