annuities

two ways deferred annuities can be funded

- single lump-sum -periodic payments

license requirement characteristic of variable

-considered a security and regulated by the securities exchange commission (SEC) and state insurance regulations -agent must hold securities license and a life insurance license registered with FINRA

single life annutiy

-covers one life -annuity payments with reference to one life -contributions with single premium or periodic premium

what does the fixed annuity provide?

-guaranteed minimum rate of interest to be credited to the purchase payments -income payments that do not vary from one payment to the next -insurance company guarantees that specified dollar amount for each payment and the length of the period payments as determined by the settlement option chosen by the annuitant

underlying investment characteristic of variable

-payments made by annuitant are invested in the insurer's separate account, not general -separate account id not apart of insurance company's portfolio

how are annuities classified?

-premium payment method: single premium vs. periodic -when income payments begin: immediate vs. deferred -how premiums are invested: fixed vs. variable -disposing of proceeds: pure life, annuity certain, or life refund annuity

what is the annuity income amount based on?

-the amount of premium paid or cash value accumulated -frequency of the payment -interest rate -annuitant's age and gender

what penalty will be applied for early withdrawals

10%

deferred annuity

Income payments begin sometime after one year from the date of purchase

Does the owner and annuitant have to be the same person?

No

immediate annuity

One that is purchased with a single lump sum payment and provides income payments that start within one year from the date of purchase

cash refund

When the annuitant dies, the beneficiary receives a lump sum refund of the principal minus benefit payments already made to the annuitant

how is an immediate annuity purchased?

With a single premium

Natural Person

a human being

What must the annuitant be?

a natural person

what do mortality tables indicate?

a number of individuals within a specified group (males, females, nonsmokers, smokers) starting at a certain age, who are expected to be alive at a succeeding age

Suitability

a requirement to determine if an insurance product or an investment is appropriate for a particular customer

Qualified Plan

a retirement plan that meets the IRS guidelines for receiving favorable tax treatment

how are surrender charges levied?

against the cash value

periodic - flexible premium

amount and frequency of each installment varies

what does the annuity pay to

annuitant

periodic - level premium

annuitant/owner pays a fixed installment

what does the owner pay into?

annuity

what happens to equity indexed annuities at the end of the contract term

annuity will be credited with the greater of the guaranteed minimum value or current value

what is the earliest you can pay an immediate annuity

as early as 1 month from purchase date

two types of refund life annuity

cash refund, installment period

what are general account assets comprised of?

conservative investments like bonds

annuity

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

Liquidation of an Estate

converting a person's net worth into a cash flow

What can an owner be?

corporation, trust, or other legal entity

What happens if a beneficiary is not named?

death benefit will be paid to the annuitant's estate

Life Contingency

dependent upon whether the insured is alive

What do you not do upon the death of the annuitant?

do not pay a face amount upon death

what does cash refund not guarantee

does not guarantee to pay any interest

what makes equity indexed different from fixed annuity

expected to earn higher interest rate

what is the current interest rate often tied to?

familiar indexes, such as the Standard and Poor's 500

what are the two options for annuity investment

fixed and variable based on how premium payments are invested

equity indexed annuities

fixed annuities that invest on aggressive basis to aim for higher returns

how is underlying investment different between fixed and variable?

fixed: general account (safe, conservative) variable: separate account (equities, no guarantee)

how are expense different between fixed and variable

fixed: guaranteed variable: guaranteed

how is income payment different between fixed and variable

fixed: guaranteed variable: no guarantee

how is interest rate different between fixed and variable

fixed: guaranteed by insurer variable: no guarantee

how is license needed different between fixed and variable

fixed: life insurance variable: life insurance and securities

What makes mortality table different for annuities than they use for life insurance?

for annuitants, these tables reflect a longer life expectancy

what does pure life guarantee

for the lifetime of the annuitant is the annuity payments

what does not happen in the accumulation period?

funds are not paid into the annuity

what happens in the annuity period?

