Annuities

A couple near retirement is planning for their golden years. They want to make sure that their retirement annuity provides monthly benefits for the rest of their lives. Should one of them die, the other would still like to continue receiving benefits. Which settlement option should they choose?

Joint and Survivor

Indexed (or equity indexed) Annuities

Are fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate.

Your client's employer does not offer a company-wide annuity contract. What type of annuity contract could your client obtain?

Individual

In a MVA (Market Value Adjusted), penalties for a premature surrender depend upon..

Current interest rates at the time of surrender.

Life Contingency

Dependent upon whether or not the insured is alive.

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n):

Equity Indexed Annuity

What is the advantage of having a qualified annuity?

Favorable tax treatment

An attempt by the producer to obtain information about a consumer's ____ are required by The Nebraska Annuity Transaction Act before a recommendation regarding an annuity can be made.

Financial status, tax status, and investment objectives.

The annuity period may last:

For the lifetime of the annuitant or for a specified period, which could be longer or shorter.

Annuities can be classified according to:

How premiums are paid into the annuity, how premiums are invested, and when and how benefits are paid out.

Joint Life

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

The equity in an equity index annuity is linked to:

An index like Standard's & Poor's 500.

Annuity Benefit Payment Options: Pure life is also known as:

Life-only or straight life

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. Most commonly, this type of annuity is known as a Single Premium Immediate Annuity (SPIA)

An annuitant who life expectancy is longer will have:

SMALLER income installments.

Multiple Life Annuities

Cover TWO or MORE lives. The most common multiple life annuities are joint life, and joint and survivor.

Which of the following is true regarding a modified guaranteed annuity?

The owner is guaranteed a fixed interest rate for a specified period of time.

Future interest rates actually paid by an insurer are based upon:

The performance of the insurance company.

At surrender, the owner gets:

The premium, plus interest (the value of the annuity), minus the surrender charge.

If a deferred annuity is surrendered prematurely, a surrender charge is imposed. How is the surrender charge determined?

The surrender charge is a percentage of the cash value and decreases over time.

A deferred annuity is surrendered prior to annuitization. Which of the following best describes the nonforfeiture value of the annuity?

The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges.

The purpose of the Nebraska Senior Protection in Annuity Transaction Act is:

To set the standards and procedures for advice given by insurance producers and insurers with regards to annuities and to protect consumers' insurance needs and financial objectives.

Deferred

Withheld or postponed until a specified time or event in the future.

Most commonly, this option is written as "join and 1/2 survivor" or "joint and 2/3 survivor".

Joint and Survivor Arrangement-Meaning the surviving beneficiary receives 1/2 or 2/3 if wgat was received when both beneficiaries were alive.

Your client owns a Market Value Adjust Annuity. In order to pay for a series of large, unexpected medical bills, he decides to surrender his policy prematurely, Which of the following will determine the penalty that the annuity owner will have to pay?

Current interest rate at the time of surrender.

Annuity Benefit Payment Options: This option is also called "refund life":

Life with Guaranteed Minimum

Annuitization Period

Payments out, to insured

If an annuitant dies during the accumulation period, the insurer is obligated to:

Return to the beneficiary either the cash value or the total premiums paid, whichever is greater. If a beneficiary is not named, the benefit will be paid to the annuitant's estate.

Qualified plan

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

The Annuity Period is the time during which:

Accumulated money is converted into an income stream.

Annuities may be classified as:

Fixed or Variable based on how the premium payments are invested.

Annuities Certain Types:

Fixed-period installments and Fixed-amount installments

This option is commonly selected by a couple in retirement.

Joint and Survivor Arrangement

Installment for a fixed amount option has no:

Life contingencies

The form of life annuity which pays benefits throughout the lifetime of the annuitant and also guarantees payment for a minimum number of years is called:

Life income with period certain

Equity indexed annuities seek:

Higher returns

In fixed annuities, the ___ bears the investment risk.

Insurer

A Market Value or Market Value Adjusted

Is a single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years.

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policyowners?

2.5% (Insurance companies PROMISE guaranteed minimums on the fixed annuities.)

Nonforfeiture

A deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges)

Suitability

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

Current Interest Rate

Exceeds guaranteed rate. Paid to annuitant when a company's own investment is better than expected.

Equity indexed annuities are:

Less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.

With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity period. This is called:

Level benefit payment amount.

Periodic Payments can be either:

Level premium or Flexible premium

What form of the annuity settlement options provides payments to an annuitant for the rest of the annuitant's life and ceases at the annuitant's death?

Pure Life

The first way to classify annuities can be based on how they can be funded (paid for). There are 2 options:

Single Premium or Periodic Payments

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Annuitant

The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written.

The purpose of the surrender charge is to help:

Compensate the company for loss of the investment value due to an early surrender of a deferred annuity.

Periodic Payments:

The premiums are paid in installments over a period of time.

Installment Refund

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

IRS

Internal Revenue Service: A U.S Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

A Market Value or Market Value Adjusted Annuity (MVA) is also known as a:

Modified Guaranteed Annuity (MGA)

Your client is planning to retire. She has accumulated $100,000 in a retirement annuity, and now wants to select the benefit option that will pay the largest monthly amount for as long as she lives. As her agent, you should recommend:

Straight Life

The annuitization date is:

The time when the annuity benefit payouts begin (trigger for benefits)

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan or the cash value of the plan, whichever is the GREATER amount.

