Chapter 12 - Variable Annuities
single premium deferred annuity
purchased with a lump sum payment of benefits at a later date
what are the two major difference between mutual funds and variable annuities
1. earnings grow tax deferred mutual funds distribute dividends/capital gains which are taxable variable annuity does not 2. variable annuities offered income guaranteed to some extent mutual funds do not
what are the annuity payout options?
1. life income 2. life with period certain 3. joint life with last survivor
what are the investors options for withdrawal
1. lump sum 2. withdraw funds randomly 3. annuitize the contract
fixed annuity
annuitant pays money to insurance company insurer obligated to pay a guaranteed amount
Lifetime withdrawal benefit
ensures the annuity payments last for entire life even if the account balance is zero
what are the types of annuities?
fixed and variable
what makes annuities unique
guarantee it provides
what happens when annuitant with life income payout option dies?
income DOES NOT go to beneficiary
what risk is associated with fixed annuities?
purchasing power risk buying power decreases over time
guaranteed minimum withdrawal benefits
regular periodic payment to the annuitant until the principal value of the account runs out remember this does not always last for a lifetime
when an investor chooses the annuitization what needs to be established?
the assumed interest rate initial value for annuity units
accumulation phase
the growth phase
who bears the investment risk for a fixed annuity?
the insurance company guarantees a rate of return
what do the value of accumulation and annuity units vary with?
the separate account performance
what is the objective of these investments?
to match or exceed rate of inflation
joint owner with last survivor
when the one owner dies (usually spouse) other owner continues to receive payments
how does the annuitant determine if monthly income will increase or decrease?
compare the separate account performance with the AIR
if the investment manager of the insurance company directly manages the separate account
must be registered as an open ended management investment company
what are units called in the annuity phase
Annuity units
if an investor chooses random withdrawal how are those taxed?
LIFO earnings portion comes out first taxed as ordinary incoemn
annuities should be recommended
after all other retirement savings vehicles
life income payout
insurance company pays annuitant for life
where do the funds go for variable annuities
into insurers separate account
which variable annuity usually pays out the smallest monthly income
joint ownership with last survivor
sep. account < AIR
monthly income decreases
if the sep. account > AIR
monthly income increases
sep. account = AIR
monthly income stays the same
immediate annuity
payment with a lump sum payout begins within 30 days
Where do the annuitants funds go?
into a general account
what happens when accumulation units change into annuity units
the number of annuity units stays FIXED
what are the early withdrawal penalties for an annuity
59 1/2 10% penalty withdrawals are taxed with ordinary income on earnings portion
what must variable annuities be sold with?
a prospectus
what are the two distinct phases of an annuity
accumulation phase annuity phase
what are units called in the accumulation phase
accumulation units
periodic payment deferred annuity
allows investment overtime payment of benefits at a later date
what happens when annuitant dies with life with period certain option
beneficiary receives remaining payments for remaining number of years
life with period certain payout option
certain period that payment occurs
monthly payment of annuititzaton
portion cost basis portions earnings
what does the assumed interest rate represent?
projection of the performance of the separate account over the lifetime of the product
investors ownership in variable annuity account
proportionate share of securities value of portfolio rises and falls with underlying securities
what is the beneficiary liable for in the death benefit provision?
taxed on earnings received as ordinary income
if the investment manager of the insurance company passes off management responsibility
must be registered as an UIT
combination annuity
variable and fixed investor contributes to both separate and general account inflation protection and guaranteed return
who are VA suitable for
1. those who can make cash payment 2. want supplemental income for retirement
Who are VA's not suitable for
1. those who might need to make a lim sum withdrawal 2. those with low risk tolerance 3. those who want to use a tx favored account
death benefit provision
if annuitant dies during the accumulation period death benefit is paid to the beneficiary --- amount of investments + accrued earnings
who would a lifetime benefit withdrawal be appropriate for ?
individual expecting a lengthy retirement
what is taxable for annuities
not the contributions made because they are after tax dollars --- cost basis earnings in excess of the cost basis
annuity phase
payout phase
who can sell variable annuities
someone with an insurance license and securities license
what must the annuitant do at the time of annutization?
choose an annuity payout option
what do investments for variable annuities include?
common stock mutual funds bonds
which variable annuity usually pays out the larges monthly income
life income
annuity
life insurance product supplemental retirement income guaranteed stream of income payments for life