funds are paid out to the annuitant

how do variable annuities act with inflation

hedge against it

surrender charges purpose

help compensate the company for loss of the investment value due to early surrender of a deferred annuity

what does a short life expectancy indicate?

higher benefit

what does pure life provide

highest monthly benefits for an individual annuitant

life with guaranteed minimum

if annuitant dies before principal has been paid out the remainder will be paid to beneficiary

two ways benefits begin

immediate annuity deferred annuity

who bears the investment risk in fixed annuities

insurer

what if the interest rate drops below 3%?

insurer is obligated to pay the guaranteed rate amount

what happens if annuitant dies during the accumulation period?

insurer is obligated to return to the beneficiary either the cash value or the total premium paid -whatever is greater

IRS

internal revenue service; a U.S. government agency responsible for collecting taxes, and enforcement of the internal revenue code

how are fixed annuity premiums deposited

into the life insurance company's general account

how will insurer invest in the accumulation period?

invest the accumulation and give the annuitant a guaranteed interest rate based on a minimum rate specified in the annuity or the current interest rate (whatever is higher)

interest rate characteristic of variable

issuing insurance company does not guarantee a minimum interest rate

nonforfeiture

law that stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization

What makes equity indexed differently from variable annuities or mutual funds

less risky

two types of periodic payments

level flexible

what are annuities based on?

life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy

What is an annuity not?

life insurance

what does a longer life expectancy indicate?

lower benefit

minimum rate

lowest the principal can contractually earn

two types of interest rate guarantees

minimum , current

what does a life contingency option entail

paying a specific amount for the remainder of an annuitant's life

pure life

payment ceases at the annuitant's death (no matter how soon annuitization period occurs)

What does an annuity protect?

people from outliving their money

what happens to surrender charges over time

percentage reduces

accumulation period (pay-in-period)

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

beneficiary

person who receives annuity assets (either amount paid into the annuity or the cash value, whatever is greater) if annuitant dies during accumulation period, or to whom the balance of annuity benefits is paid out

annuitant

person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written

what can the interest rate not drop below?

policy's guaranteed minimum (3%)

what is a periodic payment

premiums are paid in installments over a period of time

Owner

purchaser of annuitant contract -not necessarily the one that receives the benefits -has all rights, such as naming a beneficiary and surrendering the annuity

disadvantage of fixed annuity

purchasing power that they afford may be eroded over time due to inflation

what are the two life contingency options

pure life life with guaranteed minimum

what is life with guaranteed minimum also called

refund life

what are the premium payment options?

single (one-time lump-sum payment) periodic

What will annuitants have with a long life expectancy?

smaller income installments

when do income payments from the deferred annuity begin

sometime after 1 year from the purchase date

what does pure life not guarantee

that all proceeds will be fully paid out

what does life with guaranteed minimum guarantee

the entire principal amount will be paid out

pure life annuity has no guarantee that...

the entire principal will be paid out

pure life annuity provides...

the highest monthly benefit

what happens the longer the annuity is deferred

the more flexibility for payment of premiums

what are future interest rates paid by the insurer based on?

the performance of the insurance company's general account

what does the owner get at surrender?

the premium plus the interest rate (value of annuity) minus the surrender charge

what happens with any unpaid annuity benefits following a death

they are taxable when paid to the beneficiary

annuity period (pay-out-period)

time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to an annuitant -can last for lifetime or for a specified period

Annuitization Date

time when the annuity benefit payouts begin

Why does the insurance company want to secure enough investments?

to allow the company to guarantee a specified rate of interest and to assure the future income payments that the annuity will provide

3 main characteristics of variable annuities

underlying investment, interest rate, license requirements

what happens to the premiums accumulation units in the separate fund (variable)

upon annuitization, accumulation is converted to annuity units and then income is paid to the annuitant based on the value of the annuity units -number of units remain level but unit values can fluctuate until paid out

when do most payments stop?

upon the death of the annuitant

installment period

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

Deferred

withheld or postponed until a specified time or event in the future