Annuities

Conditional contract

Agreement both parties must perform certain duties

Consideration

Binding force in a contract that requires something of value to be exchanged for the transfer of risk

Special annuity products

EQUITY INDEXED MARKET VALUE ADJUSTED ANNUITIES

Federal tax consideration life/annuities

Taxation on life ins. policies -premiums are NOT tax deductible -death benefit is TAX FREE if taken as lump sum to named beneficiary -death benefit paid in installments: principal is TAX FREE and the interest is TAXABLE

Binder

Temporary contract that puts an ins. policy into force before the premium has been paid.

Assignment

Transfer of ownership rights of a life ins. policy from one person to another

Annuity

- income for a specified period of years or for life. -protects a person against outliving his/her money -accumulation of money and the LIQUIDATION of an estate -DO NOT pay face value amt. upon the death -payments stop upon the death of the annuitant -use mortality tables

Multiple life

-covers 2 or more lives -is the most common

Variable annuities

-payments not guaranteed -premiums are in separate account and invested in stocks and bonds

Joint life

-two or more annuitants receive payments until the FIRST death, then payments stop

Annuity period

AKA annuitization period or liquidation period or pay-out period. -sum accumulated is converted into income payments to the annuitant. -may last a life time or for a specified period

Contributory

Group ins. plan that requires the employees to pay part of premium

Owner, annuitant, and beneficiary

OWNEER is the purchaser and has all of the rights ANNUITANT receives benefits or payments from the annuity, (whose life expectancy and annuity is written for) BENEFICIARY receives the annuity assets, either amt. paid into the annuity or the cash value, whichever is greater, if annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out -the insurer is obligated to return either the cash value or total premiums paid, whichever is greater

Market Value MVA Ex: Client purchased 10 year 6% fixed annuity tied to Bond Fund Index Interest rate (Moody's). Client w/d money in 5 years current interest rate 6%, there's no adjustment. If current interest rate at surrender is 8% a penalty would be assessed.

-AKA modified guaranteed (MGA) -single premium deferred annuity -allows owner to lock in guaranteed interest rate over specified maturity period 3-10 years -MVA penalties for premature surrender depends on current interest rate at time of surrender -if rate surrendered is 4% ins. may pay a bonus -MVA is usually a % of the difference between contract rate of interest and current rate at surrender -ins. requires annuitant to share in market risk of changing interest rates if surrendered early

Implied authority

-Assumed

Lump-sum use of annuity

-if someone comes into large amt. of money, inheritance, lottery, award of damages from lawsuit, proceeds from a sale, lump sum distribution from a qualified pension plan -person may purchase a single premium immediate annuity, which will convert lump sum into a series of periodic payments providing stream of income for annuitant

Basic illustration

-ledger or proposal used in the sale of a life ins. policy that shows both guaranteed and non-guaranteed elements

Policy loans

-money borrowed against policy for cash value is NOT income taxable -ins. comp charges interest on outstanding policy loans

Qualified retirement plan use of annuity

-provide retirement income, often used to fund qualified retirement plans -meets IRS guidelines to receive favorable tax treatment -IRA -group (tax-sheltered annuity) or profit sharing pension plan

Uses of Annuity

-retirement, lump sum settlement, qualified retirement plans, educational funds, may be used for any accumulation of cash or simply to liquidate an estate

Annuity payment option

-similar to settlement options LIFE with guaranteed minimum the annuity will pay a specific amt. for the remainder of the annuitant's life. -if annuitant dies before the principal amt. has been paid out, the remainder is refunded to the beneficiary (life refund) PURE life aka life only or straight life, payment ceases at annuitant's death. -provides the highest monthly benefits -no guarantee that all proceeds will be fully paid out

Interest rate guarantees

-the insurer bares the investment risk -future interest rate actually paid by an insurer are based upon the performance of the ins. company -rate may not drop below a policy's guaranteed minimum. -if interest rates drop below the guaranteed minimum, the insurer is obligated to pay the guaranteed rate amt. -during accumulation phase the insurer will invest the principal or accumulation and give the annuitant a guaranteed interest rate based on a minimum rate or current rate whichever is higher.

