Annuities

Annuities

A contract which protects against the risk of living longer than expected. They provide a guaranteed life income to protect against the risk of depleting retirement funds, or the systematic liquidation of accrued assets/estate through periodic payments. Only life insurance companies can offer annuities that provides guaranteed income for life (the "survivorship factor") because they have mortality data.

Retirement Income Annuities

A deferred annuity with a decreasing term life insurance rider. The rider's face amount decreases each year and falls off when the annuitant reaches retirement age and begins receiving annuity payments. The purpose of this setup is to provide a beneficiary with a death benefit and the annuity's surrender value if the annuitant dies prior to retirement.

Annuity Units

A variable annuity contract owner's interest in the separate account after annuitization.

Accumulation Units

A variable annuity contract owner's interest in the separate account prior to annuitization.

Guaranteed Minimum Withdrawal Benefit (GMWB)

An option that may be purchased for retirement annuities. It provides a way for annuitants to protect their retirement investments from market downturns by giving annuitants the right to withdraw a maximum percentage of their investment each year until the amount of the initial investment has be recovered.

Tax-sheltered Annuities

Annuities available to employees of tax-exempt nonprofit organizations and public schools.

Periodic Payment Annuities

Annuities funded by periodic premiums paid over time. Premiums may be paid monthly, quarterly, semi-annually or annually. Annuities funded by periodic premiums may have level premiums or flexible premiums.

Single Premium Annuities

Annuities funded with a single lump-sum premium. This immediately creates a principal sum. Annuities funded with a single premium are either SPIA (single premium immediate annuity) or SPDA (single premium deferred annuity).

Fixed Annuities

Annuities that have a guaranteed minimum interest rate.

Variable Annuities

Annuities that have variable interest rates and benefits. The income received from a variable annuity may differ from month to month.

Two-Tiered Annuities

Annuities which have two distribution values contingent upon whether or not the annuity is surrendered in a lump-sum prior to annuitization.

Joint and Survivor Annuity Option

Annuity payout option paying annuity benefits to two annuitants. If either of the two annuitants dies, payments will be made to the surviving annuitant for life. Payments stop upon the death of the surviving annuitant.

Deferred Annutities

Annuity periods beginning sometime in the future, after one year or many years from the date of purchase. Many times used to build retirement funds.

Immediate Annuities

Begin immediately after the annuity is purchased, do not have an accumulation period, and have payout periods which must begin within one year of purchase.

Market Value Adjusted Annuities

Fixed annuities in which a surrender fee is incurred if surrendered prior to annuitization.

Equity Indexed Annuities

Fixed annuities that provide a guaranteed minimum interest rate and earn a current interest rate that is tied to an equity index. The contract's accumulation period is normally between 5-7 years.

Annuities Classification

How annuities are structured and designed including: 1. Funding Method 2. Date Income Payments Begin 3. Payout Options 4. Investing Configuration

Date Income Payments Begin

Immediate or Deferred.

Exclusion Ratio

Informs contract owners what portion of each annuity payment is taxable.

Net Premium

Mortality minus interest.

Life with Period Certain Annuity Option

Provides the annuitant with guaranteed income for life and further guarantees annuity payments for a minimum number of years, such as 10 or 20. If the annuitant dies within the period certain, the beneficiary will receive annuity payments for the remainder of the period. Any balance in the annuity fund after the period certain ends, is retained by the insurer.

Tax-Sheltered Annuities (TSA)

TSAs, such as a 403(b), are available to employees of tax-exempt nonprofit organizations and public schools. The employer establishes the TSA, and contributions made by employees are not taxable. TSAs are established to provide retirement income for employees. Income payments made from the TSA are taxable at the time of distribution. TSAs are beneficial because people tend to have lower income tax brackets upon retirement.

Funding Method

The accumulation of principal either through a single or periodic principal payments.

Contract Owner

The individual who purchases the annuity, pays the premiums, and has rights of ownership. The contract owner has the right to name the annuitant and the beneficiary.

Annuitant

The individual whose life the annuity has been issued, and the person who receives annuity payments.

Straight life Income Option

The life annuity payout option is Straight Life, also referred to as Life Only or Pure Life. The annuitant receives annuity payments for his entire life. Upon the annuitant's death, the annuity payments stop.

Accumulation Phase

The pay-in period of an annuity during which the contract owner pays premiums.

Annuity Phase

The payout period of an annuity during which the annuitant receives periodic income payments. Synonymous with annuity period.

Period Certain Annuity Option

Unlike a life annuity, the period certain option does not guarantee a life income. Instead, it provides income for a fixed time period, such as 10 or 15 years.

Payout Options

Ways that the accumulated funds in an annuity may be received upon annuitization. Some of the life insurance settlement options are the same as annuity payout options.

Cash Refund Annuity Payout

Life annuity payout option in which the annuitant receives income for life and the beneficiary will receive the balance of premiums plus interest minus benefits already paid when the annuitant dies. Two types: cash refund and installment refund.

Annuity Installment Refund

Life annuity refund/payout in which the beneficiary receives the balance of premium minus benefits paid in installments.

Determining Annuity Premiums

Insurers consider five factors when determining annuity premiums: 1. Annuitant's age 2. Annuitant's sex 3. assumed interest rate 4. income amount and payment guarantee 5. loading costs