Ch 14: Annuties
who is an annual premiums annuity suitable for?
- 45 y/o single male with very little in liquid assets but is saving for retirement - is certain he will retire in 10 years and requires an income of a specified amount
What companies sell immediate variable annuities directly to investors
- Fidelity - T Row Price - TIAA-CREF
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested.
- Fixed Annuity - Life Annuity
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Janice, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible.
- Fixed Annuity - Straight Life Annuity
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.
- Fixed annuity - Life Income annuity
Which companies sell tax deferred variable annuity?
- USAA - Vanguard
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retirement benefits to be protected against the risk of inflation.
- Variable protects against inflation
fixed annuity
- benefit is expressed in terms of stated dollar amount based on a guaranteed rate of return
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Jose, age 35, is a sales representative and plans to retire at age 67. His monthly income varies. He would like to invest in an annuity that allows him to change the frequency and amount of premium payments.
- deferred annuity - flexible premium
Early withdrawal penalities for annuities
- early withdrawal penalty of 10% on withdrawals prior to age 59 1/2 in addition to ordinary income tax payable on withdrawals - surrender charge imposed by insurance company of 7% to 8%
An annuity is the opposite of _____ and pays when?
- life insurance - annuity pays while you are alive
What is used in pricing annuities
- mortality tables - interest rates
annuity payments may be
- only during the life time of an annuitant - guarantee a certain number of payments - based on 2 or more lives
An annuity is an appropriate risk management tool for
- retiring couple who want to ensure a certain level of income - death of a single parent to support young children - newly widowed individual who needs to withdraw from savings to maintain a certain standard of living
What should you shop for when looking for an immediate annuity
- simply shop for the annuity that will give you the highest income, sticking with top rated insurance companies
For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants to protect her principal against loss.
- variable annuity - fixed - indexed annuity
types of annuity
1) annuity certain 2) straight life 3) joint and survivorship
3 elements that make up a payment to an annuitant
1) interest earnings 2) partial liquidation of principal 3) survivorship benefit
Single Premium Annuity
An Annuity purchased with one lump sum payment. - suitable for inheritance to fund a future retirement
Joint and Survivor Annuity
Based on the lives of two or more annuitants
T/F An annuity is a contract that provides for a series of payments made over a specified period of time which are usually comprised entirely of income.
F - Partial liquidation or principal, survivorship benefits, and investment earnings
Annuity premiums are paid for with before tax dollars.
F - after tax
T/F The payout of a life income annuity with a 10 year guarantee will provide more income than a life income only annuity.
F - it will provide less income
T/F An annuitant is a company that issues annuities.
F - person who receives annuity
T/F The exclusion ratio refers to the age eligibility of when a person can start receiving annuity payments
F - portion of each annuity payment that is not included in the recipients taxable income
T/F Annuities are generally purchased as a way to guard against the possibility that the annuitant will die prematurely.
F - provides income in retirement/ while you are alive
T/F A fixed annuity is paid for all at once.
F - single premium annuity
T/F An annuity certain contains a survivorship element.
F - straight life contains a survivorship element
T/F A joint and survivor annuity begins making benefit payments at the death of the first annuitant and pays until the death of the survivor.
F pays while both are living
T/F A straight life annuity requires premium payments that are paid for during the lifetime of the annuitant.
False - Receive payments - straight life has the highest amount of income
Why fixed annuity benefit be higher than the minimum amount guaranteed in the contract?
If interest earnings, expenses or mortality experience is better than what is assumed
What happens to the funds after the death of the annuitants
No funds remaining after the annuitant's death for bequest to children or other relative
A single premium annuity is purchased with a lump sum.
T
T/F A penalty of 10% may be assessed on a withdrawal from an annuity made prior to age 59 ½. This is in addition to ordinary income tax payable on the withdrawal.
T
T/F After the total purchase price of an annuity has been excluded from income, the subsequent benefit payments are fully taxable.
T
T/F An equity-indexed annuity is a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market.
T
T/F An immediate annuity is one in which benefits begin as soon as the annuity is purchased.
T
T/F Mortality tables and interest rates are using in pricing annuities
T
T/F Most annuities have a surrender charge if the annuity is surrendered during the early years of the contract.
T
T/F The benefits associated with variable annuities are expressed in term of annuity units that fluctuate with the performance of an investment portfolio.
T
T/F The primary reason that annuities are purchased is to supply retirement income.
T
T/F An annuity certain will pay benefits for a specified period of time, without regard to the life or death of the annuitant
T - i.e. 10 year period certain
Who is a straight life annuity suitable for?
a person that needs maximum lifetime income and has no dependents or has provided for them through other means
Use immediate annuities only for
a portion or retirement assets
With annuities what can you defer taxes on?
accrued investment earnings and survivorship benefits until annuitant begins to collect annuity benefits
What is distributed while the annuitants are alive?
accumulated capital as well as investment income
what happens if the annuitant dies before all payments are made in an annuity certain?
all payments are made and benefits continue to be paid to heirs
Nest Egg needed =
annual income in today's dollars you wish to retire on / 8% net inflation savings rate (12% - 4% inflation)
annual premiums annuity
annuity is paid for in regulaa installments
straight life annuity
annuity that pays benefits only during the lifetime of the annuitant
variable annuity
annuity unit fluctuates with the performance of a specified portfolio of investments
variable annuity benefit is expressed in terms of
annuity units
immediate annuity
begins as soon as the annuity is purchased
deferred annuity
benefits are deferred until sometime in the future; a particular time or may not be specificed
An immediate fixed or variable annuity looks like a good __________ for retirees
core investment
If a retiree receives $500,000 lump sum settlement for retirement at age 65, an annuity with guarantee $2000 until
death - whether death occurs at 69 or 96
Annuities are tax
deferred
Joint and Survivor Annuity payments continue as long as
either annuitant is alive
Who is flexible premium annuity suitable for?
for individuals saving for retirement from an unstable income
What purpose does an annuity funds fulfill?
fulfills the purpose for which the funds were originally accumulated
Life insurance settlement options can go into an
immediate annuity
timing of annuity
immediate or deferred
Straight Life Annuity pays the highest amount of
lifetime income for each dollar spent
What do annuity certain payments consist of?
payment consist of interest earnings and liquidation of principal
annuity certain
pays income only for a certain period of time without regard to death or life of annuitant
Immediate annuity allows for consolidation of various investments at retirement and
purchase an annuity that will begin to pay retirement income immediately
Annuities are purchased to supply
retirement income
Annuity certain has no ______ benefit
suvivorship
exclusion ratio
the fraction of each annuity payment that can be excluded from income taxation = original investment / total annuity benefits expected to be received
In the straight life annuity, the older the annuitant is when benefits begin the greater
the size of the payments
flexible premium annuity
the timing and amount of premiums is variable
Why may a variable annuity not be well suited for retirees?
they need a predictable income flow
What is the purpose of a variable annuity?
to provide an inflation hedge by maintaining the real purchasing power of the payments
