Excel Ch.8 Annuities
Fixed Deferred Annuity
- pays out a fixed amount for life starting at a future date -Interest credited to the cash values of annuities are deferred until distribution
An immediate annuity has been purchased with a single premium. When does the annuitant typically begin receiving benefit payments? 1 month 6 months 12 months 24 months
1 month
Market Value Adjusted Annuity
A fixed single-premium deferred annuity that allows a contract owner to lock in a guaranteed interest rate over a specified maturity period. Shifts investment risks to policy holders
Kathy's annuity is currently experiencing tax-deferred growth until she retires. Which phase is this annuity in? Payout period Accumulation period Deferred period Growth period
Accumulation Period
Which of these is NOT considered to be a purpose of an annuity? Annuities are intended to create an estate Annuities are intended to liquidate an estate Annuities are intended for the tax-free growth of principal Annuities are intended to distribute accumulated principal
Annuities are intended to create an estate
Income Tax Treatment of Annuity Benefits
Annuity benefit payments consist of principal and interest. The portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owner's "cost basis". The portion of the annuity benefits that is interest earned on the principal is taxable as ordinary income. Interest income must be reported for federal income tax purposes upon receiving distributions or income benefits from the contract. Exclusion ratio is a simple way to determine what portion pf each annuity benefit payment Is taxable
Annuity Units (Variable Annuity)
At the time the variable annuity benefits are to be paid out to the annuitant, the accumulation units in the participant's individual account are converted into annuity units. These payouts can vary from month to month depending on the investment results. Number of the units don't change, the value does The amount of each variable annuity benefit paid to an annuitant varies according to the market value of the securities backing it.
Variable Annuities
Does not provide a guaranteed rate of return, because the investment risk. The cash value is based on the results of these investment funds. A statement must be provided to the owner of the annuity at a minimum of once a year. Can be classified as either an immediate or deferred Insurers that deal with variable annuities are subject to dual regulations by the SEC and the state office of Insurance regulations
Simon has purchased a fixed immediate annuity. His payment amount will be dependent upon principal, interest, and the contract's
Income period
What happens to interest earned if the annuitant dies before the payout start date? It is taxable It is taxable only if no beneficiary is named It is not taxable It is only taxable if contract has been in force under one year
It is taxable
Which type of annuity guarantees a stated number of income payments, whether or not the annuitant is still alive to receive them?
Life annuity certain
Which annuity payout option allows the policyowner to choose a pre-determined number of benefit payments?
Period Certain
If the annuitant dies before the annuity start date,
Premiums paid plus interest earned is returned to the beneficiary
Fixed Annuities
Provide a guaranteed rate of return allow a guaranteed rate of return, Credit interest at a rate no lower than the contract guaranteed rate
What is the primary reason for buying an annuity?
Provide future economic security
Which market index is normally associated with an indexed annuity's rate of return? NAIC SEC S & P 500 A & P 300
S & P 500
Which of these will have the highest monthly payouts upon annuitilization?
Straight Life
Who assumes the investment risk with a fixed annuity contract?
The Insurer
Accumulation Units (Variable Annuity)
The value of these units varies depending on the value of stock investments that is part of a variable annuity
Accumulation Units
These make up value of contributions made by the annuitants less a deduction for expenses. The value of each accumulation unit is credit to the individuals account and varies depending on the value of the underlying stock investment
Structured settlement
an agreement in settlement of a claim involving specific payments made over a period of time
Life With Period Certain Option
annuity option that is designed to pay the annuitant an income for life but guarantees a definite minimum period of payments(ex:life and 10yr period certain contract and they die after 6 years their beneficiary still gets paid for 4 years) Know: It provides that benefit payments will continue for a minimum number of years regardless of when annuitant dies
single premium deferred annuity
can be funded with a single lump-sum premium, which the principal sum is created immediately. Ex. Individuals nearing retirement whose financial priority is retirement income could surrender their whole life policy and use the cash value as a lump-sum premium to fund annuity
Other Characteristics of Deferred Annuities include:
- When this type of annuity is cancelled during the early contract years , the insurer normally will asses a back-end load known as a surrender charge -"bailout" feature, found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below the stated level -Before this contract can be terminated for its surrender value, the insurer must fist obtain authorization from the owner -The accumulation value of this annuity is equal to the sum of premiums paid plus interest earned minus expenses and withdrawals
Andy the annuitant dies before the annuity start date. Which of the following is a TRUE statement?
