Lesson 14

Single-Premium Deferred Annuity (SPDA)

A single, lump-sum premium is deposited to the annuity which then builds interest on a tax-deferred basis.

Annuity Riders

Added to an annuity to provide additional benefits for the annuitant.

Level Premium Payments

Allows the contract owner to make equal premium payments to the insurer on a scheduled basis, such as on a monthly, quarterly, semiannual, or annual basis.

Flexible Premium Payments

Allows the contract owner to vary the annuity's premium deposit amounts at his or her discretion to better follow his or her budget, although a minimum and maximum premium payment level are enforced by the insurer.

Fixed Annuity

An annuity that accumulates and pays out a fixed rate with returns that are guaranteed by the insurer based on conservative investing.

Variable Annuity

Can vary in both the rate in which it accumulates during its accumulation period and the rate it pays out during its annuity period. Variable annuities invest in the stock market to provide the potential for a higher rate of return for the variable annuity. Potential for loss is greater with variable annuities.

Annuity Sales to Senior Citizens

Considered anyone over the age of 65, each state addresses the ethical standards required of selling, transferring, or forfeiting an annuity contract.

Dual Licensing Requirement

Fixed annuities can be sold by licensed insurance agents holding only a life insurance license. However, in order to sell variable annuities, an agent must be dually licensed and hold both state life insurance license, and registered with the financial industry authority (FINRA) Individual's selling MVA annuities are also required to be dually licensed.

General Account vs Separate Account

Fixed annuity premiums are all held in a general account since they are such low risk. Variable Annuity premium deposits are tied into a more volatile equity marketplace, so an insurance company accounts for these funds in a separate account to allow the contract owner to invest accordingly to his or her individual financial goals.

Fixed vs Variable Annuity

Fixed annuity provides an annuitant with a guaranteed, predetermined distribution amount, value of annuity decreases in time due to rising inflation. A variable annuity ties the investment to a nonguaranteed equity market in order to provide higher returns to the annuitant in attempt to hedge inflation over time.

Individual Retirement Annuity (IRA)

Fixed annuity that is combined with a decreasing term death benefit. If annuitant dies before the annuity matures (Usually at retirement), the beneficiary will receive benefits from both the value of the annuity and the decreasing term death benefit. Contribution levels allow up to 100% of an individual's annual income, but cannot exceed contribution limits set each year by the federal government. individuals 50 years or older are allowed ot make catch up contributions that exceed normal annual limits.

Equity Index Annuity

Fixed annuity that provides a minimum guaranteed rate of interest return on the annuity while also providing an opportunity for a return in interest higher than the guaranteed minimum. Based of the performance of an equity-indexed market.

Annuity Period

Funds begin to pay out the premium deposits and earned interest to the annuitant.

Accumulation Units

Funds deposited into the annuity are converted into accumulation units and are credited to an annuitants account. Units continue to increase as additional funds are deposited into the annuity; however, the value of each accumulation unit is tied to the performance of the stock in which the annuity is invested and can increase of decrease in value.

Early Withdrawal Penalty

If annuitant decideds to withdrawal before age 59.5 years of age, the benefits will be taxed as ordinary income and it will receive a 10% penalty tax.

Nonforfeiture of an Annuity

If annuitant stops paying premiums, and surrenders the annuity contract to the insurer. The accumulation period will end and the annuity payout period will begin at the time of surrender. The annuity's accumulated investment amount is paid to the annuitant minus a surrender charge.

Joint and One-Half Survivor

Less expensive option to Joint and Full Survivor only pays out one-half of the original payout amount the the survivor in comparison to the full amount.

Joint and Two-Thirds Survivor

Less expensive option to Joint and Full Survivor only pays out two-thirds of the original payout amount the the survivor in comparison to the full amount.

Single Premium Immediate Annuity (SPIA)

Means of spreading out a lump-sum of money over a specified period of time, an Immediate Annuity begins to distribute funds immediately after the first payment period, and is used when a single, lump-sum premium is deposited by the contract owner with the intent of distributing it over a specified period of time.

