Annuities

A and B have an annuity that will pay periodic income to both until one dies. After one dies, the annuity will pay nothing to the survivor. They have a ___ annuity. - life - refund life - joint life and survivorship - joint life

- Joint life A joint life annuity provides payments to two or more annuitants but stops paying when one annuitant dies; the survivor gets nothing. A joint life and survivorship annuity (or last survivor annuity) provides annuity payments to two or more annuitants until the last annuitant (the survivor) dies.

Annuity unit

- pay out period - annuitant's share of account - payments increase/decrease based on changes in value of investments

Which of these is purchased with the premium less sales charges and taxes? - Accumulation unit - Annuity unit - Separate account - General account

- Accumulation unit The net premiums (less sales charges and taxes) are used to purchase accumulation units in a variable annuity.

Accumulation Unit

- Accumulation (pay in) period - net premiums - value of units increases/decreases based on changes in value of investments

F and S had a variable joint and 2/3 to survivor life annuity. When F died, S received 2/3 of - the annuity units accumulated by F during the payout period. - the dollar value of the annuity units on which F's installments are based, for life. - F's last monthly installment for the length of the S's normal life expectancy. - F's last monthly installment until S reaches F's age of normal life expectancy.

- the dollar value of the annuity units on which F's installments are based, for life. Under this option the survivor will receive income for life but it will be based on 2/3 of the value of the annuity units in the account.

annuitant

An annuitant is a person who receives annuity payments: for life (in which case the payments would stop upon the death of the annuitant); or for a specified or guaranteed period.

immediate annuity

An annuity may be immediate or deferred. An ___________________________________ will begin paying income to the annuitant immediately. "Immediately" means at the end of the first payment period selected by the annuitant (e.g., monthly, quarterly). Therefore, if annuity payments are to be made on a monthly basis, the first payment will be made one month after funding the contract. Immediate annuities may only be funded with a single premium.

For Example

For Example John bought a variable annuity contract from Larger Than Life Insurance Company. He agreed to pay a $350 monthly premium to the company until age 60. Each month his premium purchased accumulation units. The value of each unit went up or down just as the value of his mutual funds share would go up or down. Each premium got him more units. When he retired at age 60, his accumulation units were converted to annuity units. He received 760 annuity units. Based on the number of units and their value, he began to receive annuity payments of $2,300 per month. However, each month as the value of the investments changed, his annuity payments changed as well.

owner of the annuity

The owner of the annuity (usually the annuitant) pays an insurance company to fund the annuity contract and create the estate. The funds paid to the insurance company: earn interest if the annuity is a fixed annuity; or are invested and earn a return on investment if it is a variable annuity.

Group Life Annuity

Insurance companies offer annuities, a type of tax-sheltered pension plans, as an option for retirement savings. Participants contribute to annuities in exchange for future payments -- called annuities -- to the retiree or, if applicable, to survivors. Although individuals may enter into annuity contracts with insurers, group annuity contracts are between insurers and employers that limit participation to their eligible employees.

individual life annuity

bases annuity payments on the life of one annuitant, and the payments cease when the annuitant dies.

fixed-installment annuity

involves level periodic premium payments. These payments are made in equal (i.e., level) amounts at specified times (e.g., annually, monthly) until the date annuity income payments begin. Only a deferred annuity may be purchased using this method.

Review 3

A deferred annuity will defer annuity payments until some time later than a one-payment interval from the date of purchase. Premiums for deferred annuities create cash value, just as they do in permanent insurance policies. Additionally, since there is a possibility that the annuitant may die during the accumulation period and before receiving any annuity payments, the annuity will provide a death benefit. The death benefit is only paid if the annuitant dies during the accumulation period; and before any annuity income payments are received. A single-premium annuity is paid for in a lump sum. A single premium may purchase an immediate annuity (i.e., a single-premium immediate annuity [SPIA]) or a deferred annuity (i.e., a single-premium deferred annuity [SPDA]). An immediate annuity may only be purchased with a single premium. A flexible-premium annuity also involves funding by periodic premium payments. However, these premiums may be paid at varying times and in varying amounts between a set minimum and set maximum. IRA annuities must be flexible-premium annuities. Because the amount of the premiums that will be paid cannot be determined in advance, the annuity benefits cannot be determined either until the contract owner stops paying premiums. Annuity payments may be made for a specified or guaranteed period; or the annuitant's life.

