Annuities

What are the investment options for a fixed annuity?

Fixed annuities are invested primarily in government securities, and high-grade corporate bonds. They offer a guaranteed rate of return, typically over a period of one to ten years. The company pays for expenses (including commissions) and mortality costs out of the total return on the investments in the general account.

What is the accumulation period?

The accumulation period in a deferred annuity is the time during which funds, in the form of premium payments and interest earnings, are deposited into the contract and accumulate tax deferred.

What is the payout period?

The deferred annuity enters the payout phase at some point in the future when the owner decides to withdraw the annuity using a systematic formula for disbursing the values, called annuitization. Most deferred annuities specify a maturity date, the point at which the contracts are scheduled to annuitize and begin generating monthly income payments.

What is the benefit of accumulation period?

During the accumulation phase, the money grows tax-deferred until it is withdrawn. The power of compounded tax-deferral delivers an advantage in achieving long-term retirement and financial goals. By deferring tax, consumers earn interest on principal, earnings and the savings in taxes that would normally be paid on taxable investments.

What is a variable deferred annuity?

Premium payments are used by the insurance company to purchase stocks, bonds or other types of securities per the contract owner's choice. Any increase in the value of the securities is tax-deferred. The amount of pay-out depends on how well the securities perform.

What are the method of premium payments?

Single or periodic.

What happens when an annuity is purchased?

When an annuity is purchased, the insurance company agrees to systematically distribute the annuity's value as income over a specified period of time or for the duration of a designated life or lives.

What is a deferred annuity?

With a deferred annuity, the contract specifies a future date that payments to the annuitant will begin. This date is referred to as the maturity date.

What are the characteristics for an immediate annuity?

*Includes only a payout phase. *Purchased to convert a lump sum to an income stream. *Must be purchased with a single premium payment. *Cannot be surrendered, except during the free-look period.

How are payments made to the annuitant?

Term certain, life-income, and joint and survivor.

A deferred annuity is characterized by which two distinct periods?

The accumulation period and the payout (or distribution) period.

What is an immediate annuity?

With an immediate annuity, the insurer agrees to start making payments soon after the contract is signed. Immediate annuity contracts can only be purchased with a single premium.

What are the characteristics of an equity indexed annuity?

*Earnings are based on changes in a major market index (i.e. S&P 500®). *Guarantee minimum interest rates for the policy duration. *Principal is not subject to loss.

What are the characteristics of a variable annuity?

*Earnings are based on performance of investment subaccounts. *Designed to cope with inflation. *Principal is subject to loss.

What are the characteristics of a fixed annuity?

*Earnings come from Insurers investments which are very conservative but low-yield. *Guarantees minimum interest rates for the policy duration. *High level of safety but may not keep up with inflation. *Principal is not subject to loss.

What are the characteristics of a flexible premium annuity?

*Purchased with many periodic payments *Can only fund deferral annuities *Higher administrative costs *Longer surrender charges

What is the disadvantage of having an immediate annuity?

Immediate annuities cannot be surrendered or returned.

What are the characteristics of a single-premium annuity?

*Purchased with one lump sum *Can have immediate or deferral annuities *Lower administrative costs

How are annuities purchased?

*With one lump-sum payment (a single premium annuity). *With ongoing contributions (a flexible-payment annuity).

What are the investment accounts in a variable annuity?

General (guaranteed) account and separate(variable) account.

What is the common use for immediate annuities?

Immediate annuities are commonly used to convert a large amount, such as a lump-sum distribution from a qualified pension or profit-sharing plan, into an income stream.

When do annuity payments begin?

Immediate or deferred.

What are flexible premium annuities?

A flexible-premium annuity is one purchased with periodic premiums payable on a flexible schedule. All flexible premium annuities are deferred annuities.

What are single-premium annuities?

A single-premium annuity is purchased with a single lump sum premium payable at the inception of the contract. Generally the contract owner is not allowed to make additional deposits into the contract.

What is a variable immediate annuity?

A variable immediate annuity transfers the investment risk to the annuitant. This means that once an income stream is created, the payments can increase or decrease based on the performance of the underlying investments.

What is an annuity?

An annuity is a contract between an individual and an insurance company. The annuitant agrees to pay the insurance company a single payment or a series of payments, and the insurance company agrees to pay the annuitant an income, starting immediately or at a later date, for a specified time period.

What are the annuitization options?

Life, term certain, and joint-life.

What is a fixed deferred annuity?

Money invested earns a specified rate of return on a tax deferred basis. The insurance company usually sets the rate of return every year with a guaranteed minimum rate of generally 3 percent. The actual rate often exceeds the guaranteed minimum. When individuals decide to start receiving income, the insurance company will then pay a fixed amount every month. The pay-out amount will depend on the rate of interest that the premiums have earned.

What is the purpose of annuities?

An annuity is defined as the liquidation of a principal sum to be distributed on a periodic payment basis to commence at a specific time and to continue throughout a specified period of time or for the duration of a designated life or lives.

What are the three primary categories of an annuity?

Fixed annuities, equity indexed annuities, and variable annuities.

How are annuities invested?

Fixed or variable.

What are the income flows from immediate annuities?

Fixed or variable.

What are the investment options of a variable annuity?

The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

What are the two primary tax advantages of annuities?

The two primary tax advantages of annuities are: that earnings grow on a taxdeferred basis and payouts receive favorable income tax treatment.

What is a fixed immediate annuity?

Under a fixed immediate annuity, the annuitant is guaranteed an income flow without risk that market fluctuations will affect the income amount; the insurance company absorbs the market risk associated with the investment of the annuity funds.

What is the benefit of an equity-indexed annuity?

Equity-Indexed Annuities combine the minimum interest rate guarantees offered by fixed annuities with the market-linked potential offered by variable annuities to create a product capable of generating market-linked returns without risk to principal.

What are the advantages of a deferred annuity?

Income taxes on any earnings is postponed until the money is withdrawn, typically during retirement, when clients may be in a lower tax bracket. All earnings grow tax-deferred. Clients can put in as much money as they want. Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to deferred annuities with your after-tax money. Death benefits can be provided to heirs. If clients die prematurely, their annuity can offer a death benefit to beneficiaries without the costs and delays of probate.

What are the advantages to an immediate annuity?

*Security - the annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period; *Simplicity - the annuitant does not have to manage his investments, watch markets, reportinterest or dividends; Flexibility - Payments can be received as frequently as needed to best meet the situation. *Stability - Choosing a life option assures income that can't be outlived. *Choice - Several different income payment options are available. *High Returns - the interest rates used by insurance companies to calculate immediate annuity income are generally higher than CD or Treasury rates, and since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone; *Preferred Tax Treatment - it lets them postpone paying taxes on some of the earnings accrued in a "tax-deferred" annuity when rolled into an immediate annuity (only the portion attributable to interest is taxable income, the bulk of the payments are nontaxable return of principal);

How does an annuity protect an individual financially?

Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax-favored manner.

What are the characteristics for a deferred annuity?

*Includes both an accumulation and payout phase. *Purchased to accumulate funds on a tax-deferred basis. *Purchased with flexible premiums (allowing additional deposits) or with a single premium (one payment). *Can be surrendered unless annuitization has already begun.

What is the dictionary definition of annuity?

According to the dictionary, the meaning of the word annuity is "annual payments."

How are annuities taxed?

Money put into an annuity grows on a tax-deferred basis until the annuitant begins receiving his accumulated fund as an income. That means that one hundred percent of earnings are reinvested in an annuity and allowed to compound without having to pay taxes on earnings.