Annuitant-Driven Annuity

More common type of annuity, involves the owner and annuitant being the same individual, and payments are made back to the owner/annuitant or the designated beneficiary in the event that the owner/annuitant dies within the contract's annuity period.

Single (Lump Sum) Premium Payment

Most common Premium option is a single, lump-sum option. Single payment is invested by the contract owner initially, and continues to grow as the insurer reinvests the annual earned interest back into the annuity.

Flexible Premium Deferred Annuity (FPDA)

Offers multiple premium, deferred annuity that allows the contract owner to control the premium deposit amounts and frequency within certain limits stated in the contract.

Business Uses of Annuities

Often set up by employers as part of a retirement compensation package, a qualified annuity is often used to fund pension plans, 401(k), 403(b), and SEPs, along with other retirement plans on a tax-deductible basis.

Annuity Units

Once a variable annuity enters its annuity period and begins to pay out the annuitant, the total number of accumulation units in the individual account are converted to annuity units. While the annuitant is paid out, the amount of annuity units stays the same but the value of the units will fluctuate due to the variable annuity's underlying stock investment. Annuity Unit values fluctuate with the market.

Straight Life Income Annuity

Or Pure Life annuity, Guarantees income for the entire life of the annuitant, however if annuitant dies before the principal sum is depleted, distribution stops, and any remaining amount is forfeited to the insurer instead of being paid to a beneficiary.

Temporary Annuity Certain Option

Payments are only paid for a specified period stated in the contract. Payments are guaranteed during this period, bust stop once this period has ended

Life with Period Certain Option

Payments must be paid for a specified period of time stated in the contract. Should annuitant outlive this period, payments continue to be paid for the rest of the annuitants life.

Roth Individual Retirement Annuity

Premiums are not tax deductible by the annuity's owner, and annuity benefit payments are paid to the annuitant on a tax free basis.

Personal Uses of Annuities

Provide a future stream of income for an individual to serve as retirement income, or as a source of funding for a higher education, such as an IRA.

Annuity

Provides income at a future date in an individual's life while still alive.

Insurance Aspects of an Annuity

Provides living benefits for the contract's owner, who is also the contract's annuitant.

Group vs. Individual Annuities

Provides monthly income to members of the group. Group annuities are often purchased to provide future pensions to company employees.

Securities and Exchange Commision (SEC)

Regulates variable annuities as securities sales because variable annuities are based on non-guaranteed equity investments such as common stock.

Joint and Full Survivor Option

Results in the payout of two annuitants. I one annuitant dies, payments still continue for the survivor until his or her death, at which time, all payments will cease.

Refund Life Annuity Option

Similar to straight life, this distribution option pays out for the life of the annuitant. However, if the annuitant dies before receiving at least the principal amount invested, the annuity refunds a lump-sum, or pays out the refunded installment up to the purchase amount to the designated beneficiary.

Accumulation Period

The initial growth period when funds are being added into the account to collect interest on a tax-deferred basis.

Current Rate

The rate used at the time an insurer credits the annuity, typically once a a year. Insurer guarantees that this current rate will always be higher than the minimum guaranteed rate.

Market Value-Adjusted Annuity

Unique fixed annuity, also referred to as modified guaranteed annuity because it provides a minimum guaranteed rate of return unless it's surrendered by the annuity's owner before it matures. Before its actual value is payable a market value adjustment is made to the annuity and a surrender charge is applied by the insurer.

Owner-Driven Annuity

When the owner and the annuitant are two separate individuals, to benefit the annuitant upon the death of the annuity's owner.

Tax-Sheltered Annuity (TSA)

or a 403(B) Plan, often implemented by schools, charities, and religious organizations. A TSA is an annuity reserved for non-profit organizations that aid in their employees' retirement by contributing into the annuity with pre-tax dollars and allowing it to grow tax deferred.