CH 14 Annuities

advantages to longevity annuities include:

-benefits kick in when other financial assets are likely to be exhausted -they are generally less expensive than traditional annuities they can be purchased with an inflation hedge

variable annuities contain the following fees and expenses

-investment management charge -administrative charge -mortality and expense risk charge -surrender charge

the annuity owner has a choice of annuity payout offers

-most annuities are not annuitized -under the cash option, the funds can be withdrawn in a lump sum or in installments -a life annuity (no refund) option provides a life income to the annuitant only while the annuitant remains alive -a life annuity with guaranteed payments pays a life income to the annuitant with a certain number of guaranteed payments

annuity payments consist of three sources

-premium payments -interest earnings -unliqidated principal of annuitants who die early

some variable annuities pay enhanced death benefits

-some contracts guarantee the principal -some contracts periodically adjust the value of the account to lock in investment gains through benefit, or an enhanced earning benefit

first fixed immediate annuity payment

-the first payment starts one payment interval from the date of purchase

variable annuity details (3)

-the purpose is to provide an inflation edge by maintaining the real purchasing power of the payments -premiums are used to purchase accumulation units during the period prior to retirement -at retirement, the accumulation units are converted into annuity units

disadvantages of longevity annuities include:

-your heirs will lose money if you die during the deferral period -once purchased, your funds are locked up

a flexible-premium annuity

allows the owner to vary the premium payments

a single-premium immediate annuity is

an annuity purchased with a lump sum

actuaries use special mortality tables to calculate

annuity premiums because annuitants tend to be healthy individuals

the current rate is

based on current market conditions, and is guaranteed only for a limited period

a longevity annuity

begins paying benefits only at an advanced age, such as age 85

total fees and expenses in most variable annuities are

high

a bonus annuity pays a

higher interest rate initially

longevity annuities are

low cost annuities because there are no cash values or death benefits in the policy -some insurers offer optional features that provide death benefits, inflation, protection, or the option of starting payments sooner

some insurers now make available riders that allow annuitants to

make a partial cash withdrawl

an installment refund option

pays a life income to the annuitant; after the annuitant's death, payments continue to a beneficiary until they equal the purchased price

a variable annuity

pays a lifetime income, but the income payments vary depending on common stock prices

a 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 deferred annuity...

pays periodic income payments at some future date

a fixed immediate annuity...

pays periodic income payments that are guaranteed and fixed in amount

a cash refund option is similar, but

pays the beneficiary a lump sum

an annuity is a

periodic payment that continues for a fixed period or for the duration of a designated life or lives

an inflation-indexed annuity option provides

periodic payments that are adjusted for inflation

annutant

person who receives the annuity payment

during the accumulation period prior to retirement

premiums are credited with interest

longevity annuities provide

protection against the risk of depleting your financial assets at an advanced age

a guaranteed death benefit...

protects the principal against loss due to market declines

the fundamentalist purpose of an annuity is to

provide a lifetime income that cannot be outlived

a single premium deferred annuity is

purchased with a lump sum, but income is deferred until some future date

typically, if the annuitant dies before retirement...

the amount paid to the beneficiary will be higher of two amounts: the amount invested in the contract or the value of the account at the times of death

Under a Joint Annuity

the income payments terminate when the death of the first covered person dies

the guaranteed rate is

the maximum interest rate that will be credited to the fixed annuity

the liquidation period is

the period in which funds are paid out, or annuitized

an annuity provides protection against

the risk of living too long, often called excessive longevity