Chapter 15
Disadvantages to Investing in variable annuities compared to mutual funds
-earnings are taxed as ordinary income -the administrative and insurance-related expense fees -withdrawals made before age 59 1/2 will generally incur a 10% penalty -most variable annuities carry a conditional deferred sales change
Variable annuities vs mutual funds
-insurance company product -units -investment objectives; varied -some guarantees -redeemed by issuer -price based on formula -voting rights
Mutual funds
-investment company -shares -investment objectives; varied -no guarantees -redeemed by issuer -price based on formula -voting rights
Fixed annuity
-monthly payout is fixed -guaranteed interest rate -investment risk assumed by insurance company -portfolio of fixed-income securities and mortgages -general account -vulnerable to inflation -insurance regulation
Variable annuity
-monthly payout varies -variable rate of return -investment risk assumed by annuitant -portfolio of equities, debt, money market instruments -separate account -resistant to inflation -insurance and securities regulation
Annuity distrubutions
-random withdrawals -annuitize (straight life, life with period certain, joint life with last survivor)
Advantages to Investing in variable annuities compared to mutual funds
-tax-deferred growth -guaranteed death benefit -lifetime income -IRS section 1035 exchange -no age 70 1/2 restrictions of requirements -no contributions limit -tax-free transfers between subaccounts -no probate
Annuity
A contract between an individual and an insurance company where the individual makes a series of payments that are invested by the company and repaid to the individual at a later date, generally during retirement
Period payment deferred annuity
accumulation units
Single premium deferred anuity
accumulation units
Single premium immediate annuity
annuity units
Index annuities
cash values tied to the performance of an index -designed to reduce the purchasing power risk of fixed annuities without the market risk of a variable annuity
Separate account
contributions that investors make to a variable annuity
The key difference between a fixed annuity and a variable annuity is that the fixed annuity
offers a guaranteed return
When comparing mutual funds and variable annuities, it will be correct to state that
the expense ratio of the variable annuity is usually higher than that of a comparable mutual fund
The investment return of a variable annuity comes from
the performance of the selected sub accounts
