Chapter 12 - Variable Annuities

single premium deferred annuity

purchased with a lump sum payment of benefits at a later date

what are the two major difference between mutual funds and variable annuities

1. earnings grow tax deferred mutual funds distribute dividends/capital gains which are taxable variable annuity does not 2. variable annuities offered income guaranteed to some extent mutual funds do not

what are the annuity payout options?

1. life income 2. life with period certain 3. joint life with last survivor

what are the investors options for withdrawal

1. lump sum 2. withdraw funds randomly 3. annuitize the contract

fixed annuity

annuitant pays money to insurance company insurer obligated to pay a guaranteed amount

Lifetime withdrawal benefit

ensures the annuity payments last for entire life even if the account balance is zero

what are the types of annuities?

fixed and variable

what makes annuities unique

guarantee it provides

what happens when annuitant with life income payout option dies?

income DOES NOT go to beneficiary

what risk is associated with fixed annuities?

purchasing power risk buying power decreases over time

guaranteed minimum withdrawal benefits

regular periodic payment to the annuitant until the principal value of the account runs out remember this does not always last for a lifetime

when an investor chooses the annuitization what needs to be established?

the assumed interest rate initial value for annuity units

accumulation phase

the growth phase

who bears the investment risk for a fixed annuity?

the insurance company guarantees a rate of return

what do the value of accumulation and annuity units vary with?

the separate account performance

what is the objective of these investments?

to match or exceed rate of inflation

joint owner with last survivor

when the one owner dies (usually spouse) other owner continues to receive payments

how does the annuitant determine if monthly income will increase or decrease?

compare the separate account performance with the AIR

if the investment manager of the insurance company directly manages the separate account

must be registered as an open ended management investment company

what are units called in the annuity phase

Annuity units

if an investor chooses random withdrawal how are those taxed?

LIFO earnings portion comes out first taxed as ordinary incoemn

annuities should be recommended

after all other retirement savings vehicles

life income payout

insurance company pays annuitant for life

where do the funds go for variable annuities

into insurers separate account

which variable annuity usually pays out the smallest monthly income

joint ownership with last survivor

sep. account < AIR

monthly income decreases

if the sep. account > AIR

monthly income increases

sep. account = AIR

monthly income stays the same

immediate annuity

payment with a lump sum payout begins within 30 days

Where do the annuitants funds go?

into a general account

what happens when accumulation units change into annuity units

the number of annuity units stays FIXED

what are the early withdrawal penalties for an annuity

59 1/2 10% penalty withdrawals are taxed with ordinary income on earnings portion

what must variable annuities be sold with?

a prospectus

what are the two distinct phases of an annuity

accumulation phase annuity phase

what are units called in the accumulation phase

accumulation units

periodic payment deferred annuity

allows investment overtime payment of benefits at a later date

what happens when annuitant dies with life with period certain option

beneficiary receives remaining payments for remaining number of years

life with period certain payout option

certain period that payment occurs

monthly payment of annuititzaton

portion cost basis portions earnings

what does the assumed interest rate represent?

projection of the performance of the separate account over the lifetime of the product

investors ownership in variable annuity account

proportionate share of securities value of portfolio rises and falls with underlying securities

what is the beneficiary liable for in the death benefit provision?

taxed on earnings received as ordinary income

if the investment manager of the insurance company passes off management responsibility

must be registered as an UIT

combination annuity

variable and fixed investor contributes to both separate and general account inflation protection and guaranteed return

who are VA suitable for

1. those who can make cash payment 2. want supplemental income for retirement

Who are VA's not suitable for

1. those who might need to make a lim sum withdrawal 2. those with low risk tolerance 3. those who want to use a tx favored account

death benefit provision

if annuitant dies during the accumulation period death benefit is paid to the beneficiary --- amount of investments + accrued earnings

who would a lifetime benefit withdrawal be appropriate for ?

individual expecting a lengthy retirement

what is taxable for annuities

not the contributions made because they are after tax dollars --- cost basis earnings in excess of the cost basis

annuity phase

payout phase

who can sell variable annuities

someone with an insurance license and securities license

what must the annuitant do at the time of annutization?

choose an annuity payout option

what do investments for variable annuities include?

common stock mutual funds bonds

which variable annuity usually pays out the larges monthly income

life income

annuity

life insurance product supplemental retirement income guaranteed stream of income payments for life