NY License Exam - Annuities
market-value adjusted (MVA) annuity
A fixed annuity that offers an interest rate adjustment feature. This feature lets the owner take advantage of interest crediting changes in response to market conditions at the time he or she withdraws funds.
variable annuity
A form of annuity for which the insurer makes no guarantee as to the annuity principal or the credited interest rate. Variable annuity premiums and contract values are invested in the insurer's separate accounts instead of its general account. The contract's values move up and down in response to the investment performance of the separate accounts and their associated stock, bond, and money-market portfolio
Equity-indexed annuities (EIAs) also known as indexed annuities
A type of annuity contract that allows contract owners to participate in some of the growth in the stock market while avoiding possible losses to principal. Commonly linked to the S&P 500 or a Dow Jones Index.
two-tiered fixed annuity
A variation on the standard fixed annuity. This annuity has a higher level of interest crediting than most traditional fixed annuities, provided the contract owner keeps the product and chooses to annuitize it. However, a lower rate is applied if the contract owner surrenders the annuity and takes its values in a lump sum instead of annutitzing. If he or she does that, then this lower rate of interest is retroactively applied back to the date the contract was bought.
single premium deferred annuity (SPDA)
An annuity whose money grows within the contract until the owner accesses the funds or the contract annuitizes. Once a person buys it, no additional premium payments are accepted.
fixed premium deferred annuities
An annuity whose owner makes on-going, fixed and level premium deposits of specific amounts. The owner makes these deposits at specified times (annually, quarterly, monthly) during the contract's accumulation period. This annuity type provides a specific amount of future income. Also called retirement annuity.
natural person
An individual - a parent, spouse, or partner in a business relationship.
annuity payout period
The period during which funds are paid out from the annuity in the form of periodic income payments
assumed interest rate (AIR)
The rate of interest or rate of return that an annuity contract's values are assumed to earn over the annuitization period. The AIR is usually in the range of 3 to 5 percent.
flexible premium deferred annuities
These contracts allow the owner to make premium deposits of any amount whenever he or she wants. However, a certain minimum amount may be required.
current declared rate
This rate is subject to change periodically and is based on the insurer's investment results and on the economic climate.
joint annuitants
Two or more people named as annuitants in an annuity
The __________ is the person upon whose life the annuity payment amount and duration is based.
annuitant
When it comes to beneficiaries, there are two types of annuity contracts: annuitant-driven and owner-driven.
annuitant-driven and owner-driven
With ____________, the owner's death before annuitization triggers payment of the contract value to the annuitant. The annuitant may annuitize the contract then or retain it for later annuitization. If the annuitant (now the owner) dies before annuitization, then the death benefit is paid to the annuitant's beneficiary. The beneficiary can then select the payout option by which to receive the death benefit.
annuitant-driven contracts
Determining the payment amount of each payment is very different with a variable annuity and involves four steps:
1. Determine the assumed interest rate (AIR). 2. Use the AIR to calculate the first annuity payment amount. 3. Convert the first annuity payment amount into a set number of annuity units. 4. Determine future annuity payment amounts by multiplying annuity units by the current NAV.
Most states have adopted regulations that require producers to determine the suitability of all annuity recommendations, especially those involving seniors. These state regulations generally follow the 2010 Suitability in Annuity Transactions Model Regulation adopted by the National Association of Insurance Commissioners (NAIC). This model regulation accomplishes the following:
1. It establishes a regulatory framework that makes insurers responsible for ensuring that annuity transactions are suitable, even if the insurer uses another party to supervise or monitor producer recommendations in the sale of annuities. (In other words, insurers are not exempt from suitability requirements simply because they outsource the monitoring process associated with this requirement.) 2. To the extent practical, it makes state annuity suitability standards consistent with the annuity suitability standards imposed by the Financial Industry Regulatory Authority (FINRA).
Variable annuities impose several charges and fees unique to the product. Depending on the fee and the terms of the contract, these costs are handled in one of two ways:
1. They are either deducted from the premium payments before the payments are deposited into the separate subaccounts. 2. They are deducted from the values in the subaccounts.
