Annuities

Annuity

-A contract that provides income for a specified period of years or for life. -Protects a person from outliving his or her money. -A vehicle for the accumulation of money and the liquidation of an estate.

Annuity Period

-Aka the annuitization period, liquidation period, or pay-out period. -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. -The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter.

Accumulation Period

-Aka the pay-in period -The period of time over which the owner makes payments (premiums) into an annuity. The period of time during which the payments earn interest on a tax-deferred basis.

Deferred Annuity

-An annuity in which the income payments begin sometime after 1 year from the date of purchase. -Can be funded w/ either a single lump sum (Single Premium Deferred Annuity--SPDA) or through periodic payments (Flexible Premium Deferred Annuity--FPDA) -Periodic payments can vary from year to year. -The longer the annuity is deferred, the more flexibility for payment of premiums it allows.

Immediate Annuity (Single Premium Immediate Annuity--SPIA)

-An annuity that is purchased w/ a single lump-sum payment and provides income payments that start within one year from the date of purchase -May receive first payment as early as 1 month from the purchase date -Aka single premium immediate annuity (SPIA)

Fixed Annuity 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. -Level benefit payment amount meaning the annuitant knows the exact amount of each payment received from the annuity during the annuity period. -A disadvantage of this annuity is that the purchasing power that they afford may be eroded over time due to inflation. -Premiums deposited into the general account -The insurer bears the investment risk

Life with Guaranteed Minimum (Refund Life)

-If the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. -Guarantees that the entire principal amount will be paid out.

Fixed Annuity Features pt 2

-Interest rate guaranteed by insurer -Underlying investment into general account (safe, conservative) -Expenses guaranteed -Income payment guaranteed

Variable Annuity Features pt 2

-Interest rate not guaranteed -Underlying investment into separate account (equities, no guarantee) -License needed is life insurance and securities -Expenses guaranteed -Income payment is not guarantee

Surrender Charge

-Levied against the cash value, and is generally a percentage that reduces over time. Ex: A common surrender charge might be 7% the 1st year, 6% the 2nd year, and 5%, 4%, 3%, 2%, 1%, and 0% respectively thereafter, therefore, if the annuity is surrendered in the 8th year or after, there would be no further surrender charge. -At surrender, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge.

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 a period of time. -Can be either level premium or flexible premium

Annuity Income amount is based upon

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

Pure Life (Aka: Life-Only or Straight Life)

-This payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs) -Option w/ the highest monthly benefits for an individual annuitant. -Under this option, 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.

Variable Annuity Characteristics

-Underlying investment: the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account -Interest rate: issuing insurance company does not guarantee a minimum interest rate -License requirements: A variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA.

Cash Refund for Life w/ Guaranteed Minimum

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

Joint Life Annuity (A type of Multiple Life Annuity)

2 or more annuitants receive payments until the first death, then payment ceases.

Qualified Plan

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

Annuitization Date

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

Market Value/Market Value Adjusted Annuity (MVA)

Aka known as a modified guaranteed annuity (MGA) 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. In a MVA, penalties for a premature surrender depend upon current interest rates at the time of surrender.

Surrender Charge Example

Assume that the annuity owner paid $700 in premium, which accumulated a total of $35 of interest, and a surrender charge is $70. If the annuity is surrendered prematurely, what will the annuity value be at surrender? The answer is $665. ($700 Premium + $35 Interest) - $70 Surrender Charge= $665 Value of the Annuity.

Waiver of Surrender Charges

Contracts provide for a waiver of surrender charges if the annuitant is confined to a LTC facility for at least 30 days.

Liquidation of an Estate

Converting a person's net worth into a cash flow.

Single Life Annuities

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

Multiple Life Annuities

Covers 2 or more lives. Most common multiple life annuities are joint life, and joint and survivor.

Bail-out Provision

Found in some annuity contracts. IT allows the contract holder, in the event that interest rates drop a specified amount within a specified time frame, to surrender the contract without charge.

Shorter life expectancy means

Higher benefit

Joint and Survivor

Income for 2 or more that cannot be outlived. often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount.

Longer life expectancy means

Lower benefit

Annuities Certain

Payment guaranteed for fixed period or until certain fixed amount paid. NO LIFE OPTION.

Variable Annuity

Serves as a hedge against inflation and is a variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.

Life w/ Period Certain

Specific monthly payment period is up, payment goes to beneficiary.

Annuity Payment Options

Specify how annuity funds are to be paid out. -Similar to the settlement options used in life insurance that determine how the policy proceeds are distributed to the beneficiaries.

Flexible Premium

The amount and frequency of each installment varies.

If an annuitant dies during the accumulation period and a beneficiary is not named the death benefit will be paid to who/what?

The annuitant's estate.

Level Premium

The annuitant/owner pays a fixed installment.

If an annuitant dies during the accumulation period, the insurer is obligated to return what to the beneficiary?

The cash value or the total premiums paid, whichever is greater.

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity of 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 annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person.

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust, or other legal entity.

Surrender Charge Purpose

The purpose is to help compensate the company or loss of the investment value due to an early surrender of a deferred annuity.

Nonforfeiture Law on Deferred Annuity

This 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 (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges). -A 10% penalty will be applied for early withdrawals prior to age 59 1/2.

Life with Period Certain Settlement Option

Under the payment option, the annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary. Ex: A life income w/ a 20-year period certain option would provide the annuitant w/ an income while he is living (for the entire life). If, however, the annuitant dies shortly after payments begin, the payments will be continued to a beneficiary fro the remainder of the period (for at total of 20 years).

Installment Refund for Life w/ Guaranteed Minimum

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

Deferred

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