INS312 Chapter 24

Nature of Annuities

+ Comparison with life insurance - Annuity is "insurance in reverse" - "Upside-down" life insurance - Living "too long" vs. Dying "too soon" - Different mortality table used for annuities and life insurance. Annuitants live longer. - Safety built in to annuity mortality tables by adding to life expectancies of annuitants (lowering mortality rates). Opposite for life insurance.

Number of lives covered

+ Single + Joint + Joint and survivor

Joint life annuity

- "first-to-die"- pays until first of two (or more) annuitants die. +Not commonly used. - Joint-and-last survivor annuity: pays until both annuitants die. + Very common Estate option. - Can combine with other refund options, like joint and survivor, 10 years certain. - Can choose payout with lesser amount for survivor - eg. Life annuity with 50% survivor

Deferred Annuities

- Accumulation period (deferral) + Upon death, greater of gross premium without interest, or cash value (before annuitization begins) * whichever is LARGER. + Cash surrender provision : terminate contract, withdraw full cash value (minus surrender charges) . - Liquidation period + Annuitization (payout period) + Can elect to commence before or after specified date.

Actuarial Considerations

- Annuity mortality tables different than life insurance (Better longevity - lower mortality) + Focus on surviving lives and longevity. + Improving mortality is bad for annuities. + Women enjoy greater longevity. + Sick people don't buy annuities, healthy people do (adverse selection).

Annuity units (Variable annuities)

- Exchange accumulation units for annuity units at liquidation. + Number of units is fixed and revalued annually, reflecting current experience. + Number of units results from company assumptions regarding mortality, expense and market value. + Income payable determined by multiplying number of units times current annuity unit value.

Immediate

- First payment comes 1 full payment period after purchase.

Deferred

- First payment comes more than 1 full payment period after purchase. + Often purchased with periodic payments over time.

Variable Annuities

- Guarantees popular today- GMIB, GMAB, GMWB. +Some companies leaving market or reducing guarantees, due to low interest and cost of derivatives backing the guarantees.

Time when payments begin

- Immediate - Deferred

Pure annuities

- Lifetime benefit only, no refunds or benefits after annuitant dies. + Largest payment (smallest premium).

Classification of Annuities

- Method of premium payment + Single premium + Installments -Nature of insurer's obligation (time when payments stop) + Pure annuity (straight life, life-no refund) + Refund annuities - cash and installment - Type of Benefits + Fixed dollars + Variable dollars (accumulation and annuity units)

Equity Indexed Annuities

- Participation rate (percentage of index increase) - Cap rate (maximum crediting rate) - Crediting floor (minimum crediting rate): minimum rate is guaranteed - Many methods for calculating contract value at end of term - Indexes: S&P most common (many others) - SEC regulation- Rule 151A - Dodd-Frank financial reform ruled this is not a variable product subject to SEC regulation

Structured Settlements

- Payouts in personal injury and wrongful death cases. - Annuity can provide lifetime income for the injured party, using a human life value approach. - Annuity provides financial security to injured party, benefits can match needs, funds are managed and payments guaranteed.

The Annuity Principle

- Pooling: those dying early pay for those living longer - Law of Large Numbers: reflect assumed mortality of premium calculation -Mortality, Interest, Expense: elements of premium (similar to life insurance) - Periodic payments + Fixed time (annuity certain no life contingency) + Life contingency (life annuity) + Payments consist of both principal and interest

Immediate Annuities

- Pure annuities - Refund annuities

Refund annuities

- Return some or all of purchase price. + The longer the guarantee or expectation of payments, the smaller the payment (larger the premium). - Life certain (10-years certain) - Installment refund (full cost recovery over time) - Cash refund (full cost recovery as lump sum)

Accumulation units (Variable annuities)

- vary by market performance (appreciation or depreciation). + like Net Asset Value (NAV) or share prices of stock. + total market value divided by number of shares.

"Pooling" is a factor in life insurance but has no importance in annuities.

F

A characteristic (disadvantage) of a joint-an-last survivor annuity is that it must be purchased with a single premium

F

If Joe and Maria purchase a joint-and-survivor annuity and Joe died after 5 years, payments would continue to Maria until her death and to her beneficiary after Maria's death.

F

Payments from an immediate straight life annuity will continue for at least 10 years after the death of the annuitant

F

A life annuity certain is always more expensive per dollar of income than a straight life annuity, all other things being equal.

T

A life annuity certain will pay a designated number of payments whether the primary annuitant lives or dies

T

A pure (or Straight) life annuity provides the maximum amount of income per dollar of outlay (premium).

T

Annuities can be used to both accumulate funds and then to liquidate those funds over an annuitant's remaining lifetime.

T

Life certain (10-years certain)

— More expensive than straight life annuity