Chapter 14

liquidation period

(also called the payout period or annuitization period) follows the accumula-tion period and refers to the period in which the funds are being paid to the annuitant.

Accumulation Units

Premiums used to purchase units of a vari-able annuity prior to retirement; value of each unit varies depending on common stock prices.

What are the annual contribution limits to an IRA?

The annual contribution limits to an IRA per 2015 tax code are a maximum of $5,500 or 100% of taxable compensation, whichever is less. Workers 50 or older can contribute an additional $1,000 or a max of $6,500.

single-premium imme-diate annuity

The annuity is purchased with a lump sum, and the first payment starts one payment interval from the date of purchase.

flexible-premium annuity

allows the annuity owner to vary the premium payments; there is no requirement that a specified amount must be deposited each year.

Identify the annuity settlement options that are typically found in a fixed annuity.

· Cash or guaranteed installment option · No refund life annuity · Inflation indexed annuity option · Joint-and-Survivor annuity

Describe the major characteristics of a Roth IRA.

· Tax free distributions · Taxable compensation below certain annual limits · No age limits · Contribution limit as of 2015, is $5,500 or $6,500 for those over the age of 50. · Contributors are not deductible · Investment income accumulates tax-free · Distributions are tax-free if you meet certain conditions · Contributions can be withdrawn tax-free. 100% penalty tax if a withdrawal is made before 59.5 years of age. · No minimum distribution requirement.

Describe the major characteristics of a fixed annuity.

· The accumulation period prior to retirement, premiums are credited with interest. · Liquidation period follows the accumulation period and referrers to the period in which the funds are being paid out. · Payment of benefits

Explain the basic characteristics of a traditional IRA.

· The contribution made to an IRA can be fully or partly tax deductible. If the IRA is tax deductible, the annuitant will be taxed as soon as he/she makes a withdrawal. · Annuitants are limited on how much they can invest or save during the year. · An individual must be younger than 70.5 years old, and have taxable compensation during the year · An annuitant must be 59.5 years of age to make a withdrawal without paying a penalty. If a withdrawal is done before 59.5 there is a 10% tax penalty. If a withdrawal hasn't been done prior to 70.5 years of age the annuitant is required to a make a withdrawal.

Explain the eligibility requirements for a traditional IRA.

· The participant must have taxable compensation during the year. · The participant must be under the age of 70 and a half.

What is an IRA rollover?

A IRA rollover is a tax-free distribution of cash or tother property from one retirement plan, which is then deposited into another retirement plan.

How does an annuity differ from life insurance?

Life insurance creates an immediate estate and provides protection against dying too soon before sufficient financial assets can be accumulated. Whereas, an annuity provides protection against living too long and exhausting your savings while you are still alive.

individual retirement account (IRA)

allows workers with taxable compensation to make annual contributions to a retirement plan up to certain limits and receive favorable income-tax treatment of such contributions.

equity-indexed annuity

is a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term

Explain the major characteristics of an equity-indexed annuity.

is a fixed, deferred annuity that allows the owner to participate in the growth of the stock market and provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term. · The participation rate is the percent of increase in the stock index that is credited to the contract · Some insurers have a maximum cap rate on the interest rate credited to the annuity · Insurers use different indexing methods to credit excess interest to the annuity · Some have a guaranteed minimum value at the ne do the index period

joint-and-survivor annuity

is a more appeal-ing annuity that also pays benefits based on the lives of two or more annuitants. However, the annuity payments continue until the last annuitant dies.

annuity

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

Longevity annuity

is a single-premium deferred annuity that begins paying ben-efits only at an advanced age, such as age 85.

traditional IRA

is an IRA that allows workers to take a tax deduction for part or all of their IRA con-tributions.

Roth IRA

is another type of IRA that provides sub-stantial tax advantages. The annual contribution lim-its discussed earlier for a traditional IRA also apply to a Roth IRA.

exclusion ratio

is determined by dividing the investment in the contract by the expected return

single-premium deferred annuity

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

life annuity (no refund)

option provides a life income to the annuitant only while the annuitant is alive. No additional payments are made after the annui-tant dies.

Life Annuity with Period Certain

pays a life income to the annuitant with a certain number of guaranteed payments such as 5, 10, 15, or 20 years.

installment refund option

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

Variable Annuity

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

Describe the basic characteristics of a variable annuity.

pays a lifetime income, but the income payments vary depending on common stock prices. · The purpose is to provide an inflation hedge 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.

fixed immediate annuity

pays periodic income payments that are guaranteed and fixed in amount; the first payment is due one payment interval from the date of purchase

accumulation period

prior to retirement, premiums are credited with interest.

deferred annuity

provides periodic income payments at some future date.

Inflation annuity option

provides periodic payments that are adjusted for inflation

Explain the major characteristics of a longevity annuity.

provides protection against the risk of depleting your financial assets at an advanced age. They 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 option of starting payments sooner.

joint life annuity

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