CHAPTER 5

What are the Annuity (Benefit) Payment Options?

-Life Income (Pure or Straight Life) -Life Income Period Certain -Life Income with Refund (Installment or Cash Refund) -Life Income Joint & Survivor -Joint Life

What are the Premium Payment Options for Annuities?

-Single Premium -Periodic Premium -Flexible Premium

Fixed (Guaranteed) Annuity Some fixed annuities offer a base interest rate plus ____

A bonus interest rate which becomes the current rate credited into the annuity The current rate is set by he insurance company at the time the contract is issued and is guaranteed for a specific time period

What must a prospective buyer of a variable annuity be provided with?

A prospectus This gives detailed information on the separate account available in the annuity (this must be provided at or before time of sale)

Premium Payment Option (Single Premium Immediate Annuity [SPIA])

A single premium (lump sum) payment is made into this annuity from which the annuitant may immediately begin drawing benefits (within a year of the issue date) The following might be used to purchase a SPIA: -retirement plan rollover -savings account balance (or CDs) -mutual funds -deferred annuity values -death proceeds of a life insurance policy

What are deferred annuities ideal for?

Accumulating a retirement fund

What type of annuity are accumulation periods part of?

Accumulation periods are only found within deferred annuities, not immediate annuities.

What is a nonqualified annuity?

An annuity funded with after-tax dollars, meaning taxes on the money were paid before it foes into the annuity Upon distribution, only the earnings are taxable as ordinary income

What is a qualified annuity?

An annuity funded with pre-tax dollars. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes)

Indexed Annuity

An annuity product with interest rates that are linked to the positive performance of a related index, such as the Standard & Poor's 500 index The contract offers safety of principal with guarantees minimum returns (this is backed by the insurer's general account) The minimum guarantee can be as low as 0%, reflecting that the policy will not adversely affected by negative stock market index performance

What licenses are required to sell variable annuities?

An insurance license and securities license (FINRA)

Variable Annuity

Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated Payments are based on "units" rather than dollars While not guarantees, variable annuities may act as a hedge against inflation This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation

When can the beneficiary be named?

At receipt of the first purchase payment and may only be changed by the owner

When do owner's rights being?

At time of purchase A tax-free owner, who may also be the annuitant, may change the annuity date, beneficiary, and payout option

Premium Payment Option (Periodic Premium)

Continuous premiums are paid into the contract While annuities can offer fixed level premiums, the most common example of a periodic premium is a flexible premium

Immediate Annuity

Does not have an accumulation period and is used to generate immediate income within a year of the issue date

Fixed (Guaranteed) Annuity

During the accumulation period, the insurer guarantees a minimum fixed interest rate. At annuitization, benefits are paid as a minimum level fixed amount

Premium Payment Option Flexible Premium)

Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum dollar amount they will accept

What is the investment return on variable annuities?

It varies according to the separate account selected based on the assumed interest rate (AIR). If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month

Life Insurance vs Annuity (Table comparison)

LIFE INSURANCE: -Provides a benefit upon death of insured -Creates an estate -Pays a death benefit -Protects against premature death -Owner, insured, beneficiary Policy ANNUITY: -Provides steady income until death of the annuitant -Liquidates an estate -Pays a living benefit -Protects against living too long -Owner, annuitant, beneficiary -Contract

Lump Sum vs. Annuitization

LUMP SUM: the annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a steam of income. There could be tax penalties depending upon when this occurs ANNUITIZATION: the election to receive payments from the annuity for life, or for a specified period depending on the settlement option selected

Is there evidence of insurability required to purchase an annuity?

No

Is an indexed annuity a security product?

No therefore it does not require an additional securities license to sell it

If a lifetime benefit is selected, is it revocable?

No, it is an irrevocable election

Annuity Payments

Once a contract is annuitized, the insurance company has ownership of the funds of the account. In return the annuitant is entitled to guaranteed income stream based on the terms Depending on the option chosen, the annuitant may be able to name a beneficiary to receive any remaining benefits available upon the annuitant's death Factors the determine monthly income payments: -account value at time of annuitization -interest rate return -age & gender of annuitant -payment option selected

When does the annuity period begin?

Once the policyowner elects to convert a deferred annuity into an income benefit payment

Who are the players in Control of the Contract?

