Annuities - Unit 9

Factors in Determining a Life Annuity Payment Amount

-Annuitant's Age -Annuitant's Gender -Payment Guarantee -Assumed Interest Rate

Pay-in Phase

Accumulation Period. When principal and periodic deposits grow with credited interest.

Annuitant's Age

Age is used to determine life expectancy, indicating how long payments will have to be made. Younger the annuitant, the lower the payment amount.

Level Benefit Payment Amount

Fixed annuities provide a level payment amount. Annuitants can count on getting a specified $ amount of income on a regular basis. Fixed payment can lose purchasing power during periods of inflation and over a number of years, fixed benefit may become inadequate to live on even though the dollar amount is the same.

Separate Account Assets

Insurers are not allowed to bear the risk of variable annuities. Investment losses could impair insurer's ability to maintain the value of their fixed annuities and other guaranteed products. Assets supporting variable annuities are kept in a separate account where the investment risk is borne by the annuity owner. Owner makes the various investment choices called sub-accounts, which resemble mutual funds.

Temporary Annuities

May not last as long as person lives, no guarantee.

Contract Owner

Person or couple who buy the annuity and has certain rights. Contract owner has a right to: -Name or change the annuitant -Name or change the beneficiary; -Choose the payout option -Add more money or take withdrawals; and -Surrender or terminate the agreement.

Assumed Interest Rate

The insurer assumes that it will earn some rate of interest on the funds used to buy the annuity. The lower the assumed interest rate, the lower the payment.

Annuity Units

When annuity period begins, accumulation units are converted to annuity units. From then on, annuity units stay the same throughout the annuity period; however value of an annuity unit varies with the value of the investments in the separate account. If value of separate account goes up, amount of annuity payment increases. If it goes down, the annuity payment decreases.

Payment Guarantee

A refund option will lower the payment. With a period certain option, the longer the period, the lower the payment.

Equity-Indexed Annuity (EIAs)

A type of tax-deferred annuity whose credited interest is linked to an equity index - typically the S&P 500. No securities license required.

Life Only Annuity Option

AKA Pure life, straight life, or life - no refund. Payments stop when annuitant dies - regardless of when that occurs. one month or 20 years. Pays the highest monthly income amount because there are no other contingencies and only the annuitant's life expectancy was considered to determine the amount of the monthly pay out. Annuitant may die before their life expectancy and total payout they received was much less than the total amount paid into the contract.

Accumulation Units

Accumulated values of variable annuities are expressed as accumulation units, similar to shares purchased in a mutual fund. Value of an accumulation unit is found by dividing the total value of the separate account by the number of existing accumulation units.

Immediate Annuity

After paying a lump-sum premium, an immediate annuity or single-premium annuity (SPIA) provides an individual with an income that may begin as soon as a month after purchase or may be delayed for up to one year. Funds in the contract accumulate on a tax-deferred basis. When payments begin, portion of each payment that is attributed to interest is subject to taxes; the rest is treated as a return as a return of principal and, therefore is tax free.

Life with Period Certain

Also pays an income for as long as the annuitant is alive. In addition, annuitant selects a payment period, typically 5, 10, or 20 years, and payments are guaranteed to be made for at least that number of years.

Employer-Sponsored Retirement Plans

Annuities are designed to accept employer contributions made to the retirement plans set up for their employees. The payout options can provide a lifetime of income for the employee and their spouses.

Premium Payment Options

Deferred annuities can be purchased with: -Single Premium (Single Premium Deferred Annuity (SPDA) -Ongoing Premium Payments (Periodic or Flexible Premium Deferred Annuities PPDA or FPDA). Payment options similar to life insurance: monthly, quarterly, and so forth. Emphasis is on accumulation of money for future use.

Death Benefit

Deferred annuity death benefit does not provide a surviving family a life insurance policy. Rather the accumulated contract value is paid to a selected beneficiary if annuity owner dies during the accumulation period. Amount paid as a death benefit is the greater of: -accumulated value of the annuity; or -Total premiums paid to that point, minus any withdrawals. -Paid to estate if no beneficiary has been named.

