Life Insurance Exam: Chapter 5 | Annuities

Accumulation Period

(aka Pay in period) Period of time in which owner makes payments into annuity

Fixed Annuity features

-Minimum rate of interest to be credited to the purchase payments -Income annuity payments do not vary (level benefit payment amount)

Annuities are generally used for:

-Planning for retirement -Someone who runs into a large lump sum (lottery) -College Education

Annuity Income is based upon...

-Premium Value -Frequency of Payment -Interest Rate -Annuitant's Age/Gender

Annuities can be paid into in 2 ways:

-Single, Lump-Sum Payment -Periodic Payments (level or flexible)

Annuity

A contract that provides income for a specific period of time or life. Protects a person from outliving their money.

Joint Life Annuity

A payout arrangement when 2 or more annuitants are covered until the first dies, then payments stop

Surrender Charge

A percentage of the cash value of the annuity that is paid to the insurer if the owner of the annuity forfeits annuity before annuitization.

Deferred Annuity

An annuity in which income payments are made more than one year from the date of purchase. Can be funded with single lump sum payment or periodic payments

Immediate Annuity (SPA, single premium annuity)

An annuity purchased with a lump sum payment, that provides income within one year from the purchase date

Life with Period Certain

Annuity payments are guaranteed for the lifetime of the annuitant AND for a specified amount of time for the beneficiary

Multiple Life Annuity

Cover two or more lives

Single Life Annuity

Covers one life only

Indexed Annuity (or Equity Indexed Annuity)

Fixed annuities that invest on an aggressive basis to aim for higher returns. Guaranteed minimum interest rate. Less risky than a variable annuity or mutual fund but are expected to return a higher interest rate than a fixed annuity

Life with Guaranteed Minimum (aka Refund Life)

If annuitant dies before principal amount has been paid out fully, the beneficiary receives the remainder also called refund life annuity

Waiver

If annuitant is confined to a Long-Term Care facility for at least 30 days, surrender charge is waived

Annuities may be owned by a trust, corporation or person, but the annuitant must be a ....

Natural person

Do the annuity owner and the annuitant need to be the same?

No

Fixed Annuity Disadvantage

Paying the same premium means that inflation over time could erode buying power

Pure Life Annuity

Payment ceases at annuitant's death. Provides highest monthly benefits for an individualized annuitant. Full amount of payout not guaranteed.

Upon the death of the annuitant...

Payments cease. No death benefit.

Joint and Survivor Annuity

Payout arrangement of 2 or more annuitants are covered, but payments occur until both die. After the first dies, the payment is received as a fraction (usually 1/2 or 2/3) of the previous payment prior to death of the first annuitant.

The owner ____ _____ the annuity which ____ ____ annuitant

Pays into, Pays to

In Fixed annuities the insurer bears the investment risk. Interest rates paid by the insurer are based upon:

Performance of the insurance company, but the rate must be > the policy's guaranteed minimum

Annuity Period

Period of time in which the sum of past premiums are converted into a stream of income for the annuitant

At surrender, the owner gets:

Premium + Interest - Surrender Value

Annuities Certain

Short-term annuities that limit amounts paid to a fixed period or a certain amount

Market Value Adjusted Annuity (or Modified guaranteed annuity)

Single-premium deferred annuity that allows owner to lock in a guaranteed interest rate over a specified maturity period. Penalties for surrender based on interest rate at the time.

Bail-Out Provision

Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain time frame.

A deferred Annuity has a guaranteed __________ ________ that is available if the owner decides to forfeit the annuity before annuitization.

Surrender Value

If the annuitant dies during the accumulation period...

The insurer is obligated to return cash value or total premiums paid, whichever is GREATER.

Mortality Tables

Used to determine income granted by annuities

Installment Refund -- Refund Life Annuity Type

When annuitant dies, beneficiary continues to receive guaranteed installments until the entire principal amount has been paid out

Cash Refund -- Refund Life Annuity Type

When annuitant dies, beneficiary receives lump sum refund of principal minus benefit payments already made to annuitant