Annuities
The owner of an annuity is the
purchaser of the annuity contract, but not necessarily the one who receives the benefits
An annuity is
a contract that provides income for a specified period of years, or for life
Like a fixed annuity, the indexed annuity has a
guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500
The annuitant and the contract owner do
not need to be the same person, but most often are.
An annuity protects a person against
outliving his or her money
Annuities are also used to provide what is known as structured settlements
a SS would take on the form of a court settlement arising from a civil law suit or it may take on the form of the income that is provided to the winner of a state lottery
Equity indexed annuities are less risky than
a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity
Annuities are not life insurance, but rather a vehicle for the
accumulation of money and the liquidation of an estate
Variable premiums purchase
accumulation units in the fund, which is similar to buying shares in a mutual fund
annuity income amount is based upon the following
amount of premium paid or cash value accumulated frequency of the payment interest rate annuitant's age and gender
Indexed (or equity indexed) annuities are
fixed annuities that invest on a relatively aggressive basis to aim for higher returns.
Annuities may be classified as
fixed or variable based on how the premium payments are invested
With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called
level benefit payment amount. A disadvantage of fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.
periodic payment annuities can be either
level premium, in which the annuitant/owner pays a fixed installment, or flexible premium, in which the amount and frequency of each installment varies
Annuities use
mortality tables
Annuities can also be classified according to when the income payments from the annuity begin.
when the income payments from the annuity begin
A corporation, trust or other legal entity may own an annuity, but the
annuitant must be a natural person
Accumulation units represent ownership interest in the separate account. Upon annuitization, the accumulation units are converted to
annuity units. The income is then paid to the annuitant based on the value of the annuity units.
If an annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either the
cash value or the total premiums paid, whichever is greater
A variable annuity serves as a
hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.
The accumulation period, also known as
the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. Futhermore, it is the period of time during which the payments earn interest on a tax-deferred basis
The annuity period, also known as the
annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant
The owner of an annuity may be a
corporation, trust, or other legal entity
With fixed-amount installments, the 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
Basic function of an annuity is that of
liquidating a principal sum, regardless of how it was accumulated
The beneficiary is the person who
receives annuity assets (either amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out
Annuities are purchased, for the most part, to provide or supplement
retirement income and/or college education
Annuities certain are
short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated
The first way to classify annuities can be based on how they can be funded (paid for). There are 2 options:
single payment (lump sum) or through periodic payments in which the premiums are paid in installments over a period of time
An immediate annuity is one that is purchased with a
single, lump-sum payment and provides income payments that start within one year from the date of purchase
An annuitant whose life expectancy is longer will have
smaller income installments
With fixed-period installments, the annuitant selects the
time period for the benefits, and the 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 amount of time only, whether or not the annuitant is living
Annuities have nonforfeiture values (the accumulation value)
which may be withdrawn prior to the annuitization date
A fixed annuity provides the following features
Guaranteed minimum rate of interest to be credited to the purchase payment(s) Income (annuity) payments that do not 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
The 3 main characteristics of variable annuities are
Underlying investment: the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account Interest rate: issuing insurance company does not guarantee a minimum interest rate License requirements: a variable annuity is considered a security and is 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. Agents or companies that sell variable annuities must also be properly registered with FINRA.
The owner of the annuity has all
of the rights, such as naming the beneficiary and surrendering the annuity.
Annuity payment options specify how annuity funds are to be
paid out. They are very similar to the settlement options used in life insurance that determine how the policy proceeds are distributed to the beneficiaries
A deferred annuity is an annuity which the income payments begin
sometime after one year from the date of purchase
In most annuity cases, the payments
stop upon the death of the anuitant (do not pay face amount upon the death of the annuitant)
The parties in an annuity consist of
the owner, annuitant, and beneficiary
The anuitant is the person
who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written