Premiums paid plus interest earned is returned to the beneficiary
Funding Method
(Describes how you pay for it) + (Describes how they pay you) SINGLE PREMIUM (you pay once) + DEFERRED (they start paying you atleast a year later). You cannot make installment payments and get paid immediately Single Payment - Lump Sum Periodic Payments- Installments paid over a period of time
When does an immediate annuity begin making payments? After multiple premiums have been paid After the first premium has been paid After policy has been active for one year After the incontestable period
After the first premium has been paid
Lisa has recently bought a fixed annuity. Which of these is considered to be a disadvantage of owning this type of annuity?
During periods of inflation, annuitants will experience a decrease in purchasing power of their payments
Which of the following is an annuity that is linked to a market-related index?
Equity-Indexed Annuity
The taxable portion of each annuity payment is calculated using which method? Exclusion Ratio Taxable Ratio Cost Basis Tax Basis
Exclusion Ratio
Which of these annuities require premium payments that vary from year to year?
Flexible premium deferred annuity
Annuity options available for purchasers (4)
Funding method- Single lump-sum payment or periodic payments over time Date annuity benefit payment begins begin- Immediately or deferred until future date Investment Configuration- a fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return Payout period- Specified number of years, or for life, or combination of both
Annuity Period
also called the liquidation, annuitization, or pay-out period. The time when the money that has accrued during the accumulation period is paid-out in the form of payments to the annuitant
single life annuity
an annuity in which you receive a set monthly payment for your entire life Know: Characterized by having only ONE annuitant
Straight Life Income Payout Option
annuity option that pays the annuitant a guaranteed income for the annuitants lifetime but when the annuitant dies no further payments are made to anyone. Garuantees protection against exhaustion of saving due to longevity. Pays the largest monthly benefits a single annuitant because it is based only on life expectance. Creates risk if the annuitant dies early they would forfeit all their money to the insurance company Know: This offers protection against exhaustion of savings due to longevity
Exclusion Ratio
investment in the contract/expected return
While Life insurance protects against the risk of premature death, annuities protect against?
the risk of living too long
Accumulation Period v. Annuity Period
Accumulation Period: The pay-in period, where the contract owner makes the purchase payments. The accumulation period of an annuity may continue after the purchase payment is ceased Annuity Period: Liquidation period, annuitilization period, or paid-out period. This is the time when the money that has accrued during the accumulation period is paid-out in the form of a payment(s) to the annuitant
How are annuities given favorable tax treatment?
Gains are taxed at distribution
An annuitant is guaranteed to NOT outlive their benefits with a(n)
Guaranteed lifetime withdrawal benefit
Phil is shopping for an annuity that guarantees he CANNOT outlive the benefits. Which of these benefit options would he choose?
Guaranteed lifetime withdrawal benefit
Annuity Payout Options
Life Annuity payout/ Income options: Straight Life income, Cash Refund, Installment refund, Life with period Certain, Joint and survivor, fixed amount and period certain 1. Life Annuity/Straight Life/Pure Life -periodic payments over lifetime (usually monthly) -largest periodic payment 2. Life Annuity with Period Certain -periodic payments for life with certain minimum period guaranteed -if annuitant dies before period certain expires, payments made to beneficiaries -if annuitant lives beyond the period certain, payments continue until his death 3. Joint Life with Last Survivor Annuity -covers two or more people -payment is conditioned on both (all) lives 4. Mortality Guarantee -guarantee payments for as long as they live (even if life expectancy changes) 5. Operating Expense Guarantee -expenses projected by the company for administering the plan -if higher than expected, they cover the difference
Which type of annuity stops all payments upon the death of the annuitant? Life annuity Period certain annuity Cash refund annuity Joint and survivor annuity
Life annuity