single-premium annuity

An annuity can be paid for in a number of ways. A _____________________________________is paid for in a lump sum. A single premium may purchase an immediate annuity (i.e., a single-premium immediate annuity [SPIA]) or a deferred annuity (i.e., a single-premium deferred annuity [SPDA]). An immediate annuity may only be purchased with a single premium.

fixed annuity

In addition to the expense and mortality guarantee, a _________________________ has an additional guarantee. It guarantees a minimum interest yield, just as a whole life policy guarantees the interest on the cash value account. However, the rate applied (i.e., the current rate) may be higher. As a result, with a fixed annuity, the periodic annuity payment is level and guaranteed; the insurer bears the risks associated with mortality, expense and interest rate. In order to be able to guarantee the return, the insurer invests in stocks and bonds that pay a fixed rate of return as part of the insurer's general account. For Example Basil's annuity contract is a fixed annuity as it guarantees that Rosemary's monthly payments will be $1,000. If the insurer does not earn the interest it expected to on the premiums, has higher expenses than it projected or suffers losses because its insureds are living longer, it must still pay Rosemary $1,000 per month.

life annuity with period

The life annuity with period (or installments) certain has the features of both the life annuity and the annuity certain. It will: provide annuity payments for the longer of: - a certain specified period; or - the annuitant's lifetime. guarantee that the payments will be made for at least the certain period. If the annuitant dies before the end of that period, his beneficiary will receive the payments to the end of the period. If the annuitant outlives the guaranteed period, he will continue to receive payments until his death with nothing paid to the beneficiary.

Market Value Adjusted Annuities (MVA)

can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to market conditions. A market value adjustment (MVA) is the increase or decrease in the value of the assets held by the insurance company. This increase or decrease in value can be passed on to the client to help create an annuity that can offer more client friendly features. This adjustment is typically only passed on to the client on withdrawals in excess of the free withdrawal amounts which includes full surrender.

cap

Some equity-indexed annuities have a _____________ on the interest rate. If the cap is 7%, no more than 7% will be credited to the annuity, regardless of the gain in the index. The EIA will typically guarantee: a minimum return of 90% of the premium paid, plus 3% annual interest; and provide that the annuity will not be charged negative interest when the index decreases in value.

B has an immediate annuity that will make semiannual payments to him. He will begin receiving payments _____ month(s) after the date of his annuity purchase. - 1 - 3 - 6 - 12

- 6 An "immediate annuity" is a single premium annuity which begins annuity payments one payout interval (payment period) after its purchase. If payments are every 6 months, the first annuity payment will be 6 months from the date of purchase. If payments were quarterly, the first payment will be 3 months from the date of purchase.

S and W were joint annuitants. If S is continuing to receive payments after the death of W, they must have had a ____ annuity. - life - refund life - joint life and survivorship - joint life

- joint life and survivorship A joint life and survivorship annuity (or last survivor annuity) provides annuity payments to 2 or more annuitants until the last annuitant (the survivor) dies. A joint life annuity provides payments to 2 or more annuitants but stops paying when one annuitant dies; the survivor gets nothing.

joint-and-survivorship annuity

A joint-and-survivorship annuity (also known as last-survivor annuity) also bases its payments on the lives of two or more annuitants. However, these payments continue until the last surviving annuitant dies, and the payments are usually in a lesser amount after the first annuitant's death. For Example Cash was going to buy a life annuity that would pay him $5,000 per month. It included a provision that the payments would stop as soon as he died. His wife, Carrie, objected to that. Cash and Carrie discovered they could buy a joint-life annuity that would pay them $5,000 per month. However, the payments would stop as soon as either of them died. Carrie objected to that. Cash and Carrie could buy a joint and one-half annuity that would only pay them $4,000 per month but, after one of them died, would continue to pay $2,000 per month to the surviving annuitant until that annuitant's death. Cash and Carrie could also choose to buy a joint and two-thirds annuity that would pay them $3,600 per month. After one of them died, it would pay $2,400 per month to the surviving annuitant.

beneficiary.

