Ch 14: Annuties

who is an annual premiums annuity suitable for?

- 45 y/o single male with very little in liquid assets but is saving for retirement - is certain he will retire in 10 years and requires an income of a specified amount

What companies sell immediate variable annuities directly to investors

- Fidelity - T Row Price - TIAA-CREF

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested.

- Fixed Annuity - Life Annuity

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Janice, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible.

- Fixed Annuity - Straight Life Annuity

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

- Fixed annuity - Life Income annuity

Which companies sell tax deferred variable annuity?

- USAA - Vanguard

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retirement benefits to be protected against the risk of inflation.

- Variable protects against inflation

fixed annuity

- benefit is expressed in terms of stated dollar amount based on a guaranteed rate of return

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Jose, age 35, is a sales representative and plans to retire at age 67. His monthly income varies. He would like to invest in an annuity that allows him to change the frequency and amount of premium payments.

- deferred annuity - flexible premium

Early withdrawal penalities for annuities

- early withdrawal penalty of 10% on withdrawals prior to age 59 1/2 in addition to ordinary income tax payable on withdrawals - surrender charge imposed by insurance company of 7% to 8%

An annuity is the opposite of _____ and pays when?

- life insurance - annuity pays while you are alive

What is used in pricing annuities

- mortality tables - interest rates

annuity payments may be

- only during the life time of an annuitant - guarantee a certain number of payments - based on 2 or more lives

An annuity is an appropriate risk management tool for

- retiring couple who want to ensure a certain level of income - death of a single parent to support young children - newly widowed individual who needs to withdraw from savings to maintain a certain standard of living

What should you shop for when looking for an immediate annuity

- simply shop for the annuity that will give you the highest income, sticking with top rated insurance companies

For each of the following retirement objectives, identify either (1) a specific annuity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately. Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants to protect her principal against loss.

- variable annuity - fixed - indexed annuity

types of annuity

1) annuity certain 2) straight life 3) joint and survivorship

3 elements that make up a payment to an annuitant

1) interest earnings 2) partial liquidation of principal 3) survivorship benefit

Single Premium Annuity

An Annuity purchased with one lump sum payment. - suitable for inheritance to fund a future retirement

Joint and Survivor Annuity

Based on the lives of two or more annuitants

T/F An annuity is a contract that provides for a series of payments made over a specified period of time which are usually comprised entirely of income.

F - Partial liquidation or principal, survivorship benefits, and investment earnings

Annuity premiums are paid for with before tax dollars.

F - after tax

T/F The payout of a life income annuity with a 10 year guarantee will provide more income than a life income only annuity.

F - it will provide less income

T/F An annuitant is a company that issues annuities.

F - person who receives annuity

T/F The exclusion ratio refers to the age eligibility of when a person can start receiving annuity payments

F - portion of each annuity payment that is not included in the recipients taxable income

T/F Annuities are generally purchased as a way to guard against the possibility that the annuitant will die prematurely.

F - provides income in retirement/ while you are alive

T/F A fixed annuity is paid for all at once.

F - single premium annuity

T/F An annuity certain contains a survivorship element.

F - straight life contains a survivorship element

T/F A joint and survivor annuity begins making benefit payments at the death of the first annuitant and pays until the death of the survivor.

F pays while both are living

T/F A straight life annuity requires premium payments that are paid for during the lifetime of the annuitant.

False - Receive payments - straight life has the highest amount of income

Why fixed annuity benefit be higher than the minimum amount guaranteed in the contract?

If interest earnings, expenses or mortality experience is better than what is assumed

What happens to the funds after the death of the annuitants

No funds remaining after the annuitant's death for bequest to children or other relative

A single premium annuity is purchased with a lump sum.

T

T/F A penalty of 10% may be assessed on a withdrawal from an annuity made prior to age 59 ½. This is in addition to ordinary income tax payable on the withdrawal.

T

T/F After the total purchase price of an annuity has been excluded from income, the subsequent benefit payments are fully taxable.

T

T/F An equity-indexed annuity is a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market.

T

T/F An immediate annuity is one in which benefits begin as soon as the annuity is purchased.

T

T/F Mortality tables and interest rates are using in pricing annuities

T

T/F Most annuities have a surrender charge if the annuity is surrendered during the early years of the contract.

T

T/F The benefits associated with variable annuities are expressed in term of annuity units that fluctuate with the performance of an investment portfolio.

T

T/F The primary reason that annuities are purchased is to supply retirement income.

T

T/F An annuity certain will pay benefits for a specified period of time, without regard to the life or death of the annuitant

T - i.e. 10 year period certain

Who is a straight life annuity suitable for?

a person that needs maximum lifetime income and has no dependents or has provided for them through other means

Use immediate annuities only for

a portion or retirement assets

With annuities what can you defer taxes on?

accrued investment earnings and survivorship benefits until annuitant begins to collect annuity benefits

What is distributed while the annuitants are alive?

accumulated capital as well as investment income

what happens if the annuitant dies before all payments are made in an annuity certain?

all payments are made and benefits continue to be paid to heirs

Nest Egg needed =

annual income in today's dollars you wish to retire on / 8% net inflation savings rate (12% - 4% inflation)

annual premiums annuity

annuity is paid for in regulaa installments

straight life annuity

annuity that pays benefits only during the lifetime of the annuitant

variable annuity

annuity unit fluctuates with the performance of a specified portfolio of investments

variable annuity benefit is expressed in terms of

annuity units

immediate annuity

begins as soon as the annuity is purchased

deferred annuity

benefits are deferred until sometime in the future; a particular time or may not be specificed

An immediate fixed or variable annuity looks like a good __________ for retirees

core investment

If a retiree receives $500,000 lump sum settlement for retirement at age 65, an annuity with guarantee $2000 until

death - whether death occurs at 69 or 96

Annuities are tax

deferred

Joint and Survivor Annuity payments continue as long as

either annuitant is alive

Who is flexible premium annuity suitable for?

for individuals saving for retirement from an unstable income

What purpose does an annuity funds fulfill?

fulfills the purpose for which the funds were originally accumulated

Life insurance settlement options can go into an

immediate annuity

timing of annuity

immediate or deferred

Straight Life Annuity pays the highest amount of

lifetime income for each dollar spent

What do annuity certain payments consist of?

payment consist of interest earnings and liquidation of principal

annuity certain

pays income only for a certain period of time without regard to death or life of annuitant

Immediate annuity allows for consolidation of various investments at retirement and

purchase an annuity that will begin to pay retirement income immediately

Annuities are purchased to supply

retirement income

Annuity certain has no ______ benefit

suvivorship

exclusion ratio

the fraction of each annuity payment that can be excluded from income taxation = original investment / total annuity benefits expected to be received

In the straight life annuity, the older the annuitant is when benefits begin the greater

the size of the payments

flexible premium annuity

the timing and amount of premiums is variable

Why may a variable annuity not be well suited for retirees?

they need a predictable income flow

What is the purpose of a variable annuity?

to provide an inflation hedge by maintaining the real purchasing power of the payments