Which settlement option pays a stated amount to an annuitant, but no residual value to a beneficiary? Fixed period Interest only Installment refund Life income
Life income
Which of the following annuity payout options makes no additional payments regardless of when the annuitant dies? Life only Life with period certain Cash refund Installment refund
Life only
Tax sheltered annuity
Limited exclusively for employees of religious, charity, or educational groups a savings plan where pre-tax money is deposited to earn interest over a period of time -Also called 403(b) plans -Accumulation payments often come from voluntary salary reductions -Annuitant may have an individual account contract
Annuities VS Life Insurance
Look similar but are complete opposites Primary function of life insurance to create an estate(sum of money) by a periodic payment of money into a contract and you buy annuities to liquidate an estate. Life insurance is concerned with how soon one will die and annuities are how long one will live. Life insurance pricing based largely on mortality risk Annuities are primarily investment products when one is living
Periodic Payment (flexible premium)
Method of purchasing an annuity whereby the contract holder makes periodic payments into the contract. The pay-out phase must be deferred for all periodic payment plans. purpose of this funding is to create a certain amount of periodic annuity income Contract provides a guaranteed lifetime monthly payments of $5.06 per $1,000 at the annuitants age 65. Meaning that a contract has grown to $100,000 upon the annuitants age 65 would generate $506 a month for life
How soon can the benefit payments begin with a deferred annuity? Anytime after date of purchase Anytime within 12 months after date of purchase A minimum of 6 months after date of purchase A minimum of 12 months after date of purchase
Minimum of 12 months after date of purchase
An annuity is primarily used to provide retirement income disability income long-term care benefits death benefits
retirement income
Accumulation Period
when premiums an annuitant pays into annuities are credited as accumulation units. This period may continue between the time after premiums have ceased buy payouts not yet have begun. At the end of this period accumulation units are converted into annuity units.
What is the nonforfeiture value of an annuity before annuitization?
All premiums paid, plus interest, minus any withdrawals and surrender charges
Which of the following is considered to be the period when the accumulated value in an annuity is paid out?
Annuiltization Phase
Fixed amount option
Annuitant receives a fixed payment until the contract value is exhausted, regardless of when that will be. If annuitant dies before the contracts depleted, the beneficiary receives the remainder
Fixed Period Settlement Options are considered to be a form of a
annuity
beneficiary
person who receives survivor benefits upon annuitants death
SUITABILITY OF ANNUITY SALES FOR SENIOR CUSTOMERS
when making recommendations to a senior customer regrading purchasing or exchanging of an annuity, an agent must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. This recommendation should be based on facts disclosed by the senior consumer. Include an evaluation of his/her investments and other insurance products along with his financial situation and needs.
Investment Configuration
will determine the amount of income the benefits pay. Two Types of Investment Configurations: allows for a fixed (guaranteed) rate of return or a variable (nonguaranteed) rate of return.
During the accumulation period, who can surrender an annuity? Payor Annuitant Beneficiary Policyowner
Policyowner (The policyowner is the only one who can surrender an annuity during the accumulation period.)
Annuity units
converted accumulation units once variable annuity benefits are to be paid to the annuitant. The time of the initial payout the annuity unit calculation is made. From then on, the number for the annuity unit remains the same for the annuitant. The value of each unit varies depending on the value of the underlying stock investment options include: Life, life with period certain, unit refund, and joint and survivor annuity
Structure and Design of Annuities
funding method, date annuity benefit payments begin, investment configuration, and payout period.
How do interest earnings accumulate in a deferred annuity? On a tax credit basis On a tax-deferred basis On a tax-free basis On a taxable basis
on a tax-differed basis
What Is a Annuitant?