Pay-Out Phase

Distribution phase. Called annuitization period. Contract generates an income stream from its accumulated value.

Group Annuities

Employer-sponsored retirement plans may be funded with group annuities. Retirement plans owns the group annuity, and the retirement plan document describes the benefits to which employees are entitled. Distributions determined by employer.

General Account

Fixed annuities are supported by the insurer's general account. Investment risk is borne by insurer. Assets in the general account are conservatively invested typically in debt securities and other fixed-rate investments that provide a steady return for many years.

Fixed Annuity

Guaranteed against loss. Aside from surrender charges, the value of a fixed annuity will never be less than the amount paid into the contract.

Variable Annuities

Have the potential to keep pace with inflation. Supported by investments (stocks and bonds). No guarantee stocks will always rise faster than cost of living. Have investment risk because value are not guaranteed against loss.

Surrender Period

In order to avoid additional fees from insurance company for early withdrawal, there is a waiting period called the surrender period. May be as short as two years, up to 12 years. Surrender charge applies if funds are withdrawn during that time. Stated in the contract and commonly start at 10% declining each year. EX: Surrender period of 10 years, funds withdrawn in Year 1 will be charged a 10% fee, in Year 2 9%, Year 3, 8% and so on. For example: $10,000 annuity contract has a schedule of surrender charges beginning with 7% in the first year and declining by 1% each year thereafter. 10% of contract value can be withdrawn each year free of surrender charges. If the contract owner decides to withdraw $5,000, 10% of the $10,000 contract value, $1,000 is free of surrender charge. A 7% surrender charge, or $280, would apply on the other $4,000 withdrawn.

Annuity

Insurance creates an estate, annuities liquidate estates. Paid to annuity contract owner. If contract is annuitized, it will pay an income to the annuitant, Regardless of how long they live. Annuities protect people from living too long. Can be used to: -Accumulate funds over a period of time. -Evenly distribute a fund over a period of time; or -both two phases: -Pay-in -Pay-out -Cannot be used for both phases at the same time and once the contract is annuitized, no more contributions can be made. **Used while living. Premium used to accumulate money or provide an income while living.

Annuitant's Gender

Life expectancy statistics show that as group, women live longer than men. Women generally receive lower payments than men of the same age.

Beneficiary (Annuity)

No voice in the control or management of the annuity and only benefits upon the death of the contract owner.

Annuitization Period

Pay-out phase of the contract. Money converted into series of regular income payments that can continue for life or stated period of time. Accumulated value no longer belongs to the annuity owner: -No additional premium payments can be made. -no withdrawals can be taken -Annuity cannot be surrendered; and -owner cannot change the contract.

Life Annuities

Payment that is guaranteed to last for at least as long as the annuitant lives.

Single Premium Immediate Annuity (SPIA)

Pays a monthly income immediately. The first payment may begin as soon as a month after purchase or may be delayed for up to one year.

Joint Life Annuity Option

Pays income until the death of the first two or more annuitants. While the monthly payment is greater than other joint annuities, it is not considered suitable as a joint annuity because the survivor is left without income.

Insurer (Annuity)

Representing the insurer may be a local bank, financial planner, brokerage firm, or an agent/producer.

Annuitant (insured)

Similar to an insured in a life insurance policy. Chosen by the owner to receive income payments during the annuitization period. Contract owner and annuitant are frequently the same person. Must be an individual - a natural person - cannot be a corp or trust.

Immediate vs. Deferred Annuity

Structured to provide current income and a deferred contract's payout is a specific date in the future.

Withdrawal Penalties and Surrender Charges

Taxed different than annuitized payments. Taken from an annuity, the earnings or growth portion, is taxed as ordinary income. Funds continue to be taxed at ordinary income tax rates until account value is reduced to original investment amount. EX: purchased a $20,000 annuity and it grows to $45,000, first $25,000 withdrawn is fully taxable. *Additionally, if withdrawals are made before 59 1/2 years old, there is an additional 10% penalty on taxable earnings.

