Annuities

Periodic payments of accumulated funds bests describes what?

An annuity

how long does the annuity period last?

It may last for the lifetime of the annuitant

What is the main difference between immediate and deferred annuities?

When the income payments begin Immediate - within the first year Deferred - sometime after one year

personal uses of annuities are...

for retirement planning to assure that income will be provided to the annuitant

If the annuity owner dies during accumulation stage what will the beneficiary receive?

the greater of the money paid into the annuity or the cash value

An Internal Revenue Code that specifically provides for an individual retirement plan for public school teachers, for example, is a(n)

403(b) Plan (TSA)

What age is there not a 10% penalty for an early withdrawal from an Individual Retirement Account (IRA)?

59 1/2

The relevant information to be obtained in making recommendations to a senior consumer

Producers define the investment objective of their clients, whether it is for longterm growth, taxfree growth, immediate income, safety, etc. Producers need to consider the age and health of the prospective applicant for an annuity. Clients must be advised of the possibility of a variable annuity not doing well and determine whether or not they are financially able to assume the investment risk.

A 403(b) plan commonly referred to as a TSA is available to be used by who

teachers and non-profit organizations

In an annuity, the accumulated money is converted into a stream of income during which time period?

Annuitization period

how are annuities classified

according to when the income payments from the annuity begin, how the money in the annuity grows

Annuitant

insured; policy issued on annuitant's life; must be a natural person

Installments certain

In contrast with life contingency benefit payment options, annuities certain are short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.

Market value adjusted annuities

A market value or market value adusted annuity (MVA), also known as a modified guaranteed annuity (MGA), is a singlepremium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years. In an MVA, penalties for a premature surrender depend upon current interest rates at the time of surrender. The market value adjustment is usually a percentage of the difference between the contracted rate of interest in the annuity and the current rate at surrender. The insurance company requires the annuitant to share in the market risk of changing interest rates, if the annuity is surrendered early.

What product will protect and individual from outliving his or her money?

Annuity

Non-qualified annuities

A non-qualified retirement plan is one in which the contributions are not exempt from taxation. However, increase of the funds during the accumulation period are not taxed until they are actually received.

Can the annuitant be the same person as the annuity owner?

yes, but they don't have to be

What causes a variable annuity benefit to vary?

An annuity's underlying investment

Group annuities

different types: tax sheltered annuity (TSA) A tax sheltered annuity is a retirement plan for certain employees of public schools, employees of certain Code Section 501(c)(3) tax-exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan profit sharing pension plans (contribution plan in which your employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee)

Owner

has all rights to policy (usually annuitant). Can be corporation or trust.

Business uses of annuities are...

used as a vehicle to fund employee retirement plans

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan or the cash value of the plan, whichever is greater

what do annuities provide for annuitants?

Guaranteed income

single premium deferred annuities

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.

What is an annuity period?

The period of time during which accumulated money is converted into income payments

Annuitization period

payments out, to insured

deferred annuities

A deferred annuity is an annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (Single Premium Deferred Annuities SPDAs) or through periodic payments (Flexible Premium Deferred Annuities FPDAs). Periodic payments can vary from year to year. The longer the annuity is deferred, the more flexibility for payment of premiums it allows.

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan and who has earned income

Earned income

Earned income means salary, wages, and commissions, but would not include income from investments, unemployment benefits, income from trust funds, etc.

Beneficiary of an Annuity

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.

Beneficiary

will receive any amount contributed to annuity (plus any gain) if annuitant dies during accumulation period.

immediate annuities (single premium immediate annuity SPIA)

An immediate annuity is one that is purchased with a single, lumpsum payment and provides income payments that start within one year from the date of purchase. Typically, an immediate annuity will make the first payment as early as 1 month from the purchase date. Most commonly, this type of annuity is known as a Single Premium Immediate Annuity (SPIA).

Joint-life payment

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

if a company is starting an annuity and the corporation will the anuitant, who must the person be?

a natural person

individual annuities

individual - IRAs An individual retirement account (IRA) that allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred no capital gains (a profit from the sale of property or of an investment) or dividend income (Distribution of earnings to shareholders that may be in the form of cash,stock, or property) is taxed).

fixed-amount installment payment

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 option pays a specific amount until funds are exhausted, whether or not the annuitant is living.

who is eligible to contribute to an IRA?

a 50 year old school teacher, anyone with earned income that is under 70 1/2 can have an IRA. Unemployment benefits would not be considered "earned income"

Do equity indexed annuities earn higher or lower interest rates than fixed annuities?

higher

Equity index annuities

Indexed (or equity indexed) annuities are fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500. Generally, the 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 excess of 4% is credited to the annuitant's account. So if the interest earned is 12%, the company keeps 4% and credits the client's account with 8%. Equity indexed annuities are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.

Owner of an Annuity

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. 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 a corporation, trust, or other legal entity.