one whom an annuity is payable, or a person upon the continuance of whose life further payment depends
Period Certain Annuity
option not based on life contingency, instead benefit payments for a minimum number of years, such as 10,15, or 20 years, regardless of when the annuitant dies. At the end of the term payments are ceased
The principal
original sum of money paid into the annuity through premiums
Qualified Annuity Plans
a tax-defferred arrangement established by an employer to provide retirement benefits for employees. This plan is qualified because of having met the government requirements Qualified annuity: annuity purchased as part of tax-qualified individual or employee-sposored retirement plan, such as an IRA. This may be used to fund an IRA and permit continued contributions within the maximum limits set by the IRS IRA funds that have been annuitized no longer permit contribution
Maria would like an annuity that provides a guaranteed accumulation or payout. The type of annuity she is seeking is called
annuity certain
Fixed annuities provide all of the following EXCEPT
hedge against inflation
Joint and Full Survivor Payout Option
payout for payment of annuity to two people until the last annuitant dies. If either person dies, the same income payment continue to the survivor for life. When surviving annuitant dies, no further payment options are made for anyone Two additional payout options: Two- thirds survivor- income is reduced to two-thirds of the original joint income One-half survivor - income is reduced to one-half the original joint income
Installment Refund Payout Option
pays a life income to the annuitant; after the annuitant's death, payments continue monthly to a beneficiary until they equal the purchase price
Cash Refund Payout Option
provides a guaranteed income to the annuitant for life; if annuitant dies before the annuity fund is depleted, a lump-sum cash payment of the remaining balance is made to the annuitant's beneficiary
An annuitant dies during the distribution period. What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made? Variable annuity Refund annuity Rebate annuity Return annuity
refund annuity
Annuity
simply a vehicle for liquidating a sum of money, its a payment plan that provides future economic security. Start with a lump some of money, then pay it out in equal installments over a period of time until the original fund is exhausted Original sum of money(principal), length of payment period, and interest rate of annuity earns, this is a fairly simple process to calculate the payment amount (Surrender charges)
Equity Indexed Annuities
type of fixed annuity that offer the potential for higher rates of return than a standard fixed annuity. There is a minimum guaranteed rate(3-4%) so a certain rate of growth is guaranteed. Designed to bridge the gap between fixed and variable annuities. These are sometimes died to the Standards and Poor's 500 or the composite stock price index have long term inflation protection
1035 exchange
applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy.
Date Income Payments Begin (Immediate Annuities)
Purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. Its purpose is to provide for liquidation of a principal sum -Commonly used to structure the payments of liability insurance settlements, lottery winnings, and other large sums -This usually is called a Single Payment Immediate Annuity (SPIA)
Deferred Annuities
Start providing income after the first year. Deferred annuities are usually purchased with either Single Premium Deferred Annuity (SPDA) or from monthly payments known as Flexible Premium Deferred Annuity. (FPDA) Fixed Deferred Annuity pays out a fixed amount for life starting at a future date Interest credited to the cash values of annuities are deferred until distribution Accumulate interest meanings on a tax-deffered basis and provide income payments at some specific future date (normally within a minimum of 12 months after date of purchase.) Unlike immediate annuities, deferred annuities can be funded with periodic payments over time
Kristi purchases an annuity that will pay her husband an income for 15 years. If he dies, this income will become payable to their children for the remainder of the period. Kristi has what kind of annuity?
Temporary annuity certain
Which of these statements regarding annuities is correct?
The annuitants life expectancy determines the annuity payments
What will the beneficiary receive if an annuitant dies during the accumulation period?
The greater of the accumulated cash value or total premium paid
Annuitant
The income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to the annuitant.
Contract owner
The individual who purchases the annuity, pays the premiums, and has rights of ownership -An owner may be the annuitant, beneficiary, or neither
Annuities
are ways of providing a stream of income for a guaranteed period of time Simply stated, an annuity is started with a large sum of money that will be paid put I installments over a period of time The Monthly amount of benefits an annuitant receives is based on factors such as : Principle amount , rate of interest the annuity earns, and length of payout period.
Immediate Annuities
designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase.(can start taking money out after 1 month)These are funded with one single payment and are often called SPIAs(single premium immediate annuities). - lacks an accumulation period. As you might guess, immediate annuities ca.n only be funded with a single payment and are usually called SPIA - Intended for liquidation of a principal sum. An annuity cannot simultaneously accept periodic funding payments by the annuitant and pay out income to the annuitant
Under a non-qualified annuity, interest is taxed after the deposits have been made death of the annuitant distribution of payments exclusion ratio has been calculated
exclusion ratio has been calculated (The taxable and non-taxable portions of annuity payments are determined by the exclusion ratio.)
Partial Withdrawal
is taken from an annuity before age 59 1/2 the withdrawal is considered 100% interest, and is therefore taxable as ordinary income A 10% tax penalty is applied if a distribution is recieved before the annuitant turns 59 1/2. After this age, withdrawals do not insure the 10% penalty tax, but are taxable as ordinary income