When the total amount of payments or number of payments is guaranteed, regardless of the length of the annuitant's life, any payments made after the death of the annuitant are paid to the annuitant's _________________________________

joint-life annuity

bases annuity payments on the lives of two or more annuitants. These payments cease as soon as one annuitant dies.

A level premium annuity - is purchased with a single premium. - pays level income annually to the annuitant. - is purchased in installments prior to the date annuity payments start. - is completely paid for at least one year before annuity payments start.

- is purchased in installments prior to the date annuity payments start. A level premium annuity is a deferred annuity purchased with level periodic (annual, monthly, etc.) premium payments until the date the annuity payments (income) starts.

annuity unit

Once the annuity payout is to begin, the accumulation period is over. Then the annuitant's interest in the separate account is converted to annuity units. An annuity unit is an accounting measure used to determine the annuitant's share of the separate account after annuity payments begin (i.e., the annuity period). The number of annuity units the annuitant will be given is determined by: the value of his accumulation units. his life expectancy, if he will receive payments for life. the payout option he selects. the insurer's assumed interest rate. The number of annuity units will never change. But as the value of the separate account increases or decreases in relation to the assumed interest rate, the value of each annuity unit will increase or decrease. In the long term, it is expected that the value of the separate account will rise to keep pace with increases in the cost of living, although in the short term, the value of the separate account can decrease.

If T has an annuity in which the value of T's account rises or falls based on performance of the investments, T's annuity is - variable. - fixed. - life with installments (period certain). - annuity certain (period certain).

- variable. In a variable annuity the growth of annuity value and the amount of benefits are variable, based on the insurer's return on its investments. In a fixed annuity the growth is at a fixed rate and the benefits are fixed.

Review

An annuity is a contract with a life insurance company that provides for liquidation of an estate (i.e., conversion of an estate to cash) through a series of regular installment payments to an annuitant. An annuitant is a person who receives annuity payments. Any payments made after the death of the annuitant are paid to the annuitant's beneficiary. The owner of the annuity (usually the annuitant) pays an insurance company to fund the annuity contract and create the estate. The funds paid to the insurance company: earn interest if the annuity is a fixed annuity; or are invested and earn a return on investment if it is a variable annuity. All earnings while held by the insurer are tax deferred. Taxes are paid on the earnings when the annuitant receives them as part of each annuity payment. The period of time during which premiums are being paid to fund an annuity is referred to as the accumulation period. The period during which annuity payments are made to the annuitant is known as the annuity period (or annuitization).

cash- or installment-refund annuity

(also known as a refund life annuity) pays until the annuitant dies or the total amount of premiums paid for the annuity is refunded, whichever is longer. If the annuitant dies before the premiums have been refunded, the difference is paid to the annuitant's beneficiary. Refunds are paid as follows: - In a cash-refund annuity, the refund is paid in a lump sum. - In an installment-refund annuity, the refund is paid in continued annuity payments of the same amount as had been paid to the annuitant until the entire difference has been paid out. For Example In June 2009, Tater selected a life annuity with 10-year period certain payment option. It will provide annuity payments at least through June 2019. If he dies before then, his beneficiary, Ida, will receive the payments through June 2019. If Tater lives past that date, he will continue to receive payments until he dies. Over the years Caster had paid in $75,000 in premiums for his refund life annuity. By the time he died in 2012, he had been refunded a total of $20,000 in annuity payments in $1,000 monthly installments. The insurer owed Lani, his beneficiary, the remaining $55,000. If the annuity were a cash-refund annuity, she would get a check for $55,000, but if it were an installment-refund annuity, she would receive 55 monthly payments of $1,000.

