Annuities

Be able to identify the rules regarding conduct with seniors 65 and older

All insurers, brokers, agents, and others engaged in the transaction of insurance owe a prospective insured who is 65 years of age or older, a duty of honesty, good faith, and fair dealing

Life-Only

Also known as the life income option, this annuity payout option will pay the annuitant for as long as they live, meaning they could recover substantially more than they paid in. Further, since there is no beneficiary under this option, the monthly payments would be higher than the amounts paid under other less risky options. Under this option, if the annuitant dies before recovering the value of the account, the insurer keeps their money and pays it to other annuitants who live too long

Life With Period Certain

Also known as the period certain option, the insurer will guarantee that monthly payments will be made to a beneficiary if the annuitant dies within the period certain, which is selected by the annuitant when they annuitize the contract. For example, if an annuitant has a 20-year life span and annuitizes with a 10-year period certain, the insurer must make payments to either the annuitant if living, or to his or her beneficiary for at least 10 years if he or she dies. Annuitants have a choice of selecting either a 5-, 10-, 15- or 20-year period certain, but the longer the period certain is, the lower the monthly payments to the annuitant will be

Annuity

An agreement by an insurer to make periodic payments that will continue during the lifetime of the annuitant(s) or for a specified period. Annuities are considered to be the opposite of life insurance, since annuities pay while you are alive and life insurance pays when you die

General Account

Fixed annuities are funded by the insurance company's general account in which funds are invested very conservatively, often in U.S. government securities or in real estate

Beneficiary

If an annuitant dies during the accumulation period, the amount of their account would be payable to the beneficiary as a death benefit. However, if the annuitant dies during the annuity period, there may or may not be any beneficiary depending upon the payout option selected by the annuitant

Immediate

Purchased with a lump sum by the annuitant. A single premium immediate annuity has no pay-in or accumulation period. The client invests a single premium and annuitizes the contract right away

Distribution Phase

Since most annuities are considered to be nonqualified plans, the annuitant never has to annuitize the contract, meaning they can stay in the accumulation period as long as they want. If the annuitant wants to annuitize the contract and begin receiving monthly payments, they may enter the annuity or payout period at any time

Owner

The annuitant is the person on whose life the annuity contract has been issued, and is usually the owner of the contract, although they do not have to be. In most cases, the owner/annuitant is the intended recipient of the annuity payments, which will continue as long as the annuitant lives

Joint-And-Survivor

The joint-and-survivor payout option will also pay while both parties are alive, but payments will continue on to the survivor at a reduced rate when the first annuitant dies. Monthly payments for those selecting this option would be lower than those made under the joint life option, since it is less risky

Single-Premium Deferred Annuities

This is also purchased with a lump sum by the annuitant, but the insurance company invests your money until you reach a certain age. This type of annuity has the benefit of tax-deferred interest accumulation during the pay-in (accumulation) period. It is up to you when you want to start receiving your funds (plus interest) from the insurance company

Refund Life

This option is less risky for annuitants because if they die before recovering the value of their account, the insurer will refund the difference to a beneficiary. The monthly payments to the annuitant would be lower than those received under the pure and straight life option, since there is less risk for the annuitant

Deferred

This type of annuity could be purchased with either a single lump- sum payment or with level premium payments over a period of time

Separate Account

Variable annuities are funded by the insurance company's separate account in which funds are invested directly into the stock market. Variable annuities have no guaranteed rate of return

Variable Annuities

With this type of annuity, the annuitant's monthly payments will vary during the annuity (pay out) period, since no rate of return is guaranteed. The client's funds are invested into the stock market directly and the insurance company maintains a separate investment account (similar to a mutual fund) for that purpose. Funds are invested more aggressively by the insurance company, since it knows that the client is looking for a better rate of return. The annuitant bears all the investment risk in this type of product

Equity Indexed Annuities

a fixed annuity where both the principal and the interest are guaranteed

Market Value Adjusted Annuity

a type of variable annuity where a policyowner commits a sum of money for a certain period of time, usually one (1), two (2) or three (3) years. The longer the commitment, the higher the interest rate. The value at the end of the term is guaranteed, but may be adjusted if surrendered early. At the end of the term, the policyowner may either withdraw the entire sum plus all the interest earned or they can reinvest the money for another time period at the rates currently offered by the company

Tax-Sheltered Annuities

considered to be tax-qualified plans in that contributions are excluded from the participant's income and earnings accumulate on a tax-deferred basis until distribution. Since neither the contributions nor the earnings have ever been taxed, all distributions from TSAs are taxable as ordinary income and 10% IRS early withdrawal penalties may apply if a participant is under age 591⁄2

Nonqualified Annuity

one that is not tax qualified and is funded with after tax dollars. Upon annuitization, only that portion of the distribution that exceeds the annuitant's cost basis is taxable. Cost basis is defined as the amount of after tax dollars that the annuitant paid in to the annuity. Most annuities are nonqualified

Qualified Annuity

one that is tax-qualified by the IRS (such as a 403-b Tax- Sheltered Annuity or TSA) and is funded with pre-tax dollars. Pre-tax dollars are dollars that have never been taxed. Investors in qualified annuities have no cost basis, since neither the contributions nor the earnings have ever been taxed. Therefore, upon annuitization, all distributions are taxable as ordinary income

Joint-Life

selected when there is more than one annuitant. Payments are made to both parties while they are still alive, but payments stop entirely when the first annuitant dies

Annuitant

the party receiving the benefits of an annuity, similar to the insured on an insurance policy

Flexible-Premium Deferred Annuities

If our client did not have $20,000 in after tax dollars to buy this deferred annuity, they could have accomplished the same goal by paying either fixed or flexible monthly installments over the next 30 years into an annuity account. By age 60, they would have accumulated a certain amount of money and could elect to stop paying into the annuity and annuitize, which means they could take lump-sum cash or select from a number of annuity options available

Be able to identify the business and personal uses for annuity products

In business, annuities may be used to fund a structured settlement, which is a method of making guaranteed payments to a person who won a lawsuit against an insurance company, often as a result of injuries suffered in an automobile accident. Annuities are also used to fund such things as guaranteed sports contracts, real estate contracts and even the state lottery. Most personal annuities are purchased by clients who are seeking a tax deferred alternative to bank certificates of deposit, or by those who want to supplement their retirement plans or social security.

Accumulation Period

This period is also known as the pay-in period and is the period of time prior to the annuitant entering the annuity or payout period. During this time, the annuitant's funds are invested in the insurer's general account which earns tax-deferred interest which is automatically reinvested

Fixed Annuities

This type of annuity has a fixed rate of return, usually a minimum of around 4%. However, insurance companies will often pay a higher current rate of interest, which is guaranteed for one (1) year only and is subject to change (up or down) annually, but never below the minimum. With this product, the annuitant is assured of level monthly payments during the annuity period