SIE Chapter 8

seperate account

assets in an insurance company's seperate accounts are segregated from the company's general account - all of the income and capital gains that are generated by the account are credited to the account - if insurance company goes bankrupt then creditos must make claims against assets in the general account

annuity units

at annuitization, insurance company converts all of the accumulatin units into anutiy units - number is fixed at time but the value is based on the fluctuating value

Annuity period

begins when an annuitant decides to recieve income payments from the annuity

non-qualified

contract owner invests money on an after-tax basis with the interest credited to the acount accumulating on a tax-deferred basis

equity indexed contracts (EICs)

contracts that combine features of both fixed and variable annuities - gaurantee a minimum rate of return but also have upside potential - some have participation rate which limits the amount of index' appreciation that the client will earn

greatest risk for variable annuity

market risk

Contribution Limits of 529 plans

- 529 plan can be frontloaded with an initial gift of 75k which is treated as if it's being made over a 5 year period - otherwise its 15k

variable annuities

- Payments fluctuate according to the value of an account invested primarily in common stocks - provides conservative to aggressive investments that are not guaranteed

death benefits of variable aunniuities

- at time of purchase, contract owner deisgnates a person as her beneficiary - if the annuitant dies during the accumulation period, the beneficiary recieves the greate of 1) sum of all the contract owner's payments into the annuity 2) the value of the annuity on the day of the death

Expanded uses of 529 plans

- can be used for elementary and secondary school expenses - individuals can take up to10k in distributiosn annually from their 529 plans to pay for private school suitiion and books K-12 - individual to withdraw up to1 0k on a ax-free basis to repay a qualified student loan

Straight-Life Annuity

- contract in which an annuitant recives month ly payments for as long as she lives - makes no provision for a disgnated beneficiary - no payments are made after the annuitant's death

Prepaid Tuition Plans

- designed to cover tuition costs at public in-state colleges/universities - donor may pay amounts of tuition in one lump-sum or throguh installment payments

who issues variable annuities

- insurance companies - must be bD registerd with SEC - must obtain state insurance license + series 7/6 finra registration

Annuity Charges and Expenses

- must be disclosed on the prospectus of annuity 1) sales harge 2) managgement/administrative exepnses

College Savings Plans (529 plans)

- offer mutual fund type investments that grow on a tax deferred basis - contributions are made with after-tax dollras but ny earnings grow on a tax-deferred basis - earnings are subject to federal income tax, and many times not subject tto state income tax - qualified expenses include tuition and fees, room and board, and other qualified exepnses - States are reponsible for determining specific plan rules

Suitability for EICs

- only suitable for long term investors as the surrender period can be as long as 15 years

Sales Charge for Variable Annuities

- there is some form of continget deferred sales charge - no statuatory limit on sales charge like there is for mutal funds

Local Government Investment Pools

- trusts established by the state and local government and offer muncipalitie a place to invest their money - use surplus cash to purchase interests in a trust which invests assets in large pool of securities - purpose is to encourage efficient management of cash reserves of government enetities

transferability of PTP plans

-if beneficiary chooses not to attend a college covered by the plan, most plans provide for a transfer to another sibling of the original beneficiary - if the donor cancels the plan, then only the original contribution will be returns + any interest on the plan

529 plan advantages

1) allows the owner to change beneficary once per year but the beneficiary must be family member 2) twice every moths account owners can adjust their holdsings in a 529 plan

drawbacks of annuities

1) purchases of these investments have long holding periods 2) may be usbjecte to significant surrender charges and or tax liabilities if assets are withdrawn too quickly

Limitations of PTP palans

1) require that the donor or beneficiary is a resident of the state that offers the plan 2) may also limit the enrollment to a certain period oeach year and limit toe eh expenses that are coered

Section 529A plans

529 Able plans are savings accounts that are administed by the states - authorized for people who are disabled - can be opened in any state that has a nationwide ABLE program

Life Annuity with Period Certain

A Life Annuity that guarantees to provide income payments for a minimum period of time or life. Payments will continue to a beneficiary should the annuitant die during the specified period.

Unit Refund Life Annuity

A life annuity that provides that a guaranteed number of units will be paid. If the annuitant dies before they are paid, the remaining units are paid to a beneficiary.

accumulation unit

An accounting measure that represents a contract owner's proportionate unit of interest in a separate account during the accumulation period of a variable annuity. - purchased at NAV

forward pricing

The valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. Portfolio valuations occur at least once per business day.

cash surrender

allows annuitants to cancel their variable annuities at any time during the accumulation period and receive the annuity's current value - will be rquied to pay surrender charges + taxes on any increase in the value of her annuity

partial surrender

annuitants may instead choose to withdraw a part of their annuity's value of at any time - must pay taxes on gaines + surrender charges

fixed annuity contract

invest recievves a fixed rate of interest and the invetment risk is assumed by the insurance company - not considered securities and are governed by state insurance law only (ie not sEEC/FINRA)

variable contracs

offer returns that fluttuate and investors assume all of the investment risk - considered securities and subject to SEC, IFNRA, and state insurance regulation

Joint and Last Survivor Life Annuity

option in which the payments are made to two or more persons - if one person dies the survivor continues to recieve only her payments - upone death of both people, payments cease

subaccounts

seperate accounts typically contain variety of different underlying portfolios that serve different investment ojbectives

qualified annuity

special type of annuity that may only be established non-profit organizations or public shcool systems for their employees - employers may also contribute on behalf of employees - money accumulates on a tax-deferrred baiss until employees withdraw the funds - payouts are taxed as ordinary income

accumulation phase

the period of time by which the owner of the contract pays in to the annuity; a beneficiary must be named if the policy owner dies during the accumulation phase.

annuity

-agreement between a contract owner and an insurance company - owner gives insruance company specific amount of money and in return the company promises to provide a person (annuitant) with income either immediately or at some point in the future - usually considered long-term investments to supplement IRAs - are usualy non-qualified (ie contract owner invests money on an after-tax basis) with the interest credited to the account accumulating on a tax-dfefferred basis - any withdrawalbe portion subject to owner's income taxes