During the accumulation stage, the annuity contract owner has the right to
1. decide on the annuity starting date, which is the date on which income benefits are scheduled to begin; 2. choose or change the income payout option before the annuity starting date; 3. name the annuitant and the beneficiary; 4. receive some or all of the cash value in a partial or complete surrender of the contract; and 5. assign the contract.
Another way annuities are identified is by the nature of their underlying investment platform. On this basis there are four basic product designs:
1. fixed annuities 2. variable annuities 3. equity-indexed annuities 4. market-value adjusted annuities
annuity units
After the first payment under a variable annuity is made, the payment is converted into annuity units. For the second and all future income payments, the amount of each monthly payment is determined by multiplying the annuity units by the latest revalued amount of those units.
_______________ are purchased with either a single sum of money or through periodic investments, but in either case annuity payments do not begin until a future date.
Deferred annuities. During the deferral period, funds accumulate interest on a tax-deferred basis. These funds belong at all times to the contract owner.
______________ are purchased with a single sum of money to immediately begin distributing periodic payments.
Immediate annuities also referred to as a single premium immediate annuity (SPIA)
accumulation period
In an annuity, the period during which premium funds are paid into the annuity contract
rate cap
In relation to an EIA, a rate ca is the maximum interest rate that is applied to the funds on the EIA if the percentage of change in the index is greater than the cap.
If a deferred annuity owner or the contract's annuitant dies during the contract's accumulation stage, the contract's values are paid to the beneficiary as a death benefit. ________________ pay the death benefit if the owner dies, while _______________ pay the death benefit if the annuitant dies. The death benefit amount that any given contract provides depends on whether its funds accumulate at a fixed rate or at a variable rate.
Owner-driven contracts annuitant-driven contracts
annuity purchase rate
The amount of on-going income that $1,000 of the annuity contract value buys.
general account
The basic account in which an insurance company maintains the funds that support its fixed life insurance and annuity products. The general account's conservative investments allow the insurer to guarantee interest returns on its fixed insurance and annuity products.
EIA participation rate
The percentage of the index increase that is actually credited to an annuity. These rates typically range from 60 to 90 percent.
Some deferred annuities include a _____________ that allows surrender charge-free withdrawals if the interest rate credited to the accumulated value drops below a specified level.
bailout provision
A ________________ guarantees that if an annuitant dies before annuity payments begin, or soon after the distributions begin, a beneficiary will receive at least the balance of the premiums paid. This can be paid to the beneficiary in a lump-sum payment or over the balance of the period for which the payments were scheduled.
death benefit rider
A ____________ is an annuity contract in which the insurer guarantees both the annuity principal and a specified rate of interest to be credited to the contract. These guarantees are backed by the financial strength and claims-paying ability of the insurer issuing the contract.
fixed annuity
A __________________ ensures that the annuitant will receive a regular payment every month, quarter, or year. The annuitant funds it with a single lump-sum premium from which payments are made. This type of rider can help provide retirement income for the annuitant.
guaranteed income rider
accumulation units
The growth of a variable annuity's funds or value during its accumulation period is measured in terms of accumulation units. When the annuity owner makes premium deposits and allocates them among the contract;s subaccounts, they are used to buy accumulation units. These purchases are then credited to the owner's account.
The _________is the person (or entity) who buys the contract. Annuity owners have all the rights and responsibilities of contract ownership. They control the contract and make the premium payments. They also own the contract's values and, if the owner is a natural person, enjoy the benefits of tax-deferral during the accumulation stage.
annuity owner
_________________ (i.e., the rates used in converting a sum of money to a stream of income) include a mortality charge that effectively serves as an insurance premium. It protects the insurer in the event the annuitant lives beyond his or her life expectancy.
annuity purchase rates
Unlike life insurance death benefits, annuity death benefits are not received tax free. Any amount the beneficiary receives that exceeds the sum of the premiums paid into the contract is _________ to the beneficiary.
taxable
Guaranteed minimum rates
usually in the range of 2 to 3 percent compounded annually and exist for the life of the contract
The interest rate bailout feature (the bailout provision) is sometimes called a _______ provision.
