Annuities

exclusion ratio

= Total Investment / Total Amount Expected to be paid out over the life of the contracts

multiple life annuties

Cover 2 or more lives. The most common are joint life, and joint and survivor.

annuity

Is a contract that provides income for a specified period of years, or for life.

joint life

Is a payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop.

market value adjusted annuity (MVA)

Is a single-premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years.

interest rate

Issuing insurance company does not guarantee a minimum _______ for variable annuities.

pure life option

The annuity payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs). This option provides the highest monthly benefits for an individual annuitant. There is no guarantee that all the proceeds will be fully paid out.

Trust Fund Plan

The employer usually retains a consulting actuary to determine the contributions necessary to fund the benefits. The employer pays the trustee the contributions that are held and invested. Upon retirement, the trustee pays the benefits to the employee according to the terms.

Underlying Investment

The payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account.

Value of the Annuity

= Premium + Interest - Surrender Charge

security

A variable annuity is considered a _______ and is regulated by the SEC in addition to state insurance regulations.

Individual Retirement Accounts (IRAs)

An annuity may be used to accumulate retirement funds on a tax-deferred basis in an ________, subject to ____ maximum contributions.

indexed annuities

Are fixed annuities that invest on a relatively aggressive basis to aim for higher returns. The current interest rate that is actually credited is often tied to a familiar index like the S&P 500.

annuities certain

Are short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.

suitability

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 ______ of a product.

Group Permanent Plans

Consisting of cash-value life insurance written on a group basis (when group permanent life insurance funds a pension plan, the amount of life insurance is usually set at $1,000 per $10 of annuity benefits)

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 basis with subsequent values accumulating until the contract is annuitized.

retirement income

Deferred annuities are a popular means of providing _________ because they can provide income that cannot be outlived.

Flexible Premium Deferred Annuity (FPDA)

Deferred annuity that is funded through period payments. Periodic payments can vary from year to year.

Single Premium Deferred Annuity (SPDA)

Deferred annuity that is funded with a single lump sum.

general account

Fixed annuity premiums are deposited here. Is compromised mostly of conservative investments like bonds.

guaranteed minimum

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 ________ (typically 3%).

refund life option

If the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. It guarantees that the entire principal amount will be paid out.

current

In a MVA, penalties for a premature surrender depend upon ______ interest rates at the time of surrender.

mortality tables

Indicate the number of individuals within a specified group starting at a certain age, who are expected to be alive at a succeeding age.

Individual Policies

Individual cash-vale life insurance and annuity policies (often used by smaller employers as the funding device).

joint and surivor

Is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive. Although it is possible for the surviving recipient(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipients will receive a reduced payment after the first recipient dies.

deferred annuity

Is an annuity in which the income payments begin sometime after one year from the date of purchase. Can be funded with either a single lump sum or through periodic payments.

Single Premium Immediate Annuity (SPIA)

Is one that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase. Typically make the first payment as early as 1 month from the purchase date.

accumulation period

Is the period of time over which the owner makes payments (premiums) into an annuity. Payments earn interest on a tax-deferred basis.

annuity 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.

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.

qualified retirement plans

Since annuities are a popular means to provide retirement income, they are often used to fund ______________, which means they meet the IRS guidelines to receive favorable tax treatment.

annuity payment options

Specify how annuity funds are to be paid out.

Group Deferred Annuities

The annual contributions are used to purchase a deferred annuity for each employee each year.

fixed annuity

The annuitant knows the exact amount of each payment received from the annuity during the annuity period. A disadvantage is that the purchasing power that they afford may be eroded over time due to inflation.

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.

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.

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 benefits is paid out.

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. Must be a natural person.

retirement

The principal use of an annuity is to provide income for _______; however, an annuity may be used for any accumulation of cash or simply to liquidate an estate.

owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. Has all of the rights, such as naming the beneficiary and surrendering the annuity. May be a corporation, trust, or other legal entity.

surrender charge

The purpose is to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity. Is levied against the cash value, and is generally a percentage that reduces over time.

life with period certain 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.

annuity units

Upon annuitization, the accumulation units are converted to ______. The income is then paid to the annuitant based on the value of the ______. The number of _______ received remains level, but the unit values will fluctuate until actually paid out to the annuitant.

tax-deferred

Values that accumulate within an annuity contract are not subject to current income taxation. However, upon annuitization or surrender, values in excess of the owner's basis (contributions) are taxable as ordinary income.

accumulation units

Variable premiums purchase _____ in the fund, which is similar to buying shares in a Mutual Fund. Represent ownership interest in the separate account.

cash refund

When the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant. Does not guarantee to pay any interest.

installment refund

When the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.