Annuity contracts

premature distributions and penalty tax

10% penalty on annuity tax base for early withdrawals prior to age 59.5. taxable interest on withdrawal

fixed-amount installments

payments continue after death; annuitant selects how much installment will be; insurer selects how long benefits will be paid; pays for specified amount;

life w/ period certain

payments guaranteed for lifetime of annuitant; specified amount of time for beneficiary; continued to beneficiary if annuitant dies

accumulation phase

period after annuity has been purchased but before distributions begin

annuity

protects a person from outliving his money; vehicle for accumulation of money and liquidation of state; payments stop when annuitant dies; mortality table w/ long life expectancy

pure life

provides highest monthly benefits; pay specific amount which ceases at annuitant's death; fully paid-out proceeds not guaranteed;

single premium immediate annuities (spia)

provides income payments within first year from date of purchase: as early as 1 month from purchase; purchased with single lump sum payment

annuity period

accumulated sum is converted into stream of income; lasts for annuitant's lifetime; pay-out period; annuitization period

level benefit payment amount

amount of benefit is guaranteed; inflation: less purchasing power; deflation: more purchasing power

fixed period installments

annuitant selects time period; insurer selects how much each payment will be; pays for a specific amount of time only; pays for time

installment refund

annuitant's beneficiary receives all installments if annuitant dies

cash refund

annuitant's beneficiary receives refund of principal when annuitant dies; receives lump sum payment (unlike installment refund)

SPIA annuity income amount

based on cash value accumulation; frequency of payments; interest rate; age of gender and annuitant

Tax-deffered growth

both qualified and non qualified; accumulation of values are not subject to income taxation; become taxable upon surrender or annuitization; income taxes owed on earnings; exclusion ratio: total investment/total amount expected to pay

joint and survivor

cannot be outlived; commonly elected by couple in retirement; no guarantee that all proceeds will be paid out if both beneficiaries die shortly after installments begin; surviving beneficiary receives 1/2 or 2/3 of what was received when both were alive

refund life annuities

cash refund and installment refund

general account

conservative investments like bonds; specified interest rate

distributions @ death

contracts interest becomes taxable if contract holder dies before pay-out period. if beneficiary is a spouse; tax is deferred.

individually owned

cost base: anticipated return = nontaxable. tax base: interest earned on principal: taxable

retirement income

deferred annuities provide income that cannot be outlived

deferred annuities

either single premium deferred annuity or flexible premium deferred annuity; owner receives current interest rate or guaranteed interest rate whichever is higher; if surrendered prior to age 59.5, 10% penalty on taxable portion

bail-out provision

found in some annuity contracts; if interest rates drop the contract holder can surrender the contract w/o charge

qualified retirement plans

funded by annuities; meet IRS guidelines and receive favorable tax treatment

guaranteed minimum

future interest rate is based on performance of ins. company; if rate drops (below 3%) ins. company is obligated to pay.

corporate owned

growth in annuity is taxed; interest income is taxed annually

fixed annuity

guaranteed minimum interest rates; consistent income payments; annuitant chooses length of period of payments through settlement option; company's gen. acct; less purchasing power w/ inflation

variable annuities

hedge against inflation; benefit payment amounts are not guaranteed; different rates of return; insurer's sep. acct (same restrictions as gen. acct); no guarantee on minimum interest rate; securities license; register with FINRA; regulated by SEC and state;

education funds

provides savings on tax-deferred basis for education expenses

accumulation units

purchased by variable premiums; represent ownership in separate acct. converted to annuity units upon annuitization; units remain constant; values may vary

flexible premium deferred annuity

purchased w/ multiple payments which can vary yr to yr(portion each paycheck); payouts start sometime after 1 yr

single premium deferred annuity

purchased w/ single payment but benefit is not paid until 1 year or more

life w/ guaranteed minimum

remainder of principal refunded to beneficiary if annuitant dies

single life

highest monthly payment; contributions can be single premium or periodic

personal uses of annuities

ideal for those with large lump sums of cash; single premium immediate purchase to convert large lump into periodic payments

current interest rate

insurer invests principal and gives annuitant guaranteed interest rate baed on minimum as specified in the annuity or current rate whichever is higher

payments to beneficiary

insurer is obligated to return the cash value or total premiums paid to the beneficiary if annuitant dies

multiple life

joint-life, joint, and survivor; covers two or more

indexed annuities

less risky than variable annuity or mutual fund, but higher interest rate than fixed; aims for higher returns; invests on aggressive basis; guaranteed interest rate; tied to s&p500 sometimes; a company may keep interest returns, but give excess to annuitant;

nonforfeiture

meaning an annuity has a guaranteed surrender value if owner decides to surrender prior to annuitization

three parties of annuity

owner (purchaser, not necessarily one who receives, has all the rights); annuitant (receives benefits, has to be natural person); beneficiary (receives annuity assets wither amount paid into annuity or cash value whichever is greater)

accumulation period

owner contributes premiums into annuity; earn interest on tax-deferred basis; pay-in period

surrender charges

owner gets premium plus interest minus charge; compensates company for loss of investment value; levied against cash value; percentage decreases over time; 7% first yr, 6% second yr and so on;

insurance aspect of annuity

payment phases stop upon death of annuitant; grows tax deferred; longer life expectancy than life insurance

one sum cash surrenders

results in immediate taxation of interest earned

annuities certain (types)

short term that limits the amounts paid to a certain fixed period or until a certain fixed amount is liquidated

longer life expectancy =

smaller income installments

waiver

surrender charges cancelled if annuitant is confined to long-term care facility for at least 30 days

tax deferred accumulation

tax base: interest accumulated in an annuity; taxes are deferred during accumulation period

joint-life

tow or more annuitants receive payments until first annuitant dies; then payments stop

withdrawal of interest and principal

when annuity is withdrawn during accumulation phase; amounts are taxed on LIFO basis; principal has no further tax consequences.