Annuities

Periodic Payments

An annuity paid for in installments over a period of time.

Indexed Method

An index, such as the Standard and Poor's 500 index, and a formula for the way in which the gains will be credited. Used when the insurer retains the first gains up to a given percentage, after which gains are credited to the annuity

Types of Annuities

Fixed Equity Indexed Variable

Indexed Annuity

Fixed. Invest on a relatively aggressive basis to aim for higher returns. Has guaranteed minimum interest rates. The interest rate that is actually credited is often tied to a familiar index such as the Standard and Poor's 500. Less risky than a variable annuity or mutual fund but are expected to earn higher interest rate than fixed annuities.

Level Benefit Payment Amount

In a fixed annuity, the annuitant knows the exact amount of each payment received from the annuity during the annuity period.

Deferred Annuity

Income payments begin sometime after one year from the date of purchase. These can be funded with either a single lump sum or through period payments.

Interest Rate in Variable Annuity

Issuing insurance company does not guarantee a minimum interest rate

Parties of an Annuity

Owner, Annuitant and Beneficiary

Joint Life

Payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop

Immediate Annuity

Purchased with a single, lump sum payment and provides income payments that start within one year from the date of purchase, as soon as one month from the purchase date

Variable Annuity

Serves as a hedge against inflation. Annuitant may receive different rates of return on the funds that are paid into the annuity.

Flexible Premium Payment

The amount and frequency of each installment to pay for the annuity varies.

Fixed Guaranteed Interest Method

The insurer declares an interest rate that is credited for a given period.

Level Premium Payment

The owner of an annuity pays a fixed installment for the annuity.

Parties

Annuitant Beneficiary Owner

Types of Interest rates

Guaranteed Current

Annuities Certain

Short term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated.

Market Value Adjusted Annuity

A single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3-10 years. Penalties for a premature surrender depend upon current interest rates at the time of surrender.

Single Payment Annuity

An annuity paid for in one lump sum

Monthly Average

Change in the index is calculated monthly and applied at the time

Point to Point Measure

Change in the index is measured over two points in time and the increase is applied to the annuity value

Income Payments

Immediate Deferred

Underlying Investment in Variable Annuity

Payments that the annuitant invests into the variable annuity are invested in the insurer's separate account, not their general account. Not subject to the restrictions that are applicable to the insurer's own general account

License Requirements in Variable Annuity

Regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. They also must be properly registered with FINRA

Premium Payments

Single Periodic

Accumulation Period

The period of time over which the annuitant makes payments into an annuity.

Annuity Period

Time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant.

Life with Guaranteed Minimum Option

States that if the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary, Also known as the refund life. Guarantees that the entire principal amount will be paid out.

Interest Crediting Methodology

The way that interest and gains are credited to the annuity account.

Life with Period Certain Option

The annuity payments are guaranteed for the lifetime of the annuitant and for a specified period of time for the beneficiary,

Pure Life Option

Payment of annuity ceases at the annuitant's death (no matter how soon in the annuitization period that occurs) Provides the highest monthly benefits for the annuitant. While the annuity payments are guaranteed for life, there is no guarantee that all proceeds will be fully paid out.

Annuity

Contract that provides income for a specified period of years, or for life. Protects a person against outliving his or her money.

Settlement Options

Life Only Refund Life Annuity Life with period certain Joint life Joint and Survivor Lump Sum Annuities Certain

Phases

Accumulation Annuitization

Fixed Amount Installments

Annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. This option pays a specific amount until funds are exhausted, whether or not the annuitant is living.

Fixed Period Installments

Annuitant selects the time period for the benefits, insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified time only, whether or not the annuitant is living.

Joint and Survivor

Payout arrangement is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive. No guarantee that all proceeds will be paid out if both beneficiaries die shortly after the installments begin.

High Water Mark Formula

Index is measured at various times during the contract, and compares the highest value with the index level at the start of the measured term, often one year. Highest value is credited to the annuity account at the end of the period.

General Account

Owned by the insurance company, These are comprised mostly of conservative investments like bonds. These investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide.

Installment Refund

When annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.

Fixed Annuity

Guarantees minimum rate of interest to be credited to the purchase payment or payments. Income payments that don't vary from one payment to the next. The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.

Cash Refund

When annuitant dies, the beneficiary receives a lump sum refund of the principal minus benefit payments already made to the annuitant. No guarantee to pay interest