flexible-premium

annuity also involves funding by periodic premium payments. However, these premiums may be paid at varying times and in varying amounts between a set minimum and set maximum. IRA annuities must be flexible-premium annuities. Because the amount of the premiums that will be paid cannot be determined in advance, the annuity benefits cannot be determined either until the contract owner stops paying premiums. For Example Heather's payment of a $50,000 lump sum premium made her annuity a single-premium annuity, and she chose to buy an immediate annuity. She could also have used it to buy a deferred annuity that would begin paying her income at a later age. John's annuity was a fixed-installment annuity, purchased with the payment of $350-per-month premiums. Since he agreed to pay $350 per month up to age 60, he will not begin to receive annuity payments until he is finished making his payments. John's annuity is a deferred annuity. Amber has an IRA annuity. Each year she puts up to $3,000 into the annuity whenever she wants during the year. She is not obligated to put $3,000 in each year. Some years she puts in less, and in other years she does not fund the annuity at all.

equity-indexed annuity (EIA)

A variation of the fixed annuity is the _______________________________________. This is a fixed annuity that credits interest based on a current interest rate and has a guaranteed minimum interest rate. During the accumulation period, the current interest rate is tied to an equity (stock) index. The most commonly used index is the Standard and Poor's 500 Composite Stock Price Index (the S&P 500). The amount of the current interest rate is determined by: applying a participation rate to the gain in the index; and/or deducting a spread, margin or asset fee from the gain. For Example An EIA provides for the participation rate to be 80% of the annual gain in the S&P 500. If the gain in the index had been 10% for the year, the current interest rate would be 8% (80% of 10%). Another EIA has a margin of 2.5%. If the gain in the index had been 10% for the year, its current interest rate would be 7.5% (10% - 2.5% = 7.5%).

Fixed vs. Variable Annuities

Some annuities provide for fixed payments; others provide variable payments. Both fixed annuities and variable annuities are based on expense and mortality guarantees from the insurer. These are guarantees that the annuity benefits will not be affected by any adverse experience in terms of: insurer expenses (i.e., the expense guarantee); and/or the person living longer than expected (i.e., the mortality guarantee).

X purchased an immediate annuity from LMNO Insurance Co. X will begin receiving annuity payments - after one year. - at any time agreed upon by X and LMNO. - at a specified date after a number of years. - after a period equal to the period of time between annuity payments.

- after a period equal to the period of time between annuity payments. An "immediate annuity" is a single-premium annuity which begins annuity payments one payout interval (payment period) after its purchase. If payments are every six months, the first annuity payment will be six months from the date of purchase. If payments were quarterly, the first payment will be three months from the date of purchase. A "deferred annuity" is any annuity which begins payments later than one payment interval from the date of purchase. Installment premiums (level or flexible) may only purchase deferred annuities; they cannot purchase immediate annuities. Single premiums may purchase deferred annuities or immediate annuities.

Q paid $75,000 for a life annuity with 20-year period certain. This annuity will provide payments - only for 20 years. - which will total $75,000 in 20 annual installments. - for 20 years, or Q's life, whichever is longer. - only for Q's life.

- for 20 years, or Q's life, whichever is longer. The life annuity with installments (period) certain provides for payments for the annuitant's life with a guarantee that payments will be made for a certain period. For example, a life annuity with 10-year period certain will provide for payments to be made for 10 years or the annuitant's lifetime, whichever is longer. Therefore, the least that will be paid is 10 years of payments. If the annuitant dies within the 10-year period, his survivor will receive payments for the rest of the 10 years. If the annuitant lives longer than 10 years, he will continue to receive payments until he dies. "Only for 20 years" describes a period certain annuity, which will only pay the annuitant for the selected period of time, and not for life. "Only for Q's life" describes a life annuity, in which payments will stop upon the death of the annuitant and will pay nothing to the survivor.

A flexible premium annuity - pays varying amounts based on the returns of the separate account investments. - is an immediate annuity. - guarantees the amount of future payments. - is a deferred annuity which cannot guarantee the payments in advance because the premium payment amounts are flexible.

- is a deferred annuity which cannot guarantee the payments in advance because the premium payment amounts are flexible. Flexible premium annuity is a deferred annuity purchased with periodic premium payments which may vary in amount between a set minimum and maximum. Benefits will be based on the amount of premium paid. Because the amount of premiums that will be paid cannot be determined in advance, benefits cannot be determined in advance either. Only a single premium can create an immediate annuity.

