Series 66 - Insurance-Based Products

1035 Exchange

- Allows ability to exchange types of insurance products for others, without a tax consequence

Variable universal life insurance

- Flexible life with excess premiums invested in separate account - Combines features, a variable life and universal life - Access premiums above amount necessary to pay, for the death benefit are invested in a separate account rather than the general account - Performance of separate account determines insurance coverage in rate of cash value growth - Premium payments flexible within limits - Changes in premium payments can affect the amount of coverage in the growth of cash value pending performance of investment in separate account - Absolute minimum amount of coverage provided by the policy

Viatical settlements

- Source of liquidity for terminally ill patients with short term life expectancies - Permits one to invest another person's life insurance policy - Buyer is known as viatical settlement provider - Seller is the original owner of the life insurance policy(viator) - Holder get immediate cash in exchange for sale in transfer of life insurance policy ownership rights - Seller gives up ownership policy in return for immediate cash payment

Which of the following annuity payment options will continue payments for a specified time period if the annuitant dies prematurely?

A life annuity-period certain pays for the annuitant's life, but if that person dies prematurely, the annuity will pay a designated beneficiary for a specified minimum time period (usually 10 years).

A 60 year old man wishes to receive an annuity payment for himself and his beneficiary for at least 15 years. The recommended payout option is:

A life annuity-period certain will pay for one's life, however if that person dies early, the annuity will still pay for a designated period. In this case, the period certain would be 15 years. A life annuity simply pays for one's life. Once that person dies, payments cease. A unit refund annuity pays the remaining balance as a lump sum if the annuitant dies "early." The annuity option that chooses installments for a designated amount allows the annuitant to choose the monthly amount to be received. Payments continue for that amount until the account is exhausted.

Perpetuity

Annuity with no end point Fixed payment that goes on forever NOT sold by insurance companies.

Perpetuity value calculation

Annual income / market rate of interest

AIR

Assumed interest rate Conservative estimated growth rate Not guaranteed rate

Bonus credit

Bonus money offered by insurance company that matches a % of invested money into the annuity

Life annuity with period certian

Covers life of annuitant, if annuitant dies, payments continue for specified minimum period. Usually lower payment amounts

Joint and Last Survivor

Covers two lives

Simple interest

Does not have value of compounding interest. Interest only based on static principal amount

Universal life insurance

Flexible insurance, cash value, coverage amount and premiums may be varied Allows owner to change both premium payments and death benefit. Policy sets minimum payment amount. If minimum is paid, policy effectively operates as term insurance. More premium paid, excess invested in insurers general account and builds cash value like whole life. Cash value can't e used to buy additional insurance or to decrease or discontinue premium payments

Equity indexed annuities

Gives return tied to broad based index Variation of fixed annuity Give return based on index, promise guaranteed minimum return, lower than that of fixed annuity Caps losses and gains Participation rate can limit gains and losses.

During the payout period of a variable annuity contract, the annuitant assumes: I mortality risk II market risk III expense risk IV investment risk

II and IV In a variable annuity, the insurance company assumes mortality risk and expense risk, but not investment risk or purchasing power risk. Mortality risk is the risk that the purchaser lives longer than the insurance company expects, and the insurance company is obligated to pay for as long as that person lives. Expense risk is the risk that the insurance company's expenses increase faster than expected - the insurance company caps the expenses that it can charge against the annuity. If these increase beyond the capped amount, this is the insurance company's problem.

Unit refund life annuity

If annuitant dies before receiving full investment value from separate account, estate gets a refund of remaining value

Accumulation units

Instead of buying shares in separate account, holder purchases accumulation units. NAV computed daily just as mutual funds. As each payment is made, more accumulation units are purchased. Mandatory reinvestment of cap gains, interest, dividends. Tax deferral on reinvestments

Insurance company "trusts"

Insurance companies create trusts that buy open end management companies. Method used by insurance companies to structure variable annuities

Fixed annuity

Insurance company product. Will take periodic payments or lump sum with promise that at certain age, total investment can be turned into an annuity for retirement income - guaranteed rate of return - only subject to state insurance regulation - insurance company assumed the investment risk - premiums are deposited to the general account - insurance company also assumed mortality and expense risk. - holder or "annuitant" assumes inflation risk.

