Chapter 7 - Annuities

Point-to-point index-linked crediting method

based on the difference between an index value at the end of the term compared with the index values at the start of the term.

Annuity

A contract between an individual (annuitant) and an insurance company which promises to pay an income on a regular basis for a specific period of time.

Term certain annuity

Acts as a hedge against the mortality risk retained when an individual purchases a single life annuity by preserving some or all of the capital for distribution to the annuitant's heirs, but this hedge comes at a cost.

Flexible premium annuity

Allows the insured the option to vary premium deposits.

Deferred Annuity

An annuity contact that does not begin payments immediately, but waits until some future time to start payments.

Immediate Annuity

An instrument created when the contact owner trades a sum of money in return for a stream pf income that begins immediately

Qualified Annuities

Annuity contracts purchased with funds in a qualified retirement plan or IRA

Secondary market annuities

called pre-owned annuities or in-force annuities. These annuities can be purchased from the original owner at a discount or from a third party, in which the stream of income is assigned to the purchaser. These typically offer a rate of return or yield that is well above the yield available on standard fixed annuities, immediate annuities, or even bonds of similar credit quality

Life annuity Contracts

protects clients from outliving their assets by providing a series of periodic payments to the annuitant, typically for as ling as the annuitant lives.

Cash refund annuity

Guarantees that the annuitant or the annuitant's family will receive the premium payments made to purchase the annuity, but instead of continuing to make periodic payments until there is a full recovery of the premium, the balance is paid in cash at the annuitant's death

Equity-index annuities

Have characteristics of both fixed and variable annuities, either immediate or deferred, that earn interest or provide benefits that are linked to an external equity reference or any equity index.

Joint and Survivor Annuity

Promises to make payments over the lives of two or more annuitants. Annuity payments are made until the last annuitant dies. This is commonly used to fund retirement cash-flow needs of married couples. A 100% joint and survivor annuity pays the specified monthly payments to the annuitants while both are alive and continues to make the same payments to the survivor after the first annuitant's death. A 75% joint survivor annuity pays the specified monthly payments to the annuitants whole both are alive and continues to make a payment equal to 75% of the original payment to the survivor after the first annuitant's death. A 50% joint and survivor annuity pays the specified monthly payment to the annuitants while both are alive and continues to make a payment equal to 50% of the original payment to the survivor after the first annuitant's death.

Indexing method

The approach used to measure the amount of change, if any in the index. Some common indexing methods include: 1. annual reset (ratcheting) approach, 2. the high water mark approach, 3. the point-to-point approach.

Inflation

The increase in the general price level and is often measured by the CPI

Annual Reset Method

The index-linked interest crediting rate is determined each year by comparing the index value at the end of the contract year with the index value at the beginning of the year of the contract year. Interest is added to the annuity each year during the term.

Annuitant

The individual upon whose life the contact is dependent. It is generally the life expectancy of the annuitant that affects the timing and amount of payout under the contact

Fixed annuity

The most conservative type of annuity that earns a minimum guaranteed rate of return.

Accumulation Phase

The period over which annuity funds are accumulated

Annuitization

The time when annuity funds are exchanged for a stream of income guaranteed for a period of time.

Annuitized

The time when regular, periodic (such as monthly or annual) payments begin for life or for a period of time in excess of one year.

Beneficiary

Those persons entitled to the death benefit of the annuity

Longevity insurance

a sophisticated name for a deferred annuity purchased by an individual at or before retirement that will not begin to make payments until that person reaches an advanced age.

Installment refund annuity

a special type of term certain annuity whereby the insurer promises to continue periodic annuity payments after the annuitant has died until the sum of all annuity payments made equals the purchase price of the annuity.

Single life annuity

also known as a straight life annuity, provides a stream of income to the annuitant for life.

Single premium annuity

an annuity purchased with a single lump sum.

straight or pure life annuity

an annuity that provides a stream of income to the annuitant for life.

Floor crediting rate

an indexed annuity is the minimum index-linked interest rate that will be credited to the contract in a given period.

non-qualified annuities

annuity contracts purchased with funds outside of qualified retirement plans or IRAs (for example, from investment accounts or private savings.)

IRD assets

assets that have a deferred income tax liability that was not paid prior to the date of the owner's death.

Participation rate

determines how much of the increase in the index will be used to calculate the index-linked interst

High watermark approach

determining index-linked interest is accomplished by comparing the value of the index at various points during the term (usually on anniversary dates)

Owner

person, trust, or company that owns the annuity contract and names the annuitant and benes. The owner could also be the annuitant and/or bene.

Variable annuities

provide consumers with an opportunity to individually tailor the types of investments backing up the annuity contract to their unique needs, and equity-indexed annuities provided returns linked to market-based indexes.

Guarantee funds

run by the state insurance commission, they act as the payor of last resort in the case of an insurance company failure.

Cap rate

some indexed annuities impose an upper limit on the index-linked interest rate

Parties to annuity contract

the annuitant, the bene, the owner, and the insurance company.

Initial Rate

the first rate of interest that is earned under a fixed annuities contract and is guaranteed for a specified period of time.

Risk-based capital

the investment risk assessment undertaken by the insurance company in investing the money backing up the annuity pool.

Retirement life Expectancy

the period between retirement and death

Index term

the period over which index-linked interest is calculated for equity-indexed annuities

Pooling of risk

the spreading of risk among a large number of similar contributors to the pool. protection is provided to the entire pool of contributors. With annuities, the risk that is being spread is the risk of outliving retirement funds, or superannuation.