Refund life benefit payment

Under the life with guaranteed minimum settlement 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. This option is also called refund life. It guarantees that the entire principal amount will be paid out. Two types: Cash refund - A lump -sum payment. With the cash refund option in annuities, 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. Installment refund - With the 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-period installment payment

With fixedperiod 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 for a specified amount of time only, whether or not the annuitant is living.

How must a married couple contribute to an IRA?

a married couple who file a joint tax return could contribute the maximum amount into 2 separate accounts, even if only one spouse had earned income; each account contributions cannot exceed a specified amount for individuals in any one year. It is currently $5,500 with a 6% penalty fee for excess amounts contributed. An individual can contribute up to 100% of earned income up to the limit. Must be under 70 1/2 to have an IRA

Are Roth IRA's tax deductible?

No, the contributions made are made with after-tax dollars. Qualified distributions are not income taxable. Contributions can continue past age 70 1/2 and distributions do not have to begin at age 70 1/2

A 25 year old individual wants to take measures now to make sure that after he retires, he will maintain a steady, guaranteed income. What would best help him do this?

An Annuity

Joint and survivor payment

The Joint and survivor arrangement 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. Most commonly, this option is written as "joint and survivor" or "joint and 2/3 survivor," in which the surviving beneficiary receives or 2/3 of what was received when both beneficiaries were alive. This option is commonly selected by a couple in retirement. As with the life income option, there is no guarantee that all the proceeds will be paid out if both beneficiaries die shortly after the installments begin.

When annuity contributions are maintained in the insurer's separate asset account and the annuitant is credited with a certain number of accumulation units to determine the annuity owner's interest in that separate account, the type of contract is?

A variable annuity

fixed annuities

A fixed annuity provides the following features: Guaranteed minimum rate of interest to be credited to the purchase payment(s); Income (annuity) payments that do not vary from one payment to the next; 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. 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. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

The president of a company is starting an annuity and decides that his corporation will be the annuitant, what kind of person must the annuitant be?

a natural person

qualified annuities

A qualified retirement plan is one that conforms to the requirements of federal tax laws and for which the Internal Revenue Service recognizes contributions to the plan as taxdeductible expenses to the employer

Accumulation period

payments in, to insurer

Tax sheltered annuities

A 403(b) plan or a taxsheltered annuity (TSA) is a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems. Contributions can be made by the employer or by the employee through salary reduction and are excluded from the employee's current income. As with any other qualified plan, 403(b) limits employee contributions to a maximum amount that changes annually, adjusted for inflation. The same catchup provisions also apply.

annuity period

The annuity period, also known as the annuitiation period, liuidation period, or payout 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 equity in an equity index annuity is linked to what?

An index like Standard & Poor's 500. Equity indexed annuities are not securities but they invest on a relatively agressive basis to aim for higher returns. Like a fixed annuity, the equity indexed annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500

if a client's employer doesn't offer a company-wide annuity contract, what type of annuity contract could they obtain?

Individual There are two main types of annuity arrangements, group and individual. Group contract can be obtained through an employer. If that is not available an individual plan may be obtained.

Be able to identify the rules regarding the sale to seniors

All insurers, agents and brokers who solicit insurance to insured age 65 or older, owe those insured a duty of honesty, good faith and fair dealing. An annuity should not be sold to a senior if the purpose for purchasing the annuity is to affect MediCal eligibility. Individuals who violate these regulations are subject to the following administrative penalties: $1,000 for the first violation; $5,000 $50,000 for second or subsequent violations. If the Commissioner determines that the licensee's actions may cause significant harm to seniors, the Commissioner may suspend the producer's license. Insurers who violate these rules are liable for an administrative penalty of $10,000 for the first violation, and $30,000-$300,000 for each subsequent violation.

individual retirement annuities (IRAs)

Anyone with earned income who has not attained age 70 1/2 can have an IRA (Individual Retirement Annuity or Account). An individual can contribute 100% of earned income up to a specified amount ($5,500 as of 2013) Married couples can contribute double the amount $11,000 even if only one person earns income but each must maintain a seperate account not exceeding the individual limit of $5,500 in each account. Taxpayers who are age 50 or older are entitled to make additional catchup contributions. Currently, the catchup amount is an additional $1,000 per year. The excess contribution penalty for traditional IRAs is 6%, until withdrawn. IRA contributions must be made in cash in order to be tax-deductible (any form of money such as cash, check or money order) The money invested in the account can be used to buy stocks, bonds, mutual funds or annuities. The money used for IRA contributions cannot be used to purchase life insurance policies or collectibles such as art, antiques or stamps.

In the taxation of a traditional IRA, when are early distributions subject to a penalty?

