Classification - Annuities

Annuity Units

A variable annuity contract owner's interest in the separate account after annuitization.

Accumulation Units

A variable annuity contract owner's interest in the separate account prior to annuitization.

Fixed Annuities

Annuities that have a guaranteed minimum interest rate.

Variable Annuities

Annuities that have variable interest rates and benefits.

Variable Annuity Example

Because Paul opted for a safe investment, his wife Laura thought she could take more risk. Consequently she invested in a variable annuity. With this choice, Laura chooses how (where) to invest the money - and the value of her annuity will be dependent on the performance of her investment choices.

Annuities are either:

Fixed annuities - provide a fixed guaranteed interest rate Variable annuities - provide a variable interest rate A third type of investment configuration is equity-indexed annuities.

Net Premium

Mortality minus interest.

SEC

The U.S. Securities and Exchange Commission, which oversees the operations of FINRA.

Annuitant

The individual whose life the annuity has been issued, and the person who receives annuity payments.

Separate Account

The insurer's account used to invest premium dollars for variable life insurance and annuities.

Accumulation Phase

The pay-in period of an annuity during which the contract owner pays premiums. Synonymous with accumulation period.

Accumulation Period

The pay-in period of an annuity during which the contract owner pays premiums. Synonymous with accumulation phase.

Annuity Phase

The payout period of an annuity during which the annuitant receives periodic income payments. Synonymous with annuity period.

This annuity is regulated as a securities product and agents selling this product must have a securities license:

Variable Annuity

Dollar Cost Averaging

an investment strategy where the contract owner invests the same amount of money at regular intervals over a lengthy period of time, instead of trying to guess the market highs and lows. A program of regular investing may help smooth out the highs and lows of a volatile stock market.

The benefit amount that an annuitant receives from a variable annuity is determined by both of the following:

-The number of annuity units -The value of annuity units

Annuity Units Features

-The number of your annuity units is fixed at the time that you buy the income annuity contract, or when you annuitize your deferred variable annuity. -While the number of units does not change, the value of each unit fluctuates to reflect the performance of the underlying investments in the separate account. -That's why the income you receive from a variable annuity may differ from month to month.

Annuities

A contract which protects against the risk or living longer than expected. Annuities provide a guaranteed life income to protect against the risk of depleting retirement funds.

Market Value Adjusted Annuities

Fixed annuities in which a surrender fee is incurred if surrendered prior to annuitization. Lower interest rates have the effect of increasing the surrender value, in which case there may be no surrender charge. However, higher interest rates have the effect of decreasing the surrender value because the insurer would have continued to earn the higher interest rate had the annuity not been surrendered. In this case, a surrender charge is incurred. Market value adjusted annuities are categorized as securities, so producers selling them must have a securities license.

Equity Indexed Annuities

Fixed annuities that provide a guaranteed minimum interest rate and earn a current interest rate that is tied to an equity index. The guaranteed minimum interest rate is typically 3% or 4%, providing a minimum growth rate. The contract's accumulation period is between five and seven years, at which point either the guaranteed minimum value or the indexed value is credited to the account, whichever is greater. When the contract owner is ready to withdraw the funds from an equity indexed annuity, he or she can take a lump sum distribution or annuitize the contract and receive periodic payments.

Back-end Loaded

Life insurance policy in which sales and administrative charges are not deducted until the policyowner takes out cash value from the policy or surrenders the policy for its cash value.

Annuity Units Example

Linda has 5,000 accumulation units. Each accumulation unit is valued at $100 at the time of annuitization, so her share of the separate account is $500,000. Based on her age, sex, and choice of payout option, the insurer determines $3 per $1,000 of value. This means that Linda's first monthly annuity payment would be $1,500 ($500,000 ÷ $1,000 = 500; $3 × 500 = $1,500 monthly payment). The value of each annuity unit at that time is $4, so Linda has 375 annuity units ($1,500 ÷ $4 = 375 annuity units). The number of annuity units Linda has will never change. If the following month the value of each annuity unit increases to $5, then Linda's monthly annuity payment would be $1,875 (375 × $5 = $1,875).

Annuitization

The point at which funds accumulated in an annuity are converted into periodic income payments beginning the annuity phase.

Accumulation Units Example

Tom pays $1,200 on July 1 into the separate account for his deferred variable annuity. On July 1, this amount of premium purchases 12 accumulation units, so each accumulation unit is valued at $100 on July 1. On July 2, each accumulation unit is valued at $150; however, Tom still only has 12 accumulation units even though the total value of his accumulation units has increased from $1,200 to $1,800. If Tom pays an additional $600 into the separate account on July 3, purchasing 10 accumulation units, he has a total of 22 accumulation units each unit valued at $60 on July 3. His total value in the separate account has dropped to $1,320.

Determining the number of annuity units is a two-step process:

-First, multiply the number of accumulation units by the dollar value of each accumulation unit. This provides the dollar value of the separate account upon annuitization. Notice how accumulation units are converted into annuity units in order for variable annuity benefits to be paid out. -Second, the amount of the first annuity payment is determined. This is based on the annuitant's age, sex, and payout option. The annuity payment is based on each $1,000 of value in the separate account. -The first annuity payment is converted into a fixed number of annuity units by dividing it by the value of an annuity unit at that point.

Fixed Annuity Example

Paul chose a fixed annuity for his investment option. This means that the insurance company chooses where to invest his money, and guarantees to pay Paul a pre-determined fixed return.

Variably Annuity Features

-Variable annuities have the potential for greater earnings and are intended to offset the effects of inflation. -Since variable interest rates are not guaranteed, the insurer cannot promise a certain dollar amount for each annuity benefit. -The insurer does not cushion investment gains and losses. -Instead, the annuity directly reflects investment experience. -Variable annuities have the potential for immense gain, but also loss. -With variable annuities, the investment risk is borne upon the contract owner. -While the SEC regulates the investment portion of the variable annuity, the state insurance department is responsible for regulating the insurance portion -Variable annuities are back-end loaded, meaning the insurer may charge a surrender fee if the contract owner surrenders the policy instead of annuitizing.

Fixed Annuity Features

-Guaranteed minimum rate of interest to be credited to the purchase payments Income payments that do not vary from one payment to the next -The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant. -The downside to fixed annuities is that the earning potential may not be sufficient to offset the effects of inflation. A variable annuity can address this problem. -Premiums for a fixed annuity are invested in the insurer's general account. This account is composed of conservative assets such as bonds -While the risk of investment is borne upon the insurance company, the conservative investments are relatively stable permitting the insurer to quote contract owners an interest rate and annuity payment amount with a greater degree of certainty. -The amount paid during the annuity phase is usually stated in dollars per $1,000 of funds in the annuity. -Fixed annuities will earn the insurer's current interest rate. However, contract owners are quoted a guaranteed minimum interest rate (around 4%) that the annuity will earn.

Accumulation Units Features

-The separate account has a certain total number of accumulation units. -In the most basic terms, the value of each accumulation unit can be calculated by dividing the value in the separate account by the insurer's total number of accumulation units. -The number of accumulation units a contract owner has directly correlates to the portion of the separate account owned by the contract owner. -The value of each accumulation unit varies daily, so while the number of accumulation units a contract owner has may stay the same, the total dollar value of a contract owner's accumulation units may vary daily. -Part of the premium paid is used to cover sales fees and taxes, so the net premium purchases accumulation units.