Annuities

Cash Refund Option

*A cash refund option provides a guaranteed income to the annuitant for life. If the annuitant dies before the annuity fund (principal) is depleted, a lump-sum cash payment of the remaining balance is made to the annuitant's beneficiary.*

Accumulation Period

*The accumulation period of an annuity is that time during which funds are being paid into the annuity, accumulation normally may continue after the purchase payments cease.*

Immediate Annuities

An immediate annuity would typically pay its first payment one month from the purchase date. Thus, it *lacks an accumulation period. Immediate annuities can only be funded with a single payment and are often called single-premium immediate annuities (or SPIAs) and is intended for liquidation of principal sum. An annuity cannot simultaneously accept periodic funding payments by the annuitant and pay out income to the annuitant.

Joint and Full Survivor

*The joint and full survivor option provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.* A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit.

Life with Period Certain Option

Also known as the life income with term-certain option, this payout approach is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. For example, if an individual has a life and 10-year certain annuity, the individual is guaranteed payments for life or the individual's beneficiary will receive the same payments for four or more years.

Funding Methods

An annuity begins with a sum of money called the principal sum. Annuity principal is created (or funded) in one of two ways: 1) immediately with a single premium, or 2) over time with a series of periodic premiums.

Period Certain Option

The period certain income option is not based on life contingency. Instead, it guarantees 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 specified term, payments cease.

Temporary Annuity Certain

Under a temporary annuity certain, the payments are guaranteed to be made for a specified number of years. Since this income is guaranteed, if the annuitant dies before receiving payments for the full specified period of time, the annuitant's beneficiary will receive the payments for the remaining number of years.

Variable Annuities

Variable annuities shift the investment risk from the insurer to the contract owner. Invest deferred annuity payments in an insurer's *separate accounts,* as opposed to an insurer's general accounts. *Because variable annuities are based on non-guaranteed equity investments (such as common stock), a sales representative who wants to sell such contracts must be registered with the Financial Industry Regulatory Authority (FINRA) as well as hold a state insurance license. Not only can the value of a variable annuity fluctuate in response to movements in the market, so too will the amount of annuity income fluctuate even after the contract has annuitized.

Deferred Annuities

*Deferred annuities accumulate interest earnings on a tax-deferred basis and provide income payments at some specified 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.* Most insurers charge contract owners a back-end load for liquidating deferred annuities in the early years of the contract called *surrender charges*. Many deferred annuity contracts waive the surrender charge when the *annuitant dies or becomes disabled*. For those years where charges are applicable, most annuities provide for an annual "free withdrawal", which allows the annuity owner to a certain percentage, usually 10%, of the annuity account with no surrender charge applied. Also, some annuities may offer a *"bailout" provision*, which allows the annuity owner to surrender the annuity without surrender charges if interest rates fall below a state level within a specified time period.

Straight Life Income Option

*This annuity guarantees protection against exhaustion of savings due to longevity. When a life annuitant outlives life expectancy, the funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy. The straight life annuity typically pays the largest monthly benefit to a single annuitant because it is based only on life expectancy. However, it creates a risk that the annuitant may die early and forfeit much of the value of the annuity to the insurance company.*

Periodic Payments (Flexible Premium Deferred Annuities (FPDAs))

The purpose of this type of funding is to create a certain amount of periodic annuity income. In other words, the contract defines what premium is required to generate a specified amount for a specified period of time upon contract maturity.

Fixed Annuities

*Fixed annuities provide a guaranteed rate of return.* During the period in which the annuitant is making payments to fund the annuity (the accumulation period), the insurer invests these payments in conservative, long-term securities (typically bonds). This allows the insurer to credit a steady interest rate to the annuity contract. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. In this way, a fixed annuity has two interest rates: a minimum guaranteed rate and a current rate. The current rate is what the insurer credits to the annuity on a regular schedule (typically each year). The current rate will never be lower than the minimum rate, which the insurer guarantees. In this way the accumulation of funds in a fixed annuity is certain and the contract owner's principal is secure. The investment risk is borne by the insurer. *When converted to a payout mode, fixed annuities provide a guaranteed fixed benefit amount to the annuitant,* typically stated in terms of dollars per $1,000 of accumulated value. This is possible because the interest rate payable on the annuity funds is fixed and guaranteed at the point of annuitization. *Since the benefit amount is fixed, annuitants may see the purchasing power of their income payments decline over the years due to inflation.*

Annuities vs. Life Insurance

Annuities are a mirror image of a life insurance contract. The principal function of a life insurance contract is to create and estate (an "estate" being a sum of money) by the periodic payment of money into the contract. However, an annuity's principal function is to liquidate an estate by the periodic payment of money out of the contract. Life insurance is concerned with how soon one will die while life annuities are concerned with how long one will live. Annuities are primarily investment products. Individuals purchase or fund annuities with a single-sum amount or through a series of periodic payments. The insurer credits the annuity fund with a certain rate of interest which is not currently taxable to the annuitant. In this way, the annuity grows. The ultimate amount that will be available for payout is a reflection of these factors. Most annuities guarantee a death benefit payable in the event the annuitant dies before payout begins. *Surrender charges* are used to discourage withdrawals and exchanges in an annuity. *A spouse as beneficiary may continue the contract with deferred taxation as contingent owner.*

Single Premium (Single-Premium Immediate Annuities (SPIAs))

Annuities can be funded with a single lump-sum premium, in which case the principal sum is created immediately. For example, individuals nearing retirement whose financial priority is retirement income could surrender their whole life policies and use the cash value as a lump sum premium to fund an annuity.

Installment Refund Option

Like the cash refund, the installment refund option guarantees that the total annuity fund will be paid to the annuitant or to the annuitant's beneficiary. The difference is that under the installment option, the fund remaining at the annuitant's death is paid to the beneficiary as annuity payments, not a single lump sum.

Liquidation (The Payout) Period

Refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate *benefit payments at regular intervals.* Typically, benefits are paid out monthly. Quarterly, semiannual, or annual payment arrangements can also be structured.