annuities
two ways deferred annuities can be funded
- single lump-sum -periodic payments
license requirement characteristic of variable
-considered a security and regulated by the securities exchange commission (SEC) and state insurance regulations -agent must hold securities license and a life insurance license registered with FINRA
single life annutiy
-covers one life -annuity payments with reference to one life -contributions with single premium or periodic premium
what does the fixed annuity provide?
-guaranteed minimum rate of interest to be credited to the purchase payments -income payments that do not vary from one payment to the next -insurance company guarantees that specified dollar amount for each payment and the length of the period payments as determined by the settlement option chosen by the annuitant
underlying investment characteristic of variable
-payments made by annuitant are invested in the insurer's separate account, not general -separate account id not apart of insurance company's portfolio
how are annuities classified?
-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
what is the annuity income amount based on?
-the amount of premium paid or cash value accumulated -frequency of the payment -interest rate -annuitant's age and gender
what penalty will be applied for early withdrawals
10%
deferred annuity
Income payments begin sometime after one year from the date of purchase
Does the owner and annuitant have to be the same person?
No
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
cash refund
When the annuitant dies, the beneficiary receives a lump sum refund of the principal minus benefit payments already made to the annuitant
how is an immediate annuity purchased?
With a single premium
Natural Person
a human being
What must the annuitant be?
a natural person
what do mortality tables indicate?
a number of individuals within a specified group (males, females, nonsmokers, smokers) starting at a certain age, who are expected to be alive at a succeeding age
Suitability
a requirement to determine if an insurance product or an investment is appropriate for a particular customer
Qualified Plan
a retirement plan that meets the IRS guidelines for receiving favorable tax treatment
how are surrender charges levied?
against the cash value
periodic - flexible premium
amount and frequency of each installment varies
what does the annuity pay to
annuitant
periodic - level premium
annuitant/owner pays a fixed installment
what does the owner pay into?
annuity
what happens to equity indexed annuities at the end of the contract term
annuity will be credited with the greater of the guaranteed minimum value or current value
what is the earliest you can pay an immediate annuity
as early as 1 month from purchase date
two types of refund life annuity
cash refund, installment period
what are general account assets comprised of?
conservative investments like bonds
annuity
contract that provides income for a specified period of years, or for life
Liquidation of an Estate
converting a person's net worth into a cash flow
What can an owner be?
corporation, trust, or other legal entity
What happens if a beneficiary is not named?
death benefit will be paid to the annuitant's estate
Life Contingency
dependent upon whether the insured is alive
What do you not do upon the death of the annuitant?
do not pay a face amount upon death
what does cash refund not guarantee
does not guarantee to pay any interest
what makes equity indexed different from fixed annuity
expected to earn higher interest rate
what is the current interest rate often tied to?
familiar indexes, such as the Standard and Poor's 500
what are the two options for annuity investment
fixed and variable based on how premium payments are invested
equity indexed annuities
fixed annuities that invest on aggressive basis to aim for higher returns
how is underlying investment different between fixed and variable?
fixed: general account (safe, conservative) variable: separate account (equities, no guarantee)
how are expense different between fixed and variable
fixed: guaranteed variable: guaranteed
how is income payment different between fixed and variable
fixed: guaranteed variable: no guarantee
how is interest rate different between fixed and variable
fixed: guaranteed by insurer variable: no guarantee
how is license needed different between fixed and variable
fixed: life insurance variable: life insurance and securities
What makes mortality table different for annuities than they use for life insurance?
for annuitants, these tables reflect a longer life expectancy
what does pure life guarantee
for the lifetime of the annuitant is the annuity payments
what does not happen in the accumulation period?
funds are not paid into the annuity
what happens in the annuity period?
funds are paid out to the annuitant
how do variable annuities act with inflation
hedge against it
surrender charges purpose
help compensate the company for loss of the investment value due to early surrender of a deferred annuity
what does a short life expectancy indicate?
