Chapter 5- Annuities

Lower benefit

Longer life expectancy

Retirement Income

Main use of annuities

Taxable

Any unpaid annuity benefits following the death of an annuitant are ______ when paid to the beneficiary

IRS

(Internal Revenue Service) Governmental agency responsible for collecting federal taxes, issuing regulations, and enforcing tax laws

Life with period (term) certain

Life contingency payout option Annuity payments are guaranteed for the lifetime of the annuitant and for a specified period of time for the beneficiary

Fixed Amount

Annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings Pays a specific amount until funds are exhausted, whether or not the annuitant is living

Fixed amount

Annuitant selects the amount of each payment and the insurer will determine how long they pay the benefits

Level Premium

Annuitant/owner pays a fixed installment

Joint and Survivor

A modification of the life income option in that it guarantees an income for two recipients that neither can outlive Reduced payment after the first recipient dies Joint and ½ survivor, joint and ⅔ survivor

Joint Life

A payout arrangement where two or more annuitants receive payments until first death among the annuitants, and then payments stop

Qualified Plan

A retirement plan that meets the IRS guidelines for receiving favorable tax treatment.

Flexible Premium

Amount and frequency of each installment varies

Annuity income based on

Amount of premium paid or cash value accumulated Frequency of the payment Interest rate Annuitant's age and gender

Smaller income installments

An annuitant whose life expectancy is longer will have

Annuity

Contract that provides income for a specified period of years, or for life Protects individuals from outliving their money

Multiple Life Annuities

Cover 2 or more lives Joint, joint life, and survivor

Single Life

Cover one life, annuity payments are made with reference to one life only Single premium or on a periodic premium basis with subsequent values accumulating until the contract is annuitized

Life Contingency

Dependent upon whether or not the insured is alive

Level Benefit Payment Amount

Fixed Annuities Annuitant knows the exact amount of each payment received from the annuity during the payment period

Equity Indexed Annuities

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns Guaranteed minimum (3,4%) Current Interest rate Often tied to a familiar index (S&P 500) The insurance companies reserve the initial returns but pay the excess to the annuitant Less risky than variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity

Retirement Income

Fund qualified retirement plans, which means they meet the IRS guidelines to receive favorable tax treatment Can be individual and group

Fixed Annuities

Guaranteed minimum rate of interest to be credited to the purchase payment(s) Income (annuity) payments that do not vary from one to the next The insurance company guarantees the specified dollar amount for each payment and the length of period of payments is chosen by the annuitant

Life with Guarantee Settlement Option

If the annuitant dies before the principal amount has been paid out, the rest goes to the beneficiary Also called refund life Guarantees the whole principal will be paid out

Interest Rate Guarantees

In fixed annuities, the insurer bears the investment risk Based on the performance of the insurance company's general account May not drop below a policy's guaranteed minimum (3%) If it does drop below, the insurer is obligated to pay the guaranteed rate amount

Mortality Tables

Indicate the number of individuals within a specified group (males, smokers, etc) starting at a certain age, who are expected to be alive at a succeeding age

Market Value Adjusted Annuities

Know as a modified guaranteed annuity Single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 and 10 years

Annuity Period

Known as annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated is converted into a stream of income payments to the annuitant May last for the lifetime of the annuitant or a specific period

Accumulation Period

Known as pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity Time which payments earn interest on a tax-deferred basis

Immediate Annuity

One that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase Usually as early as 1 month from the purchase date Known as Single Premium Immediate Annuity

Single Premium

One time lump sum payment

Life Annuity

Pay a specific amount for the remainder of the annuitant's life

Fixed Period Installments

Pays for a specified amount of time only, whether or not the annuitant is living The annuitant selects the time period for the benefits and the insurer determines how much each payment will be, based on the value of the account and future earnings projections

Classification of annuities

Premium payment method: single premium vs. periodic When income payments begin: immediate vs. deferred How premiums are invested: fixed vs. variable Disposing of proceeds: pure life, annuity certain, or life refund annuity

Periodic Payments

Premiums are paid in installments over time

Education Funds

Providing income for retirement and estate liquidation, annuities can be used to accumulate funds for college education Can provide savings on a tax-deferred basis for the education expenses of the annuitant

Beneficiary

The person who receives annuity assets if the annuitant dies during accumulation period

Annuitant

The person who receives benefits or payments from the annuity The annuitant must be a natural person

Lump-Sum Settlements

Serve as an ideal financial vehicle for someone who comes into a large sum of money Ex: inheritance, lottery, lawsuit, etc

Annuities Certian

Short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated

Higher benefit

Shorter life expectancy

Annuity Benefit Payment Options

Specify how annuity funds are paid out

Nonforfeiture Law

Stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization

The cash value will be paid to the annuitant's estate

The annuity owner dies during accumulation and does not have a beneficiary and the cash value exceeds the premium being paid

Deffered Annuity

The income payments begin sometime after 1 year from the purchase date Can be funded with either a single lump sum or period payments from year to year Long it is deferred, the more flexibility for payment of premiums it allows

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits Has all of the rights, naming the beneficiary and surrendering the annuity May be a corp, trust, or other legal entity

Annuitization Date

The time when the annuity benefit payouts begin

Pure Life (life only or straight life)

This payment ceases at the annuitant's death Highest monthly benefits for an individual annuitant No guarantee that all proceeds will be paid out

Cash Installment

Two types of refund life annuities

Cash Refund

When the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant Does not guarantee to pay any interest

Installment Refund

When the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out

General Account Assets

Where fixed annuity premiums are deposited Comprised of mostly conservative investments like bonds Guaranteed a specified rate of interest

Suitability

a requirement to determine if an insurance product or an investment is appropriate for a particular customer

Deferred

withheld or postponed until a specified time or event in the future