Chapter 5 - Annuities

Annuity Mechanics

- only deferred payment have accumulation period - An immediate annuity must start providing income within a year of the first premium payment.

annuity phases

-accumulation period (pay in) money are paid into annuity until annutization;tax are deferred , tax due when take out - annuitization (liquidation) payments begin, action - annuity period

Ralph has selected an annuity benefit or payment option where, upon annuitization, the annuity will pay a benefit for as long as either Ralph or a co-annuitant are alive. Ralph has elected which of the following benefit or payment options?

Under Life Income Joint and Survivor, payments would continue until the death of the second person to die.

annuitant

- income is based on the annuitant's age , gender and life expectancy - if dies, goes to beneficiary - named by owner, not necessarily owner -The spouse-beneficiary may adopt the annuity as his/her own. As the owner, he/she may name a new annuitant and/or beneficiary, or assign ownership to another person for value.

?If a Market Value Adjustment Annuity is crediting interest at rates that are higher than those available in the open market, then upon surrender the insurer will add money to the policy's cash value, in effect sharing some of the gain it is realizing on its general account bond portfolio

?Variable Annuities are valued and paid in terms of units, rather than dollars. Upon annuitization, accumulation units are converted to annuity units, and the income is paid on the value of the annuity units.

Nonforfeiture Provisions

An annuity owner will not lose the value accumulated up to the point where they stopped paying into the contract. Nonforfeiture provisions give the owner the rights to the accumulation in the contract. The owner has the right to surrender the contract during the accumulation period. Remember, these provisions only apply to deferred annuities since immediate annuities do not have an accumulation period. tax penalty surrender charges waiver Bailout Provision (Escape Clause) - During the accumulation period, some contracts also offer a "bailout" provision that allows the owner to withdraw money from the annuity without surrender charges if the crediting rate falls by more than a specific amount. This will enable the policy owner to consider other savings and investment options.

In which of the following circumstances is an annuity's tax-deferral benefit lost?

If a corporation owns an annuity, the tax-deferral benefit is lost. Tax-deferral of annuity earnings is only for natural persons.

What is the difference between the cash value and the cash surrender value of an annuity?

The surrender charge is the difference between the cash value and the cash surrender value of an annuity.

Life Insurance vs. Annuities

Although both annuities and life insurance offer tax-deferred growth of principal, the long term benefit of an annuity is the lifetime income stream available at any time to the annuitant.

SPIA ; SPDA ; FPDA a flexible premium annuity allows the addition of more principal value at any time prior to annuitization of the contract.

An annuity that begins payments to the annuitant within one month of policy issue is a Single Premium Immediate Annuity ("SPIA").

type of annuities The actual rate of interest credited is based on the insurer's general account assets.

FIXED- guarantee minimum interest insurer bears investment risk fixed level income stream inflation/purchasing power decrease 1. indexed annuity stock index interest 2.market value adjusted annuity adjust interest based on bond returns VARIABLE-deposit are made into separate account, owner has all risk, accumulation units vs annuity units , number of annuity united is fixed but value fluctuates has inflation protection FINRA registration=security license and insurance license

use of annuities Corporate owned annuities must be associated with a qualified retirement plan for the corporation to avoid current income taxation. There are no interest rate limitations for annuities in the IRC. All annuities provide a death benefit guarantee prior to annuitization; a corporate owner of an annuity will name itself as the beneficiary.

- lump-sum settlements - retirement income - structured settlement to distribute lottery ... - savings vehicle-income withdraw or surrender - education fund - long term care

The Annuity Period (Pay-Out/Liquidation) at the annuitization section Life Income Joint & Survivor Annuity is payable to 2 annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. Depending on which option is selected, these options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor,

it begins once the policy owner elects to convert a deferred annuity into an income benefit payment. life income (pure straight life) most income for life, no beneficiary life income period certain life income with a specified period beneficiary only during period certain life income with refund (installment or cash) lifetime income to annuitant after annuitant, balance refunded in payment or lump sum to beneficiary life income joint and surivior 2 annuitants , continues after first annuitant dies joint life benefits payable on 2 names annuitants but payments stop upon death of first annuitant

Annuity classification

premium funding- single or periodic investment options- fix or variable date payout begins- immediate or deferred income options - life income or period certain