VI. Annuities

How is the surrender value of a deferred annuity calculated?

(Premium+Interest) - Surrender Charge = Value of the Annuity.

How is a deferred annuity taxed as it grows?

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What kind of annuity is used to accumulate funds for retirement?

Deferred annuities are often used to accumulate funds for retirement.

In a fixed annuity, how are the guaranteed and current interest rate related?

The current interest rates are based upon the performance of the insurance company. Should interest rates drop below the guaranteed rate, the insurer is obligated to pay the guaranteed rate amount. (Usually 3%)

How does inflation affect the purchasing power of a fixed annuity?

With fixed payment in times of inflation, the benefit payment will have less purchasing power and in time of deflation the benefit payment well have more purchasing power. The purchasing power that they afford may be eroded over time due to inflation.

A) Who has all of the rights in an annuity? B) Beyond a person what other entities might this be?

A) The owner of an annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. B) A corporation, trust, or other legal entity

An annuity can have 2 distinct periods. What are they called, and what happens during each?

Accumulation period (pay-in period): Period of time over which the annuitant makes payments (premiums) into an annuity. Annuity Period (annuitization period, liquidation period, or pay-out period): The annuity period is the time over which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant.

What happens if a deferred annuity is surrendered prior to age 59.5?

If a deferred annuity is surrendered prior to age 59.5, income tax must be paid on the gain, and there is a 10% penalty on the taxable portion. Furthermore, a surrender charge will be required by the insurance company. Generally based on a percentage that reduces over time.

If the annuitant dies during the accumulation period, what happens to the account?

If the annuitant dies before the payout period, his/her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater.

What type of annuity credits its interest based upon an index like the S&P 500?

Indexed(or Equity Indexed) Annuities: Fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate.

Who receives benefits or payments from an annuity?

The annuitant. While the owner does not have to be a person, the annuitant must be a natural person.

What is the difference between the annuitant and the beneficiary of an annuity?

The beneficiary only receives benefits from the annuity if the annuitant dies during the accumulation period.