Exam FX Chapter 5: Annuities

Annuities are not ____ __________, but rather a vehicle for the accumulation of money and the _____________ of an estate.

life insurance; liquidation

Any individual fixed-dollar annuity contract delivered in PA must include a.... (the right to examine)

notice on the first page that clearly states that the annuity owner may return the contract within 10 days of delivery if dissatisfied.

Pure life

payment ceases at the annuitants death. Provides highest monthly benefits for an individual annuitant. No guarantees that all proceeds will be paid out, however.

Underlying investment

the payments that the annuitant makes into the variable annuity are invested into the insurer's separate account, not their general account.

2 options for periodic payments

level premiums (installment is fixed) flexible premiums (the amount and frequency of each installment varies)

Life annuity

pays a specific amount for the remainder of the annuitants life.

Qualified retirement plans

plans that meet IRS guidelines to receive a favorable tax treatment. Can be individual (IRA) and group (TSA)

Surrender charges

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

principal use of an annuity

retirement

3 main characteristics of variable annuities

underlying investment interest rate license agreements

Upon annuitization, the accumulation units are converted to?

Annuity units

Annuity

a contract that provides income for a specified period of years, or for life.

Nonforfeiture

a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization.

Natural person

a human being

Qualified plan

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

License requirement

a variable annuity is considered a security and is regulated by the SEC in addition to state insurance regulations.

What must be credited to or charged against the amount allocated to an account?

all income, gains and losses

Bail-out provision

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

The annuity period

also known as the annuitization period, liquidation period or pay-out period and is the time during which the sum has been accumulated during the period is converted into a stream of income payments to the annuitant.

The accumulation period

also known as the pay-in period and is the period of time over which the owner makes payments into an annuity.

Accumulation units

are purchased with variable premiums and is similar to buying shares in a mutual fund.

annuities certain

are short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.

If an annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either the....

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

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.

Interest rate

issuing insurance company does not guarantee a minimum interest rate.

Beneficiary

the person who receives annuity assets if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Annuitant

the person who receives the benefits or payments from the annuity. Their life expectancy is taken into account and the annuity is written for them.

At surrender the owner gets....

the premium, plus the value of the annuity, minus the surrender charge

Liquidation of an estate

converting a person's net worth into a cash flow

Lump-sum settlements

converts a lump-sum from a single premium immediate annuity into a series of periodic payments.

multiple life annuities

cover 2 or more lives.

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.

Joint life

payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop.

Suitability

requirement to determine if an insurance product or an investment is appropriate for a particular customer.

Variable annuity separate accounts are required to establish the.....

reserve liability

PA state law requires that all underlying assets for variable contracts be maintained in a....

separate account

Variable annuities

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

2 options for funding an annuity

single premium (one-time lump sum payment) periodic payments (payments are pain in installments over a period of time)

Annuity payment options

specify how annuity funds are to be paid out.

Guaranteed minimum withdrawal benefit

the annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered.

fixed amount installments

the annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. pays until all funds are exhaysted

fixed-period installments

the annuitant selects the time period for the benefits and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. pays for a specified amount of time only.

Life with period certain

the annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary.

Who bears the investment risk in fixed annuities?

the insurer. Interest rates cannot be dropped below a policy's guaranteed minimum (typically 3%)

Owner

the purchaser of the annuity contract, but not necessarily the one who receives the benefits.

The annuitization date

the time when the annuity benefit payouts begin

cash refund

when the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant.

installment refund

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

General account

where fixed annuity premiums are deposited in the life insurance company

Level benefit payment amount

with fixed annuities the annuitant knows the exact amount of each payment received from the annuity during the annuity period.

Deferred

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

Deferred annuity

an annuity in which the income payments begin sometime after one year from the date of purchase. Can be funded with single premiums or period premiums.

Education

annuities can be used to accumulate funds for college education.

Single life annuities

cover one life and annuity payments are made with reference to one life only.

Life contingency

dependent upon whether or not the insured is alive.

Separate accounts are subject to periodic ___________ by the Department

examinations

Indexed annuities

fixed annuities that invest on a relatively aggressive basis to aim for higher returns.

IRS

Internal Revenue Service

2 types of refund life annuities

Cash refund installment refund

Fixed annuity

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 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.

Joint and survivor

guarantees an income for two recipients that neither can outlive. Usually when one of the two recipients dies, the living one received reduced payments.