Ch. 4

Important Variable Annuity Terms

Accumulation Unit, Annuity Unit, Dual Regulation, Surrender Charges/Back-End Load, Bailout Provision

Three classifications of Annuities

Fixed annuities, Equity Indexed Annuities, Variable Annuities

Taxation of Annuities

Internal Revenue Code Section 72 governs the income tax treatment of Annuities

Fixed Period Annuity

While most annuities pay the annuitant for their entire life a fixed period annuity is the exception to that rule. In an annuity certain or temporary annuity, no funds are left at the conclusion of the selected time period. A beneficiary is named in the event of death of the annuitant during that time period.

Suitability in Investments

agent is responsible for determining the suitability or appropriateness of products to all applicants for both life insurance and annuities. It's the agent's responsibility to insure that any recommendations they make meet and address the clients needs and financial objectives as defined in the NAIC model.

Who is the owner of an annuity

the person responsible for paying the premium and has the right to change beneficiaries, make withdrawals or surrender the annuity during the accumulation phase

Who is the annuitant

the person whose life the contract has been issued, may or may not be the owner

Dual Regulation

the solicitation of a variable annuity is regulated by two entities - The Department of Insurance or Department of Financial Service, and FINRA which is controlled by the SEC

Joint and Survivor

this option pays over the lives of two people: the annuitant and the survivor. They can be Joint and 100%, Joint and 50%, or Joint and 2/3rds. When the annuitant dies the survivor receives the percentage chosen in the product

Installment Refund

when the annuitant dies the same payments that he/she was receiving will be continued to a beneficiary until the funds run out

Gender

women statistically live longer than men so they will receive less per month since the annuity pays for their entire life

Annuity Payout Factors

five factors are considered in determining how much an annuitant will receive on a residual basis. - Age, amount funded, gender, interest and expenses, and the settlement option that is chosen by the annuitant

Period Certain

in this settlement option the insurance company agrees to pay the annuitant or a beneficiary a monthly sum for a certain or specified number of years

Structured Settlements

can be used to distribute funds from lawsuit settlements. Injured party might receive a lawsuit settlement over the course of their entire life.

Interest and Expenses

company will factor in the interest received, also the company must factor in any loading charges that were incurred in servicing the account

Settlement or Payout Option Selected

determines what happens to the funds in the event the annuitant dies after annuitization.

Age as an Annuity Payout Factor

matters because it determines how much per month the annuitant will receive. The older the higher the payment

Surrender Charges/Back-End Load

It is also sometimes referred to as Contingent Deferred Sales Charge. purpose of a surrender charge is to discourage the surrender of the annuity and compensate the company for loss of the investment value. A surrender charge is levied against the cash value when the owner prematurely surrenders the deferred annuity, and the surrender charge is generally a percentage that reduces over time.

Market Value Annuities

The surrender penalties depend upon current interest rates at the time of surrender. the market value adjustment is usually a percentage of the difference between the contracted rate of interest in the annuity and the current rate at surrender

Life Annuity

annuitant receives a sum of money monthly, which continues as long as the annuitant lives. When the annuitant dies, the insurance company keeps the remaining balance of the funds. If the annuitant outlives the fund, meaning all principal and interest is exhausted, payments will continue until death as promised. Contain the highest risk to the annuitant and so the company will offer the highest monthly return as an incentive to choose it.

Who is the annuity beneficiary

may be named in the annuity contract depending on the settlement option that is selected. They're intended to receive any leftover or residual benefit in the event the annuitant was to die.

Deferred Annuity

means the payout will occur at some future date longer than 32 days from the purchase date. perfect for a young person with a lump sum of cash to invest for the future or a person wanting to make payments into a fund for retirement at a later date.

Bailout Provision

permits the annuity owner of the annuity to surrender the annuity without surrender charges if interest rates decrease within a specific time period

Equity Indexed Annuities

provide growth based on the performance of one of the financial indexes such as the S&P 500, DOw Jones, or Moody's Bond Index. Liked Fixed Annuities an equity indexed annuity offers the potential for higher credited rates of interest, but also guarantees the owner's principal. Interest credited is measured by increases in specific index but contains a "cap" which is a maximum interest that can be earned from point to point. Safety net of an Equity Indexed Annuity is that the interest credited can never be less than the guaranteed minimum.

1035 Exchange

provides for tax-free exchanges of certain kinds of financial products, including annuity contracts.

Accumulation Unit

purchased with premiums that paid into the annuity, less expenses which are credited to the annuitants account.

Fixed Annuities

return to the annuitant a fixed rate of interest that is guaranteed by the contract and backed by the funds in company's general account. Will pay current interest rates guaranteed at the beginning of each year but if the current rates fall below a minimum guaranteed rate, the company must pay the minimum guarantee. Upside is it offers a higher minimum guaranteed interest than equity indexed annuities.

Factors that determine Annuity Premium

the factors that determine the premium in an annuity are age, gender, interest rates, payments guarantees, and company loading

Accumulation Period

the growth phase of th annuity and is the time period prior to annuitization. During the accumulation period growth is tax deferred, meaning the growth is not taxed until it is withdrawn and is compounding, meaning the interest earned is added to the principal and then earns more interest, which is an important reason why people purchase annuities

Annuity Unit

the measurement and method by which annuity income is determined. during the annuity phase, the value of each unit changes, not the number of units owned, which remain fixed throughout the annuity phase.

Cash Refund

when the annuitant dies all premium payments are returned to a beneficiary minus the amount already paid. The refund to the beneficiary is offered as a lump-sum cash payment, in variable annuities this would be referred to as a unit refund annuity.

Annuity Phases

Annuitization - Accumulation Period

What are the two types of Annuities

Immediate and Deferred

Variable Annuities

Important to understand that although variable products provide the opportunity for the most growth there is no guarantee provided because Variable Annuities are funded with Mutual Funds which contain risk. In VA's the company is required to maintain a separate account that consists of a portfolio of equity investments. Performance of the variable annuity is dependent upon investments in the separate account with the risk borne by the annuity owner. Each year the company must report tot he owner the number of credits and dollar value of the unit. Variable annuities were developed to counter inflation.

Immediate Annuity

always purchased with a single, lump sum payment and provide income payments that start within one month of the date of purchase and are called single premium immediate annuities. Beneficial for a person who may be older and retiring and is in need of immediate income that will continue for the length of their life

Amount funded

amount received in benefit monthly needs to be proportional to what has been funded in the annuity

Annuities

an accumulation and distribution of cash.

Annuitization

an annuity annuitizes when the annuitant receives the first monthly benefit payment. The annuitant is the person who is intended to reveive the benefit and that person's life expectancy is used to determine the benefit received

Exclusion Ratios

based on the premise that during the Pay-Out phase search monthly income check received represents a payout of both principal and growth. Since the principal has already been taxed only the growth remains to be taxed.

Qualified Plans

purchased with pre-tax dollars. Sold as group plans, used for retirement.