Actual AIR is set when:

It is set when the contract annuitizes. When annuitized, customer required to selected an AIR in order to determine initial payment under the contract.

Investments made prior to annuitization of a variable annuity contract are: I legally owned by the insurance company II legally owned by the purchaser of the contract III held in the general account IV held in the separate account

Legally owned by the purchaser and, held in the separate account

Variable annuity

No guaranteed rate of return Payments depend on performance of investments in annuity Investor assumed investment risk Considered a security and subject to SEC regulations

Taxation of annuities

Non-tax qualified - no deduction of contribution, made with pre tax $ Earnings build tax-deferred. On distribution, investment amount taxed at income tax Investment income taxed at cap gains rates

Period certain annuity

Only pays for stated period of time Used to bridge gap between early retirement and when social security payments start

Life annuity

Pays over the life of the annuitant, when person dies, payments cease. Usually results in the highest period payment.

Variable life insurance

Permanent insurance with cash value invested in separate account not general account. - premium is fixed and level in the policy guarantees a Minimum fix death benefit similar to whole life - Death benefit can increase over the fixed amount if the separate account performs well - Cash value grows based on the performance of the separate account and can grow faster than a whole life policy if the separate account performs well - Like variable annuities, these are considered to be a security, and must be sold with prospectus

Whole life insurance

Permanent insurance. Premium set higher than initial amount for term but remains level teach year. Does not increase with age and coverage stays the same. Also known as "straight-life" insurance

Separate account

Premiums deposited in designated separate account that buys shares of the designated mutual fund. Legally separate entity from the insurance companies general account. Performance of investments in separate account determine the amount of the annuity payment to be made.

Term-Life insurance

Pure insurance - no cash value - non renewable after certian age Policy pays beneficiary a specified amount of money of insured person dies within term of policy. Insured typically pays annual premium covering a 1 year term As person ages, premium increases with increased probability of death If premium not paid, policy lapses Problem is very expensive in later years. And policy cannot be renewed after a maximum age

Installments for designated period

Safer - specified period of time over which he wishes to receive annuity, monthly amount set to meet this time period. At end of period, account interest is exhausted

Installments for designated amount

Specified dollar amount that he wants in each payments. Payments cease when account is exhausted

Summary of types of insurance

Term life insurance is pure insurance with no investment element. For the premium paid, the purchaser is buying life insurance coverage for a fixed time period. At the end of that time period, the policy must be renewed to maintain coverage, typically at a higher premium as the insured individual ages (because of the greater mortality risk). When the purchaser of a term life policy is young, the premium is very low; as that person ages, the premium gets higher and higher. Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Any borrowed funds reduce the benefit payment upon death. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). This "cash value" is invested in the insurer's general account and the policy owner's account is credited for the interest income earned on the general account. This rate of return can vary from year to year. The policy owner can use cash value to increase the death benefit or to skip some premium payments. Variable life products invest a portion of the premium in a separate account rather than the general account, and the investment return of the separate account will determine the amount of insurance coverage, which can vary. Variable life is similar to whole life, except that there is no guarantee of investment return. Both have a fixed annual premium, are permanent insurance, and build cash value.

Point-to-point

This method compares the index value at purchase date to the value at the end date. Any fluctuations between dates are irrelevant

High-water-mark

This method looks at the index value yearly as of the anniversary date or purchase, and bases the interst added on the highest index value over the product life versus the value at the date of purchase

Annual reset

This method measured the return achieved each year over the life and adds interest to the annuity based on the annual reset

Annuity units

Value of accumulation units + reinvested dividends, interest, cap gains etc converted into annuity units. Termed "annuitization" of the separate account

Which type of insurance requires a fixed annual premium, pays a variable death benefit, provides protection for the entire life of the insured, and gains cash value?

Variable Life