higher benefit
what does pure life provide
highest monthly benefits for an individual annuitant
life with guaranteed minimum
if annuitant dies before principal has been paid out the remainder will be paid to beneficiary
two ways benefits begin
immediate annuity deferred annuity
who bears the investment risk in fixed annuities
insurer
what if the interest rate drops below 3%?
insurer is obligated to pay the guaranteed rate amount
what happens if annuitant dies during the accumulation period?
insurer is obligated to return to the beneficiary either the cash value or the total premium paid -whatever is greater
IRS
internal revenue service; a U.S. government agency responsible for collecting taxes, and enforcement of the internal revenue code
how are fixed annuity premiums deposited
into the life insurance company's general account
how will insurer invest in the accumulation period?
invest the accumulation and give the annuitant a guaranteed interest rate based on a minimum rate specified in the annuity or the current interest rate (whatever is higher)
interest rate characteristic of variable
issuing insurance company does not guarantee a minimum interest rate
nonforfeiture
law that 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
What makes equity indexed differently from variable annuities or mutual funds
less risky
two types of periodic payments
level flexible
what are annuities based on?
life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy
What is an annuity not?
life insurance
what does a longer life expectancy indicate?
lower benefit
minimum rate
lowest the principal can contractually earn
two types of interest rate guarantees
minimum , current
what does a life contingency option entail
paying a specific amount for the remainder of an annuitant's life
pure life
payment ceases at the annuitant's death (no matter how soon annuitization period occurs)
What does an annuity protect?
people from outliving their money
what happens to surrender charges over time
percentage reduces
accumulation period (pay-in-period)
period of time over which the owner makes payments (premiums) into an annuity -period where the payments can earn interest on a tax-deferred basis
beneficiary
person who receives annuity assets (either amount paid into the annuity or the cash value, whatever is greater) if annuitant dies during accumulation period, or to whom the balance of annuity benefits is paid out
annuitant
person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written
what can the interest rate not drop below?
policy's guaranteed minimum (3%)
what is a periodic payment
premiums are paid in installments over a period of time
Owner
purchaser of annuitant contract -not necessarily the one that receives the benefits -has all rights, such as naming a beneficiary and surrendering the annuity
disadvantage of fixed annuity
purchasing power that they afford may be eroded over time due to inflation
what are the two life contingency options
pure life life with guaranteed minimum
what is life with guaranteed minimum also called
refund life
what are the premium payment options?
single (one-time lump-sum payment) periodic
What will annuitants have with a long life expectancy?
smaller income installments
when do income payments from the deferred annuity begin
sometime after 1 year from the purchase date
what does pure life not guarantee
that all proceeds will be fully paid out
what does life with guaranteed minimum guarantee
the entire principal amount will be paid out
pure life annuity has no guarantee that...
the entire principal will be paid out
pure life annuity provides...
the highest monthly benefit
what happens the longer the annuity is deferred
the more flexibility for payment of premiums
what are future interest rates paid by the insurer based on?
the performance of the insurance company's general account
what does the owner get at surrender?
the premium plus the interest rate (value of annuity) minus the surrender charge
what happens with any unpaid annuity benefits following a death
they are taxable when paid to the beneficiary
annuity period (pay-out-period)
time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to an annuitant -can last for lifetime or for a specified period
Annuitization Date
time when the annuity benefit payouts begin
Why does the insurance company want to secure enough investments?
to allow the company to guarantee a specified rate of interest and to assure the future income payments that the annuity will provide
3 main characteristics of variable annuities
underlying investment, interest rate, license requirements
what happens to the premiums accumulation units in the separate fund (variable)
upon annuitization, accumulation is converted to annuity units and then income is paid to the annuitant based on the value of the annuity units -number of units remain level but unit values can fluctuate until paid out
when do most payments stop?
upon the death of the annuitant
installment period
when the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid
Deferred
withheld or postponed until a specified time or event in the future