Regulation as Securities

Variable annuities are regulated as insurance products and are also regulated as securities. this is called dual regulation. To sell variable annuities, a producer must have a life insurance license, a special variable annuities certification (certain states), fed & state securities registration. Federal Securities Law says insurers must register their separate accounts with the Securities and Exchange Commission and comply with certain requirements for selling securities. Requires producers to provide customers with a prospectus: a document containing a detailed description of the product being offered - before beginning a sales presentation.

Accumulation Period

When an annuity is being funded, before a payout begins. Life insurance companies issue these contracts and money paid in is called a premium. Interest is credited on the accumulated value in the contract and the accumulated contract value grows beyond the contract owners deposits. During this period: -Make additional premium payments or deposits. -Take withdrawals from the accumulated value. -Surrender annuity for its cash value -Make other changes to the contract -Interest grows tax deferred

Parties Involved

-Contract Owner -Annuitant -Beneficiary; and -Insurer

Payout Options

-Life Annuities -Temporary Annuities

Personal Uses for Annuities

-Lifetime income at retirement. (tax deferred investment savings and gains providing income for future in form of regular distributions. Can help have a guaranteed lifetime income that is consistent, safe, and secure. -Accumulating Funds Prior to Retirement: Earnings on accumulated values are taxed deferred until distributions begin. Recipient must pay ordinary income rate on any interest or investment earnings. -Funding Individual Retirement Accounts (IRAs): Flexible premium annuities are designed to be used for funding IRAs; a tax-favored retirement savings plans set up through a bank, securities firm, or insurance company. -Accumulating Education Funds: Annuities can be used for long-term funding need like the accumulation of money that will be needed to pay for a college education.

Parties to an Annuity

1. Contract Owner: -Names the annuitant -Names the beneficiary -Can withdraw money -Can end the contract 2. Annuitant (insured) -Receives the income -Can be more than one person 3. Beneficiary -Receives the accumulation value if owner dies -May receive income payments if annuitant (insured) dies sooner than expected. 4. Insurer

Deferred Annuities

Do not start an immediate steady income stream. Annuity owner chooses the premium amount and the frequency of premium payments. Accumulated funds may be withdrawn at any time, subject to a possible surrender charge. No required to annuitize the contract.

Interest Rate Guarantees

During fixed annuity's accumulation period, accumulated values earn a current rate of interest that is competitive with prevailing rates on other interest-bearing investments. Generally this rate is determined at the beginning of the year and guaranteed for the year. Will never be less than a guaranteed minimum rate that is stated in the contract.

Market Value Adjusted Annuities

Fixed annuity with market value adjustment feature, also called modified guaranteed annuity. Offers the flexibility of various guarantee terms combined with the potential for higher interest rates than traditional fixed investments. Guarantee terms range from shorter term to longer term and typically credit higher interest rates for longer-term commitments. A guaranteed fixed rate is declared for the length of each guarantee term. Rate is valid only if investment is held until maturity. May be split amongst several guarantee terms to match various time horizons when funds may need to be accessed. Withdrawals made before maturity of the guarantee term may be subject to a contingent deferred sales charge (CDSC) and/or a market value adjustment (MVA). Typically, the length of the CDSC schedule matches the duration of the guarantee term. -No securities license needed - not a variable product.

Annuity Products

Four Basic types of Annuity. -Fixed -Variable -Equity-indexed; and -Market Value adjusted

Life with Refund Annuity Option

If annuitant dies, the total payments received are less than the amount paid for annuity, difference is paid to the beneficiary. Money paid either as a: -lump sum cash refund -continuation of payments in the same amount as was being paid to annuitant - installment refund

Joint-Life-and-Survivor

Insurer promises to make payments until the last survivor of two annuitants dies. EX: Married couple and the husband died first, payments would continue to the spouse for the rest of her life. Can choose for cont payments in the same amount for survivor or in a lesser amount such as two-thirds or one-half their monthly pay out.