Anytime EXCEPT, The IRS has made exceptions and does not apply the 10% penalty to certain premature distributions made necessary because of death or disability, medical expenses that exceed 7.5% of adjusted gross income, medical insurance premiums for certain unemployed, funds to purchase a first home, funds used for postsecondary education, etc.

accumulation period

The accumulation period, also known as the payin period, is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

flexible premium deferred annuities

In a Flexible Premium Deferred Annuity (FPDA), the annuity is purchased with multiple payments that can vary from year to year (e.g. a portion of each paycheck), and the benefit payments begin sometime after one year from the date of purchase (e.g. payouts start at age 65).

Pure/Straight Life benefit payment

The life annuity will pay a specific amount for the remainder of the annuitant's life. With pure life, also known as lifeonly or straight life, this 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. 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.

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.

Does the owner of an annuity need to be the party that receives the benefits?

no The owner has all the rights such as naming the beneficiary and surrendering the annuity but they don't have to receive the benefits.

variable annuities

A variable annuity is variable from the standpoint that the annuitant may receive varying rates of return on the funds that are paid into the annuity. Thus, the value of the investment account in the annuity may be subject to variation. It is because of this feature that variable annuities were developed primarily as a way to provide a hedge against inflation. 3 characteristics: underlying investment - payments made are invested in the insurer's separate account minimum Interest rate is not guaranteed by the insurance company License Reuirements a variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) 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 properly registered with FINRA.

Annuity

An annuity is a contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving his or 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. Insurance agents licensed in the life line of authority are authorized to sell some types of annuities. Annuities do not pay a face amount upon the death of the annuitant. In fact, they do just the opposite. In most cases, the payments stop upon the death of the annuitant. Annuities use mortality tables, but these tables reflect a longer life expectancy than the mortality tables used for life insurance. Mortality tables indicate the number of individuals within a specified group (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age.

What is a 403(b) plan (TSA)?

An arrangement made with certain tax-exempt "501c(3)" organizations and public schools under which employees may set aside amounts of income for retirement purposes.

general account

An insurer's general account is an investment portfolio used by the insurer for investing its premium income. It generally consists of safe, conservative, guaranteed investments, such as real estate and mortgages. Because deferred payments of a fixed annuity are invested in the general account, this allows the insurer to guarantee the interest rate.

With respect to a Variable Annuity, when is the number of annuity units determined?

At the time of initial payout

In what form must IRA contributions be made?

Cash They can then be used to purchase securities in the account. Individuals covered by qualified employer plans may also make IRA contributions but may be limited to after-tax dollars. Only persons with earned income and nonworking spouses of persons with earned income may make IRA contributions.

Early withdrawals from IRAs

Early withdrawals from an IRA are subject to income taxation and a 10% penalty, unless one of the following conditions is met: Participant is age 59; Participant is totally disabled; The money is used to make the down payment on a home (not to exceed $10,000, and usually for firsttime homebuyers); Withdrawals are for postsecondary education expenses; Withdrawals are for catastrophic medical expenses, or upon death. In those cases, the 10% penalty is waived, but the money is still subject to income taxation. Regardless of the deductible status of the IRA contribution, IRA assets grow tax deferred.

separate account in a variable annuity

Performance of a variable annuity is dependent upon performance of a seperate account. must be registered with the Securities Exchange commission (SEC) as an investment company. I usually registered as a UIT (unit investment trust) which will purchase and hold assets (common stock and other securities) for the benefit of plan participants If portfolio does well, the seperate accounts perform well and the variable annuities backed by the account will also do well. There is NO guarantee of principal, interest or investment

The standards for determining whether agent's recommended transactions meet senior consumer's insurance needs and financial objectives.

Occupation and occupational status; Marital status; Age; Number and type of dependents; Sources of income; early income; The consumer's existing insurance; The consumer's needs and objectives; The cost to the consumer and the consumer's ability to pay for the proposed transaction or transactions; Source of funds to pay premiums; Investment savings; Liquid net worth; Tax status; Need for tax advantages; Investment experience of the consumer; Consumer concern for preservation of principle; Product time horizon; and The consumer's awareness of liquidity limitations or surrender charges.

Roth IRAs

an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free. The Roth IRA is a form of an individual retirement account funded with aftertax contributions. An individual can contribute 100% of earned income up to an IRS-specified maximum, as with traditional IRAs (the dollar amounts change every year). In contrast with a traditional IRA, Roth contributions can continue beyond age 70 and distributions do not have to begin at age 70. Roth IRAs grow tax free as long as the account is open for at least 5 years. Roth IRA contributions are not tax deductible. One can contribute 100% of earned income up to a specified maximum ($5,500 as of 2013) as with traditional IRAs. Should a taxpayer make an excess contribution to a Roth IRA, there is a 6% tax penalty A traditional IRA can also be converted to a Roth IRA. Income tax will have to be paid on all deductible contributions and earnings during the year that the traditional IRA is rolled over to a Roth IRA, but the 10% early distribution penalty is waived.

For a fixed Annuity amount option, when will payments stop?

they will not stop, installments for a fixed amount option has no life contingencies. A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.