Chapter 8 - Annuities

Installment Refund Annuity

A special type of term certain annuity whereby the insurer promises to continue periodic annuity payments after the annuitant has died until the sum of all annuity payments made equals the purchase price of the annuity.

term certain annuity

Acts as a hedge against the mortality risk retained when an individual purchases a single life annuity by preserving some or all of the capital for distribution to the annuitant's heirs, but this hedge comes at a cost.

Single Premium Annuity

An Annuity purchased with one lump-sum payment, generally with after tax dollars. You can buy either a Single Premium Immediate Annuity, which allows you to "annuitize" right away, or you can buy a Single Premium Deferred Annuity, where you annuitize sometime in the future, perhaps at retirement age.

deferred annuity

An annuity contract that does not begin payments immediately, but waits until some future time to start payments

Floor crediting rate

An indexed annuity is the minimum index-linked interest rate that will be credited to the contract in a given period.

IRD Assets

Assets that have a deferred income tax liability that was not paid prior to the date of the owner's death

secondary market annuities

Called pre-owned annuities or in-force annuities. These annuities can be purchased from the original owner at a discount or from a third party, in which the stream of income is assigned to the purchaser. These typically offer a rate of return or yield that is well above the yield available on standard fixed annuities, immediate annuities, or even bonds of a similar credit quality.

High watermark approach

Determining index-linked interest is accomplished by comparing the value of the index at various points during the term (usually on anniversary dates).

Annual reset method

Equity index annuity indexing method that determines index-linked interest annually by comparing the index value at the end of the contract year with the value at the beginning of the contract year.

Cash refund Annuity

Guarantees that the annuitant or the annuitant's family will receive the premium payments made to purchase the annuity, but instead of continuing to make periodic payments until there is a full recovery of the premium, the balance is paid in cash at the annuitant's death

100% joint and survivor annuity

Pays the survivor 100% of the annuity payment after the death of the first annuitant

50% joint and survivor annuity

Pays the survivor 50% of the annuity payment after the death of the first annuitant. The initial annuity payment will be larger than with a 100% or 75% joint and survivor annuity.

75% joint and survivor annuity

Pays the survivor 75% of the annuity payment after the death of the first annuitant. The initial annuity payment will be larger than with a 100% joint and survivor annuity

variable annuities

Provide consumers with an opportunity to individually tailor the types of investments backing up the annuity contract to their unique needs

cap rate

Some indexed annuities impose an upper limit on the index-linked interest rate

indexing method

The approach used to measure the amount of change, if any, in the index. Some common indexing methods include: (1) the annual reset (ratcheting) approach, (2) the high watermark approach, and (3) the point-to-point approach.

pooling of risk

The spreading of risk among a large number of similar contributors to the pool. Protection is provided to the entire pool of contributors. With annuities, the risk that is being spread is the risk of outliving retirement funds, or superannuation.

longevity insurance

a generic name for a single-premium deferred annuity that begins paying benefits only at an advanced age, typically age 85

Free withdrawal provision

allows the contract holder the right to withdraw up to a stated percentage (usually 10) of the contract value annually without incurring a surrender charge

single life annuity/straight life/pure life

also known as a straight life annuity, provides a stream of income to the annuitant for life

non qualified annuity

annuity contract purchased with funds outside of a qualified retirement plan or IRA

qualified annuities

annuity contracts purchased with funds in a qualified retirement plan or IRA

Point-to-Point Index-Linked Crediting Method

based on the difference between an index value at the end of the term compared with the index value at the start of the term

annuity

contract between an individual and insurance company which promises to pay income on regular basis for a specified period of time

participation rate

determines how much of the increase in the index will be used to calculate the index linked market

Equity index annuities

have characteristics of both fixed and variable annuities, either immediate or deferred that earn interest or provide benefits that are linked to an external equity reference or equity index

inflation

increase in general price level and is often measured by the CPI

immediate annuity

instrument created when contract owner trades sum of money in return for stream on income that starts immediatly

fixed annuity

most conservative annuity that earns minimum guaranteed rate of return

Joint and Survivor Annuity

pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies. A 50% joint and survivor will pay a specified monthly payment to the annuitants while both alive and continues to make payment equal to 50% of original payment to survivor following the first annuitants death

life annuity contracts

protect clients from outliving their assets by providing a series of periodic payments to the annuitant, typically for as long as the annuitant lives

superannuation

risk of running out of money before death due to long life and can be mitigated by using annuities

Guarantee funds

run by the state insurance commission, they act as the payor of last resort in the case of an insurance company failure

initial rate

the first rate of interest that is earned under a fixed annuities contract and is guaranteed for a specified period of time

Renewal rate

the interest rate offered on a fixed annuity after the expiration of the initial rate

risk based capital

the investment risk assessment undertaken by the insurance company in investing the money backing up the annuity pool

index term

the period over which index-linked interest is calculated for equity-indexed annuities

Annuitant

the person whose life the contract is dependent. Generally the life expectancy of this person that affect the timing and amount of payout under the contract

annuitization

the time when annuity funds are exchanged for a stream of income guaranteed for a period of time

annuitized

time when regular, periodic payments begin for life or a specified period of time in excess of one year