CH 14 Annuities
advantages to longevity annuities include:
-benefits kick in when other financial assets are likely to be exhausted -they are generally less expensive than traditional annuities they can be purchased with an inflation hedge
variable annuities contain the following fees and expenses
-investment management charge -administrative charge -mortality and expense risk charge -surrender charge
the annuity owner has a choice of annuity payout offers
-most annuities are not annuitized -under the cash option, the funds can be withdrawn in a lump sum or in installments -a life annuity (no refund) option provides a life income to the annuitant only while the annuitant remains alive -a life annuity with guaranteed payments pays a life income to the annuitant with a certain number of guaranteed payments
annuity payments consist of three sources
-premium payments -interest earnings -unliqidated principal of annuitants who die early
some variable annuities pay enhanced death benefits
-some contracts guarantee the principal -some contracts periodically adjust the value of the account to lock in investment gains through benefit, or an enhanced earning benefit
first fixed immediate annuity payment
-the first payment starts one payment interval from the date of purchase
variable annuity details (3)
-the purpose is to provide an inflation edge by maintaining the real purchasing power of the payments -premiums are used to purchase accumulation units during the period prior to retirement -at retirement, the accumulation units are converted into annuity units
disadvantages of longevity annuities include:
-your heirs will lose money if you die during the deferral period -once purchased, your funds are locked up
a flexible-premium annuity
allows the owner to vary the premium payments
a single-premium immediate annuity is
an annuity purchased with a lump sum
actuaries use special mortality tables to calculate
annuity premiums because annuitants tend to be healthy individuals
the current rate is
based on current market conditions, and is guaranteed only for a limited period
a longevity annuity
begins paying benefits only at an advanced age, such as age 85
total fees and expenses in most variable annuities are
high
a bonus annuity pays a
higher interest rate initially
longevity annuities are
low cost annuities because there are no cash values or death benefits in the policy -some insurers offer optional features that provide death benefits, inflation, protection, or the option of starting payments sooner
some insurers now make available riders that allow annuitants to
make a partial cash withdrawl
an installment refund option
pays a life income to the annuitant; after the annuitant's death, payments continue to a beneficiary until they equal the purchased price
a variable annuity
pays a lifetime income, but the income payments vary depending on common stock prices
a joint-and-survivor annuity
pays benefits based on the lives of two or more annuitants -the annuity income is paid until the last annuitant dies
a deferred annuity...
pays periodic income payments at some future date
a fixed immediate annuity...
pays periodic income payments that are guaranteed and fixed in amount
a cash refund option is similar, but
pays the beneficiary a lump sum
an annuity is a
periodic payment that continues for a fixed period or for the duration of a designated life or lives
an inflation-indexed annuity option provides
periodic payments that are adjusted for inflation
annutant
person who receives the annuity payment
during the accumulation period prior to retirement
premiums are credited with interest
longevity annuities provide
protection against the risk of depleting your financial assets at an advanced age
a guaranteed death benefit...
protects the principal against loss due to market declines
the fundamentalist purpose of an annuity is to
provide a lifetime income that cannot be outlived
a single premium deferred annuity is
purchased with a lump sum, but income is deferred until some future date
typically, if the annuitant dies before retirement...
the amount paid to the beneficiary will be higher of two amounts: the amount invested in the contract or the value of the account at the times of death
Under a Joint Annuity
the income payments terminate when the death of the first covered person dies
the guaranteed rate is
the maximum interest rate that will be credited to the fixed annuity
the liquidation period is
the period in which funds are paid out, or annuitized
an annuity provides protection against
the risk of living too long, often called excessive longevity