S has an annuity that provides that, if S dies before he has received at least the $50,000 he paid for the annuity, S's beneficiary will receive payments until $50,000 has been paid out. This annuity is a ____ annuity. - refund life - life with no refund - straight life - joint and survivorship

- refund life A refund life annuity (or life income with refund annuity) will guarantee that at least the amount paid for the annuity will be paid out to the annuitant or to his beneficiaries if he dies before receiving that amount. In addition it provides that the annuitant will receive income for life if he is still living after that amount has been paid, e.g., an annuitant paid $10,000 for an annuity paying $1,000 a year. If he dies after receiving $6,000 in payments, his beneficiary will be paid $4,000, either in a lump sum or in installments. If he is still alive after receiving the $10,000, he will continue to receive his payments until he dies. This is a life income annuity with a guarantee of receiving at least the amount paid for the annuity.

accumulation period.

The period of time during which premiums are being paid to fund an annuity is referred to as the accumulation period. The period during which annuity payments are made to the annuitant is known as the annuity period (or annuitization). Once annuitization has begun, no further premium payments may be made towards the annuity's cash value. If the annuitant wishes to make further contributions, he would have to purchase an entirely new annuity. Premium payments are credited to the contract owner's cash value account. The insurer guarantees that a minimum rate of interest will be applied to the account, although the credit may be higher based on current earnings. For Example Basil buys an annuity contract for his wife, Rosemary, from Larger Than Life Insurance Company. The contract provides that, if Basil pays $300 per month to the company until Rosemary is 65, at that time she will receive annuity payments of $1,000 per month that will continue for the rest of her life. Because Basil is the purchaser, he is the contract owner. Rosemary will receive the payments and, thus, is the annuitant. In Basil's annuity contract, the $300 monthly premium payments should earn enough interest to create a fund that will enable Larger Than Life Insurance Company to provide the $1,000-per-month income to Rosemary starting at age 65. Once she starts receiving her annuity payments, she will be taxed only on the interest portion of the $1,000 payments.

Which of the following is "flexible" in a flexible premium annuity? - Interest rate - Amount of annuity payments - Number of annuity payments - Amount of premium payments

- Amount of premium payments Flexible premium annuity is a deferred annuity purchased with periodic premium payments which may vary in amount between a set minimum and maximum. Benefits will be based on the amount of premium paid. Because the amount of premiums that will be paid cannot be determined in advance, benefits cannot be determined in advance either. Only a single premium can create an immediate annuity.

Which of these remains fixed in number, but varies in value? - Accumulation unit - Annuity unit - Separate account - General account

- Annuity unit Once the payout is to begin, the annuitant's interest in the separate account is converted to annuity units. The annuitant will receive a certain number of annuity units. This number will remain fixed throughout the payout period. As the value of the separate account varies, the value of each annuity unit will vary, but the number of units will not change. The number of units is determined by dividing the annuitant's first monthly payment (which is based on the value of his accumulation units, his life expectancy, payout option, and assumed interest rate) by the value of 1 unit, e.g., if his first monthly payment is $200 and 1 unit is worth $4, he will have 200 ÷ 4 = 50 annuity units. As the value of the account increases or decreases in relation to the assumed interest rate the value of each annuity unit will increase or decrease but the number of units will remain fixed, e.g., if the value of a unit rises to $5, he will receive 5 x 50 = $250.

If both an older and younger person had annuity funds of the same amount and simultaneously began to receive lifetime monthly payments, who would receive the larger payments? - The older person. - The younger person. - Both would receive the same amount. - Either, depending on the purchase date of the annuity.

- The older person. Because an older person would be expected to receive fewer payments, the payments he would receive would have to be larger. The basis for life payout choices is the annuitant's life expectancy at the time of annuitization, therefore the older the person, the larger the payments with all things being equal in terms of the annuity benefit.