Annuity Benefit Payment Options: Life with Guaranteed Minimum

If the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. It guarantees that the ENTIRE principal amount will be paid out.

Annuity

Is a contract that provides income for a specified period of years, or for life. It protects a person against outliving his or her money.

Uses of Annuities

Lump-sum Settlements, Retirement Income, Education Funds, Long-term Care Needs, and Nebraska Protection in Annuity Transaction Act

After three years of making payments into a flexible premium deferred annuity, the owner decides to surrender the annuity. The insurer returns all the premium payments to the owner, except for a predetermined percentage. What is this percentage called?

Surrender charge

A disadvantage to fixed annuities is:

That the purchasing power that they afford may be eroded over time due to inflation.

Annuities Certain: Fixed-period installments

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

Single Premium:

One lump-sum payment

Cash Refund

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

Joint and Survivor Arrangement

Is a modification of the life income options in that it guarantees an income for two recipients that neither can outlive. Although it is possible for the surviving recipient(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipients will receive a reduced payment after the first recipient dies.

Deferred Annuity:

Is an annuity in which the income payments begin sometime AFTER one year from the date of purchase. They can be funded with either a single lump sum (Single Premium Deferred Annuities-SPDA;s) or through periodic payments (Flexible Premium Deferred Annuities-FPDA's).

Single Life vs. Multiple Life: Before he died, an annuitant had received $12,500 in monthly benefits from his $25,000 STRAIGHT life annuity. He was also the insured under a $50,000 paid-up whole life policy that named his wife as primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits?

$50,000 (The life policy would pay the face amount, but b/c of the settlement option selected on the annuity, payments would cease upon the annuitant's death. Straight life annuity payments STOP at death of the annuitant regardless of the principal left in the account)

Interest Rate Guarantees: During the accumulation phase, the insurer..

Will invest the principal, or accumulation, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher.

Natural person

A human being

The annuitant must be:

A natural person

Accumulation Period

Payments in, to insurer

Level Premium

The annuitant/owner pays a fixed installment

A Fixed Annuity provides the following features:

Guaranteed minimum rate of interest to be credited to the purchase payment(s); Income (annuity) 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 annuity owner dies during the accumulation period of his annuity. The cash value of his annuity exceeds the premiums he paid. There is no named beneficiary. Which of the following is true?

The CASH VALUE will be paid to the annuitant's estate.

In reference to fixed annuities, what comprises most of a life insurance company's general account?

Conservative investments like bonds

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner has all of the rights, such as naming the beneficiary and surrendering the annuity.

A prospective deferred annuity owner is concerned about what would happen if he surrendered the annuity before the annuitization period. The agent most likely explained which of the following?

Nonforfeiture option guarantees that the owner will receive a surrender value of the contract.

Flexible Premium

The amount and frequency of each installment varies

The annuity amount is based upon the following:

The amount of premium paid or cash value accumulated; The frequency of the payment; The interest rate; an The annuitant's age and gender.

Annuities Certain: Fixed-amount installments

The 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. This option pays a specific amount until funds are exhausted, whether or not the annuitant is living.

Annuity Period

Also known as, "annuitization period, liquidation period, or pay-out period", is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant.

An individual buys a flexible premium deferred life annuity with 20 year period certain. What would his beneficiary receive if he died 5 years after beginning the annuity phase?

Payment for 15 years

Accumulation Period

Also known as, "pay-in period", is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

Interest Rate Guarantees: Should the interest rates drop below the guaranteed rate..

The insurer is obligated to pay the guaranteed rate amount.

When an annuity is written, whose life expectancy is taken into account?

Annuitant

Fixed annuity premiums are deposited into:

The life insurance company's general account.

Annuities Certain

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

Life with Period Certain

Is another life contingency payout option. The annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary.

Single Life Annuities

Cover ONE life, and annuity payments are made with reference to ONE life only. Contributions can be made with a single premium or on a periodic premium basis with subsequent values accumulating until the contract is annuitized.

The market value adjustment in modified guaranteed annuities refers to..

The difference between the contracted interest rate and the rate at surrender.

The principal use of an annuity is to:

Provide income for retirement

Annuity Benefit Payment Options: This option provides the highest monthly benefits for an individual annuitant.

Pure Life (Life-Only or Straight Life)

A surrender charge is levied against:

The cash value, and is generally a percentage that reduces over time. A common surrender charge might be 7% the first year, 6% the second year and so on.

Annuity Benefit Payments Options: Pure Life

While the annuity payments are guaranteed for the lifetime of the annuitant, there is NO guarantee that all the proceeds will be FULLY paid out.

There are two types of refund life annuities:

Cash Refund and Installment Refund

Guaranteed Interest Rate

Company must pay this minimum percentage. Typically around 3%

Liquidation of an estate

Converting a person's net worth into a cash flow

Interest Rates:

Guaranteed and Current

Annuities can also be classified according to when the income payments from the annuity begin:

Immediate Annuity or Deferred Annuity