waiver of penalties
Insurance companies that offer a declared-rate fixed annuity manage two interest rates with their fixed deferred annuities:
1. a guaranteed minimum rate (which is stated in the annuity contract) 2. a current declared rate (which is subject to change periodically)
Two types of annuity suitability training for producers who sell annuities:
1. carrier-specific training in which insurers provide product training for any producer selling their annuity products 2. industry-specific training that requires producers to complete a one-time annuity training program (minimum four hours) provided by an approved education provider
Some provisions and riders spell out conditions in which distributions may be made from a deferred annuity without a surrender charge. Common examples include:
1. charge-free withdrawals provision—Some deferred annuities permit contract owners to withdraw a specified percentage (e.g., 10 percent) of the accumulated value annually without a surrender charge. 2. terminal illness rider—This rider waives surrender charges if the annuitant incurs a terminal illness. In most cases, death must be expected within one year of diagnosis. 3. disability rider—This rider allows the contract owner to withdraw funds without a surrender charge if the owner becomes disabled and remains so for a specified period of time (usually ranging from 60 days to one year). 4. long-Term care rider—With this rider, the contract owner can withdraw funds without a surrender charge if confined to a nursing home.
Variable annuities (VAs) have special riders that add a guaranteed element to their withdrawal options. Common examples include:
1. guaranteed minimum accumulation benefit (GMAB) rider—A GMAB rider guarantees that the VA's accumulated value will be at least equal to the sum of premiums paid after a specified period of time (typically five to ten years) minus previous withdrawals. Some insurers include the ability to lock in gains in the accumulation value at that point in time, so that thereafter the guaranteed minimum accumulation value equals the sum of premiums paid plus the locked-in gains 2. guaranteed minimum withdrawal benefit (GMWB) rider—With this rider, the contract owner can withdraw an amount at least equal to the sum of premiums paid. Annual withdrawals are usually limited to a specified percentage (e.g., 5 to 10 percent) of total premiums paid. 3. guaranteed minimum income benefit (GMIB) rider—This rider provides a guaranteed minimum life income regardless of the contract's accumulated value. It adds a growth factor that assures a guaranteed minimum account value. At a specified future date, the deferred VA may be converted to an immediate annuity that provides income payments based on the greater of the guaranteed minimum account value or the actual accumulated value. 4. guaranteed lifetime withdrawal benefit (GLWB) rider—With this rider, the contract owner receives a lifetime income without having to convert to an immediate annuity. This rider usually lets the owner access undistributed contract values in addition to the income payments already received, though doing so will diminish income withdrawals thereafter (since the remaining account balance from which they are drawn will be decreased).
The types of charges and fees common to variable annuities include:
1. mortality and expense (M&E) costs—These are the insurance-related costs for a variable annuity. They cover the cost of the contract's death benefit. 2. fund management fees—These charges cover the cost of managing and administering the separate subaccount investment portfolios. 3. annual contract fee—This charge is assessed every year by the insurer. It covers the cost of administering and handling the contract.
As with life insurance, there are several parties to the annuity contract. In addition to the insurance company that issues the contract, an annuity involves a(n):
1. owner 2. annuitant (who may or may not be the owner) 3. beneficiary
Fixed annuities guarantee
1. principal protection, 2. minimum interest rates, 3. a fixed level of lifelong annuitized payments, and 4. a death benefit.
Annuities have traits of both an investment product and an insurance product. As an investment product, annuities can be used to accumulate a sum of money for future distribution. As an insurance product, they
1. provide protection in the form of guaranteed death benefits and 2. can provide a lifelong stream of income if the product is annuitized.
Under most variable annuities, the death benefit equals the greater of
1. the premiums paid into the policy (less any withdrawals) or 2. the contract's accumulated value at the time of death.
non-natural person
A corporation or trust
A variation on the joint and survivor income payout is a_______________. Under this option, income is paid to two or more annuitants until the first one dies. All payouts end at that point. This is not a common payout option.
joint life annuity option
Some deferred annuities also permit the contract owner to withdraw funds from the contract at any time, without a surrender charge, if the owner becomes terminally ill or requires long-term nursing care. These are sometimes called _______________
medical bailout provisions
With __________ the owner's death triggers payment of the contract death benefit (which may be larger than the current contract value) to the annuitant.
owner-driven contracts
A _________________ ensures that the annuitant will get back at least the amount paid for the premium. This rider guarantees that he or she will receive no less than the amount invested in the contract.
return of premium rider