A (n) "_____" is the accounting measure used to determine an annuitant's interest in the variable annuity separate account prior to payout. - premium - dividend - annuity unit - accumulation unit

- accumulation unit Premiums paid for a variable annuity are placed in a "separate account" (an account separate from accounts for fixed annuities and insurance). There, after deductions for sales charges and taxes, they are converted to accumulation units (accounting measures to determine the annuitant's share of the account during the premium payment [accumulation] period). An "annuity unit" is an accounting measure used to determine the annuitant's share of the account after annuity payments begin.

If H has a life with period certain annuity and outlives the "period certain"; the insurer will - pay the commuted value. - hold the remaining proceeds. - continue making payments of the same amount until H dies. - continue making payments of a lesser amount until the proceeds are exhausted.

- continue making payments of the same amount until H dies. The life annuity with installments (period) certain provides for payments for the annuitant's life with a guarantee that payments will be made for a certain period. For example, a life annuity with 10-year period certain will provide for payments to be made for 10 years or the annuitant's lifetime, whichever is longer. Therefore, the least that will be paid is 10 years of payments. If the annuitant dies within the 10-year period, his survivor will receive payments for the rest of the 10 years. If the annuitant lives longer than 10 years, he will continue to receive payments until he dies.

A fixed annuity with a guaranteed minimum interest rate and a current interest rate is the - flexible premium annuity. - fixed and variable annuity. - equity index annuity. - deferred annuity.

- equity index annuity. An equity index annuity is a fixed annuity with a guaranteed minimum interest rate and a current interest rate. The current rate is tied to a stock index, most commonly to the Standard and Poor's (S&P) 500.

All of the following are offered by both a fixed annuity and variable annuity EXCEPT - expense guarantee. - guaranteed interest yield. - payments on a deferred basis. - payments on an immediate basis.

- guaranteed interest yield. In a fixed annuity there is a guaranteed minimum interest yield just as there is in a whole life cash value account. But in a variable annuity there is no guaranteed interest yield, as the yield will be based on the return from the securities in the separate account. In all other respects fixed annuities and variable annuities are similar. They are based on expense and mortality guarantees that provide that annuity benefits will not be affected by any adverse experience in terms of insurer expenses or persons living longer than expected. Also both types of annuities can have deferred payments or immediate payments.

C has a deferred annuity. This annuity may pay a death benefit to C's beneficiary - if C dies before receiving any annuity payments. - only if C dies before receiving income payments totaling the amount of his premiums. - only if the payment option is a life income annuity. - only if the payment option is an immediate annuity.

- if C dies before receiving any annuity payments. Under a deferred annuity the annuitant could die during the accumulation period (the period during which premiums are paid to fund the annuity) and before receiving any benefits, since premiums are generally paid over a number of years. Therefore, the insurer will provide a death benefit if this happens. The benefit is often a refund of premiums paid. Some insurers offer to refund the premiums plus some interest; others offer to refund premiums less expenses. There are no death benefits paid if the annuitant dies after starting to receive annuity payments.

Review 2

A fixed annuity has a guarantee. It guarantees a minimum interest yield, just as a whole life policy guarantees the interest on the cash value account. However, the rate applied (i.e., the current rate) may be higher. As a result, with a fixed annuity, the periodic annuity payment is level and guaranteed; the insurer bears the risks associated with mortality, expense and interest rate. A variable annuity does not guarantee the amount of the periodic annuity payment. It has no guaranteed interest yield. Instead, the yield on its cash value and the annuity payments will vary based on the insurer's return from investments in securities in a separate account. Because of the annuitant's investment risk, the annuity must be registered with the Securities and Exchange Commission (the SEC); the producer must be registered with the SEC and be licensed in securities with the Financial Industry Regulatory Authority (FINRA) and the annuitant must be given a prospectus no later than the time of application. A variation of the fixed annuity is the equity-indexed annuity (EIA). This is a fixed annuity that credits interest based on a current interest rate and has a guaranteed minimum interest rate. During the accumulation period, the current interest rate is tied to an equity (stock) index. The most commonly used index is the Standard and Poor's 500 Composite Stock Price Index (the S&P 500). An immediate annuity will begin paying income to the annuitant immediately. "Immediately" means at the end of the first payment period selected by the annuitant (e.g., monthly, quarterly). Therefore, if annuity payments are to be made on a monthly basis, the first payment will be made one month after funding the contract. Immediate annuities may only be funded with a single premium.