MET

-two or more employers in similar/related business

Coordination of benefits

-helps determine primary provider in situations where insured is covered by more than one policy, avoiding claims overpayment

Dividends

-return of unused premiums NOT considered income for tax purposes -dividends are left with insurer to accumulate interest -interest is TAXABLE as ordinary income each year it is earned, whether or not paid to PH

Educational funds use of annuity

-used to accumulate funds for college education -provides savings on tax-deferred basis for the education expenses of the annuitant

Accumulation period

-AKA pay-in period is the period of time over the owner makes payments and earn interest on a TAX DEFERRED basis. -payment in

Suitability

-Agent is recommended to assess how well the product will meet applicants needs and resources -info collected from consumers -agents must make reasonable effort to obtain relevant info to evaluate the following factors: **age, annual income, and liquid net worth, financial and tax status, investment objectives, intended use of annuity, financial experience and risk tolerance -agents must make good records -customer signed disclaimers when applicable

Apparent authority

-The appearance, actions, words, or deeds

Surrender charges

-To help compensate the comp. for loss of the investment value due to an early surrender of a deferred annuity -Annuity contracts provide for a WAIVER of surrender charges if the annuitant is confined to a LTC facility for at least 30 days.

Expressed authority

-Written contract

MEWA

-any entity other than a duly admitted insurer establishes employee benefit plan for offering/providing accident and sickness or death benefit at least two employers -groups of employers pool their risks for self-insuring

Annuities certain types Fixed period Fixed amount

-are short-term annuities that limit the amts. paid to a certain fixed period or until a certain fixed amt. is liquidated. FIXED PERIOD - annuitant selects the time period for the benefits and insurer determines how much each payment will be whether or not the annuitant is living FIXED AMT. - annuitant selects how much each payment will be and insurer determines how long the benefits will be paid -pays a specific amt. until funds are exhausted whether or not the annuitant is living

Annuity income All other factors being equal, a 65 year old male will have a higher annuity income payments than a 45 year old because he is younger OR than a 65 year old female because women statistically have a longer life expectancy

-based on **amt. of premium paid or cash value accumulated **the frequency of the payment **interest rate **annuitant's age and gender

Single life annuity

-covers one life -provides the highest monthly premium payment

Nonforfeiture

-deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (100% of the premium paid, less any prior withdrawals and related surrender charges)

Equity indexed annuity

-fixed annuities invest on aggressive basis to aim for higher returns -guaranteed minimum interest rate -tired to Standard & Poor's 500 -ins. comp reserves initial return for themselves 4% and pay the excess to annuitant (anything over 4%) -less risky than variable annuity or mutual fund

General account assets

-fixed annuity premiums are deposited into the life ins. comp. general account. -conservative investments life bonds -are secure enough to allow the ins. comp. to guarantee a specified rate of interest -assure the future income payments that the annuity will provide

Fixed annuities

-guaranteed minimum rate of interest to be credited to the purchase payment -income (annuity) payments that do not vary from one payment to the next -ins. comp. guarantees the specified dollar amt. for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant. -annuitant knows the exact amt. of each payment received. -aka level benefit payment amt. -disadvantage is purchasing power that they afford may be eroded over time due to inflation

Controlled business

An ENTITY that obtains and possess a license solely for the purpose of writing business on the owner, immediate family, relatives, employer or employees

Ways to receive living benefits

Cash value increases -accumulations can be borrowed against by the PH or paid to PH upon surrender of policy -cash grows TAX deferred -surrender or endowment any cash value in excess of cost basis is TAXABLE as Ordinary income -death, face amt. is paid and no more cash value -benefits paid to beneficiary is income TAX FREE

Premium payment options

SINGLE payment-lump sum or periodic payments paid through installments. -can be level premium or flexible premium -immediate annuity provides income payments that start within one year from date of purchase aka-single premium immediate annuity LEVEL premium-annuitant/owner pays a fixed installment FLEXIBLE premium-amt. and frequency of each installment varies DEFERRED annuity-income payments begin sometime after one year from date of purchase -can be funded with either single lump sum (single premium deferred annuity) or periodic payments (flexible premium deferred annuity)