Owner Annuitant Beneficiary

Tax-Deferred Growth

Since an annuity is an insurance contract, the accumulation value grows tax-deferred. Deferred annuities allow for the naming of a beneficiary to receive any policy values if the annuitant dies prior to annuitizing (withdrawals prior to age 59.5 are subject to income tax and generally at 10% tax penalty as well) (Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option)

What can the settlement options selected provide in an annuity?

Temporary or Lifetime payment

During the accumulation period, the contract owner and the annuitant are the same person with the designated beneficiary as the annuitant's spouse. What happens if the annuitant dies?

The IRS code allows the spouse to assume ownership upon annuitant's death All rights of ownership are assumed to include tax deferment.

Annuity (Benefit) Payment Options -Life Income (Pure or Straight Life)

The annuity benefit is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options

Annuity (Benefit) Payment Options -Life Income Period Certain

The annuity benefit is payable for life, or for a specified period of time, whichever is longer If the annuitant lives beyond the stated period, benefits will continue for life of the annuitant If the annuitant dies prior to the end of the period, a beneficiary receives the balance of the payments for the remaining time period

Annuity (Benefit) Payment Options -Life Income with Refund (Installment or Cash Refund)

The annuity benefit is payable for the lifetime of the annuitant Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary as a lump sum, cash refund, or in installments

Annuity (Benefit) Payment Options -Life Income Joint & Survivor

The annuity benefit is payable in one payment to 2 or more annuitants until the last surviving annuitant dies Upon the death of the 1st annuitant, survivor benefits continue, either paying the full amount or a reduced benefit until the survivor dies

Annuity (Benefit) Payment Options -Joint Life

The annuity is payable to 2 or more named annuitants while both are living. Upon death of the first annuitant, the benefits stop

Who bears the investment risk and receives the return earned on invested assets in variable annuity, less any charges assessed by the insurer and investment managers

The contract owner

Fixed (Guaranteed) Annuity What is the actual rate of interest created at any one time based on?

The earnings rate of the insurer's general account and the insurer bears any investment risk

Control of the Contract (Beneficiary)

The individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization or if the settlement option selected offers any residual benefit after the annuitant's death

Control of the Contract (Owner)

The individual who controls the contract and is responsible for making payments into the contract, as well as having all of the contractual rights in the policy

Control of the Contract (Annuitant)

The individual whose life the contract is based upon. Upon a lifetime annualization, payments will be made to the annuitant according to the annuitants age, gender, settlement option selected, and dollar amount used to fund the income benefit payments

What is the accumulation (pay-in) period?

The period of time from the first deposit to the start of the annuity payout (during this time, taxes are deferred) The accumulation period ends when the owner elects to annualize, or begin to receive income payments

In variable annuity, can premium payments be flexible?

The premium payments made during the accumulation period may be flexible in amount and frequency limited only to the contract's provisions (Premiums purchase accumulation units of the separate account) (The number of annuity units liquidated remains level, but the unit value fluctuates, based upon the performance of the separate account

Where are annuities funded and sold through? Who can sell them?

Through life insurance companies Someone with at least a life insurance license

Why are deferred annuities normally purchased?

To defer taxes on any contract earnings

What are annuities primarily used for?

To provide a steady stream of income to an individual typically upon retirement In theory, an annuity is designed to protect against outliving an individual's retirement income by providing lifetime income A primary function: to liquidate an estate, or to pay benefits until death

During the accumulation period can the contract owner sign the request for surrender or deferrment?

Yes (during the early part of the accumulation period, the insurer normally assesses a surrender charge)

Is a variable annuity considered a secuirity?

Yes, therefore it must comply with the Federal SEC rules as well as state insurance laws

Fixed (Guaranteed) Annuity What happens to the fixed amount purchasing power as the cost of living increase?

it decreases

What happens to the premium paid during the accumulation period in variable annuity?

it is invested into a separate account, the underlying investment in the separate account is similar to a mutual fund

What do cash values go towards?

paying for the income benefit

In direct comparison to life insurance, what is an annuity referred to as?

the opposite of a life insurance policy

Deferred Annuity

will pay periodic benefits starting at some specified time in the future Annuitization can occur at any time, but benefits from a deferred annuity are not payable for at least 1 year from the issue date