Annuity

An annuity is a contract with a life insurance company that provides for liquidation of an estate (i.e., conversion of an estate to cash) through a series of regular installment payments to an annuitant. These payments can be scheduled so that they provide retirement income and are protection against the possibility of the annuitant outliving his financial resources. While life insurance is intended to create an estate to be paid in a lump sum or in installments, an annuity is intended to pay proceeds from an estate in installments. The term "estate" refers to the annuity benefit (the total amount of dollars in the account when distributions begin) which will be "liquidated" through a series of installment payments to the annuitant. An annuity is a life insurance product. However, it does the opposite of a life insurance policy. While life insurance provides protection against a person dying prematurely and pays when a person dies, an annuity provides protection against a person living too long by paying income while he is alive. In annuities, the amounts necessary to fund the contracts are determined by the use of mortality and annuity tables and the application of mathematical principles. By using statistics relating to annuitants, a life insurance company is able to make predictions as to the amounts required to provide payments to each member of a group of annuitants until death. In order to determine which annuity would best meet the consumer's specific needs, the following information should be considered: -occupation and occupational status -marital status and number and type of dependents -age -sources of income and yearly income -consumer's existing insurance -consumer's insurance needs and objectives -cost to the consumer and the consumer's ability to pay for the proposed transaction or transactions -source of funds to pay premiums -investment savings, liquid net worth -tax status and need for tax advantages -investment experience of the consumer -consumer concern for preservation of principal Disclosure of liquidity limitations or surrender charges should also be made in assisting the consumer to select an appropriate product for his needs. An insurer is required to have reasonable grounds for believing that the recommended product is suitable for the consumer based on the information and other facts provided by the consumer. All earnings while held by the insurer are tax deferred. Taxes are paid on the earnings when the annuitant receives them as part of each annuity payment.

life annuity

Annuity payments may be made for: - a specified or guaranteed period; or - the annuitant's life. A ___________________________________also known as a straight life or pure life annuity) provides payments for the life of the annuitant. The amount of each payment is based on: -the annuitant's estimated life expectancy which takes into account his age, sex, health and other factors. As a result, the older the annuitant is when payments begin, the larger his periodic payments will be. - the amount of premiums paid for the annuity. - the amount of interest earned on the funds held by the insurer. With a life annuity, the annuitant will receive annuity payments for life, even if he outlives the amount he paid into the annuity plus the interest it earned. The payments will stop when he dies, even if that is after only one payment. Because a life annuity has no guaranteed minimum number or amount of payments, it provides larger annuity payments than those annuities that do have such guarantees. This type of annuity is best for a person who wants to receive the largest possible income payments and/or who has no dependents as a life annuity does not provide any payments to a beneficiary after the annuitant dies. Other payment options do provide for a guaranteed total dollar amount to be paid out or a total number of payments regardless of the length of the annuitant's life. It is with those options that payments may be made to a beneficiary after the death of the annuitant. For Example In June 2001, Paul bought a life annuity. After receiving one payment, he died in a car crash. His dependents will get nothing. In June 2001, Lisa also bought a life annuity. She lived to the age of 103 (20 years beyond her life expectancy) and died clutching the current month's annuity check in her hand.

annuity certain

The annuity certain (or period certain) annuity provides annuity payments for a certain specified period of time (e.g., 20 years). The amount of each payment is based on the period selected rather than on the annuitant's life expectancy. This is because payments will be made for that selected period only, whether the annuitant dies before the end of the period or lives beyond it. If the annuitant is still alive at the end of the period, payments would cease. If he were to die before the end of the period, his beneficiary would receive the payments still owing for the remainder of the period. For Example In June 2001, Caster bought a 10-year certain annuity to provide him with annuity payments through June 2011. Payments will cease in June 2011, even if he is still living. If Caster dies before then, his beneficiary, Lani, will receive payments through June 2011.

