Annuity contracts
premature distributions and penalty tax
10% penalty on annuity tax base for early withdrawals prior to age 59.5. taxable interest on withdrawal
fixed-amount installments
payments continue after death; annuitant selects how much installment will be; insurer selects how long benefits will be paid; pays for specified amount;
life w/ period certain
payments guaranteed for lifetime of annuitant; specified amount of time for beneficiary; continued to beneficiary if annuitant dies
accumulation phase
period after annuity has been purchased but before distributions begin
annuity
protects a person from outliving his money; vehicle for accumulation of money and liquidation of state; payments stop when annuitant dies; mortality table w/ long life expectancy
pure life
provides highest monthly benefits; pay specific amount which ceases at annuitant's death; fully paid-out proceeds not guaranteed;
single premium immediate annuities (spia)
provides income payments within first year from date of purchase: as early as 1 month from purchase; purchased with single lump sum payment
annuity period
accumulated sum is converted into stream of income; lasts for annuitant's lifetime; pay-out period; annuitization period
level benefit payment amount
amount of benefit is guaranteed; inflation: less purchasing power; deflation: more purchasing power
fixed period installments
annuitant selects time period; insurer selects how much each payment will be; pays for a specific amount of time only; pays for time
installment refund
annuitant's beneficiary receives all installments if annuitant dies
cash refund
annuitant's beneficiary receives refund of principal when annuitant dies; receives lump sum payment (unlike installment refund)
SPIA annuity income amount
based on cash value accumulation; frequency of payments; interest rate; age of gender and annuitant
Tax-deffered growth
both qualified and non qualified; accumulation of values are not subject to income taxation; become taxable upon surrender or annuitization; income taxes owed on earnings; exclusion ratio: total investment/total amount expected to pay
joint and survivor
cannot be outlived; commonly elected by couple in retirement; no guarantee that all proceeds will be paid out if both beneficiaries die shortly after installments begin; surviving beneficiary receives 1/2 or 2/3 of what was received when both were alive
refund life annuities
cash refund and installment refund
general account
conservative investments like bonds; specified interest rate
distributions @ death
contracts interest becomes taxable if contract holder dies before pay-out period. if beneficiary is a spouse; tax is deferred.
individually owned
cost base: anticipated return = nontaxable. tax base: interest earned on principal: taxable
retirement income
deferred annuities provide income that cannot be outlived
deferred annuities
either single premium deferred annuity or flexible premium deferred annuity; owner receives current interest rate or guaranteed interest rate whichever is higher; if surrendered prior to age 59.5, 10% penalty on taxable portion
bail-out provision
found in some annuity contracts; if interest rates drop the contract holder can surrender the contract w/o charge
qualified retirement plans
funded by annuities; meet IRS guidelines and receive favorable tax treatment
guaranteed minimum
future interest rate is based on performance of ins. company; if rate drops (below 3%) ins. company is obligated to pay.
corporate owned
growth in annuity is taxed; interest income is taxed annually
fixed annuity
guaranteed minimum interest rates; consistent income payments; annuitant chooses length of period of payments through settlement option; company's gen. acct; less purchasing power w/ inflation
variable annuities
hedge against inflation; benefit payment amounts are not guaranteed; different rates of return; insurer's sep. acct (same restrictions as gen. acct); no guarantee on minimum interest rate; securities license; register with FINRA; regulated by SEC and state;
education funds
provides savings on tax-deferred basis for education expenses
accumulation units
purchased by variable premiums; represent ownership in separate acct. converted to annuity units upon annuitization; units remain constant; values may vary
flexible premium deferred annuity
purchased w/ multiple payments which can vary yr to yr(portion each paycheck); payouts start sometime after 1 yr
single premium deferred annuity
purchased w/ single payment but benefit is not paid until 1 year or more
life w/ guaranteed minimum
remainder of principal refunded to beneficiary if annuitant dies
single life
highest monthly payment; contributions can be single premium or periodic
personal uses of annuities
ideal for those with large lump sums of cash; single premium immediate purchase to convert large lump into periodic payments
current interest rate
insurer invests principal and gives annuitant guaranteed interest rate baed on minimum as specified in the annuity or current rate whichever is higher
payments to beneficiary
insurer is obligated to return the cash value or total premiums paid to the beneficiary if annuitant dies
multiple life
joint-life, joint, and survivor; covers two or more
indexed annuities
less risky than variable annuity or mutual fund, but higher interest rate than fixed; aims for higher returns; invests on aggressive basis; guaranteed interest rate; tied to s&p500 sometimes; a company may keep interest returns, but give excess to annuitant;
nonforfeiture
meaning an annuity has a guaranteed surrender value if owner decides to surrender prior to annuitization
three parties of annuity
owner (purchaser, not necessarily one who receives, has all the rights); annuitant (receives benefits, has to be natural person); beneficiary (receives annuity assets wither amount paid into annuity or cash value whichever is greater)
accumulation period
owner contributes premiums into annuity; earn interest on tax-deferred basis; pay-in period
surrender charges
owner gets premium plus interest minus charge; compensates company for loss of investment value; levied against cash value; percentage decreases over time; 7% first yr, 6% second yr and so on;
insurance aspect of annuity
payment phases stop upon death of annuitant; grows tax deferred; longer life expectancy than life insurance
one sum cash surrenders
results in immediate taxation of interest earned
annuities certain (types)
short term that limits the amounts paid to a certain fixed period or until a certain fixed amount is liquidated
longer life expectancy =
smaller income installments
waiver
surrender charges cancelled if annuitant is confined to long-term care facility for at least 30 days
tax deferred accumulation
tax base: interest accumulated in an annuity; taxes are deferred during accumulation period
joint-life
tow or more annuitants receive payments until first annuitant dies; then payments stop
withdrawal of interest and principal
when annuity is withdrawn during accumulation phase; amounts are taxed on LIFO basis; principal has no further tax consequences.