Chapter 5 Part C: Types of Annuities

Life with guaranteed minumum settlement option

if annuitant dies before the principal amount has been paid put, the remainder of the principal amount will be refunded to the beneficiary. - Also called refund life -guarantees that the entire principal amount will be paid out

Multiple Life Annuities

covers 2 or more lives, -2 most common: Joint life and Joint & Survivor

Join & Survivor Payout Arrangement

- surviving recipients will recieve a reduced pmt after the first recipient dies -Most Common: "Joint & 1/2 survivor" -meaning survivor receives 1/2 of the amount that was received when both recipients were alive

Variable Annuity

-Serve as a hedge against inflation -Variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity

Classification on Annuity Investment Options

1)Fixed Annuity 2) Variable

Joint Life Payout Arrangement

2 or more annuitants receive payments until the first death among the annuitants, and then the payments stop

A surrender charge

Levied against the cash value, generally a % that reduces over time. Ex: 7% first yr, 6% next yr, etc

Annuities Certain are

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

Fixed amount Installment

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 the funds are exhausted, whether or not the annuitant is living

In fixed annuities the ____________ bears the investment risk

insurer -interest rates actually paid by an insurer are based upon the performance of the insurance company -however, rate may not drop below a policy's guaranteed minimum(typically 3%) - insurer will invest the principal and give the annuitant a guaranteed interest rate based on a min rate as specified in the annuity, or current interest rate: whichever is higher

Pure Life (life-only or straight life) settlement option

payment ceases at the annutiant's death - provides the highest monlthy benefits for an individual annuitnat

At surrender,

the owner gets the premium, plus interest (value of the annuity), minus the surrender charge

Surrender Charge Purpose:

help compensate the company for the loss of investment value due to an early surrender of a deferred annuity

Variable premiums purchase Accumulation units in the fund:

-similar to buying shares in a Mutual Fund -accum units represent ownership interest in the seperate acct. -upon annuitization, the accum units are converted to annuity units, and income is paid to annuitant based on the value of the annuity units; the number of annuity units received remains level, but the unit values will fluctuate until actually paid out to annuitant

Two Types of refund Life Annuities:

1) Cash refund: when annuitant dies, beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant; does not guarantee to pay any interest 2) Installment Refund: when annuitant dies, benficiary will continue to receive guaranteed installments until the entire principal has been paid out

Period Payment Annuities can either be:

1) Level: Annuitant/Owner pays a fixed installment 2) Flexible: amount & frequency of each installment varies

Premium Payment Options:

1) Single Premium: onetime lump sum payments 2) Periodic Payments: paid in installments over a period of time

Fixed Annuity

1) guarantees min rate of interest to be credited to purchase payments 2) income(annuity) pmts that do not vary from one payment to the next 3) Insurance company guarantees the specified dollar amount for each payment & length of the period of payments as determines by the settlement option chosen by the annuitant -Level benefit pmt amt: annuitant knows exact amount of each pmt received from annuity during the annuity period -Disadvantage: purchasing power that they afford may be eroded over time due to inflation

Annuities can be classified according to:

1) how premiums are paid into the annuity 2) how premiums are invested 3) when & how benefits are paid out

Classification: Annuity benefit payment options

Annuity benefit payment options specify how annuity funds are to be paid out

Life with period certain

Annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary. Ex: 20 yr period certain option-> provide annuitant w/ income while living, but if annuitant dies then the payments will be made to the beneficiary for the remainder of the period (20 yrs)

Non-forfeiture: Annuity

a deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization, with a surrender charge(10% penalty will be applied for early withdrawals-> prior to age 59 1/2)

3 Main characteristics of Variable Annuites:

1) Underlying Investment: payements are invested in insurer's seperate acct; seperate acct is not apart of the insurance company's investment portfolio, not subject to restrictions that apply to insurer's general acct 2) Interest Rate: Issuing Insurance Company does not guarantee a min interest rate 3) License Requirements: a variable annuity is considered a security and is regulated by the SEC, agents that sells must have a license to sell

Fixed Period Installments

annuitant selects the time period for the benefits, and the insurer determines how much each payments will be, based on the value of the account & future earnings projection -pays for a specific amount of time only, whether or not annuitant is living

Classification according to when the income payments from the annuity begin:

1) Immediate Annuity: purchased with a single, lum-sum payment and provides income payments that start within one year from the date of purchase 2) Deferred Annuity: income payments begin sometime after one year from the date of purchase; can be either single or periodic payments; the longer the annuity is deferred, the more flexible for the payment of premium it allows

Single Life Annuities

cover one life, and annuity pmts are made w/ reference to one life only

Equity Indexed Annuities

fixed annuities that invest on a relatively aggressive basis to aim for higher returns - also has guaranteed min interest rate - current rate is often tied to a familiar index(S&P 500) -generally, insurance companies reserve the initial returns for themselves but pay the excess to the annuitant(ex: if 12% earned, compnay may keep 4% and credit annuitant acct. for 8%) - less riskier than variable annuity or mutual fund but are expected to earn higher interest rate than a regular fixed annuity

General Account

fixed annuity premiums are deposited into the life insurance company's general acct - comprised mostly of conservative investments like bonds: secure enough for insurance company to guarantee rate of interest as well as assure future income payments that the annuity will provide