variable annuity

does not guarantee the amount of the periodic annuity payment. It has no guaranteed interest yield. Instead, the yield on its cash value and the annuity payments will vary based on the insurer's return from investments in securities in a separate account. This means the annuitant bears the investment risk. This is the price he has to pay for the chance to get higher annuity payments to counter the effects of inflation. Because of the annuitant's investment risk: the annuity must be registered with the Securities and Exchange Commission (the SEC). the producer must be registered with the SEC and be licensed in securities with the Financial Industry Regulatory Authority (FINRA). the annuitant must be given a prospectus no later than the time of application. Premiums paid for a variable annuity are placed in a separate account. After deductions for sales charges and taxes, the net premiums are converted to accumulation units. Accumulation units are accounting measures to determine the annuitant's share of the separate account during the period in which premiums are being paid to fund the annuity (i.e., the accumulation period). The value of an accumulation unit is equal to the value of the securities in the separate account divided by the number of accumulation units outstanding in the account. Value of securities in separate account ÷ number of accumulation units = value of 1 accumulation unit With each additional premium paid and the reinvestment of stock dividends and capital gains distributions, the number of accumulation units will increase. However, the value of each accumulation unit will increase or decrease as the value of the securities in the separate account increases or decreases.

deferred annuity

will defer annuity payments until some time later than a one-payment interval from the date of purchase. Premiums for deferred annuities create cash value, just as they do in permanent insurance policies. Additionally, since there is a possibility that the annuitant may die during the accumulation period and before receiving any annuity payments, the annuity will provide a death benefit. Depending on the annuity, the death benefit may be: a refund of the premiums paid. a refund of premiums plus some interest. a refund of premiums less insurer expenses. payment of the cash value. The death benefit is only paid if the annuitant dies: during the accumulation period; and before any annuity income payments are received. For Example Heather inherited $50,000 with which she purchases an immediate annuity from Larger Than Life Insurance Company. The annuity will pay her $1,000 per month for the rest of her life with her first payment being sent to her one month after purchase. If she had decided on quarterly payments, her first $3,000 payment would have been sent to her in three months. Rosemary's annuity is a deferred annuity since she will not receive annuity payments until she is 65. If she dies before receiving any payments, the insurer will pay the amount of the cash value in the annuity as a death benefit to her beneficiary, Justin.

Which of the following is true about annuities? - A single-premium annuity can be immediate or deferred. - An installment premium annuity can be immediate or deferred. - An IRA must be a level premium annuity. - A flexible premium annuity has a predetermined annuity benefit.

- A single-premium annuity can be immediate or deferred. An "immediate annuity" is a single-premium annuity which begins annuity payments one payout interval (payment period) after its purchase. If payments are every six months, the first annuity payment will be six months from the date of purchase. If payments were quarterly, the first payment will be three months from the date of purchase. A "deferred annuity" is any annuity which begins payments later than one payment interval from the date of purchase. Installment premiums (level or flexible) may only purchase deferred annuities; they cannot purchase immediate annuities. Single premiums may purchase deferred annuities or immediate annuities. Only a single premium can create an immediate annuity. Note, IRA annuities must be flexible-premium annuities, not level-premium annuities.

Review 4

A life annuity (also known as a straight life or pure life annuity) provides payments for the life of the annuitant. The annuity certain (or period certain) annuity provides annuity payments for a certain specified period of time (e.g., 20 years). The life annuity with period (or installments) certain has the features of both the life annuity and the annuity certain. It will provide annuity payments for the longer of a certain specified period; or the annuitant's lifetime. A cash- or installment-refund annuity (also known as a refund life annuity) pays until the annuitant dies or the total amount of premiums paid for the annuity is refunded, whichever is longer. An individual life annuity bases annuity payments on the life of one annuitant, and the payments cease when the annuitant dies. A joint-life annuity bases annuity payments on the lives of two or more annuitants. These payments cease as soon as one annuitant dies. A joint-and-survivorship annuity (also known as last-survivor annuity) also bases its payments on the lives of two or more annuitants. However, these payments continue until the last surviving annuitant dies, and the payments are usually in a lesser amount after the first annuitant's death.