Annuities

For Test

-Nothing like life insurance. But they are true mirrors of each other --Both share the same actuarial factors of mortality factor, interest credit, and an expense load. - Life insurance CREATES an estate(through money payments to the insurer which built up the death benefit upon death of insurer). Annuities LIQUIDATE an estate.(takes a large sum of money that the insurance company has which was provided by the anuitant and distributes that through a series of payments. -L.I and Ann. --both feature tax-deferred accumulation(growth). ---in life insurance cash value grows on a tax deferred basis And same for annuity's --when money is payed out the rules change significantly= --- Life insurance death benefit is generally income tax-free distributions. In annuity's their is no way to get tax-free payments ---Annuity income payments are part taxable interest and part tax-free return of principal. -how it works --a sum of money called the principle is invested into an insurance company. At the later date the money is liquidated to provide an income that cannot be outlived

Key Points

-Prior to annuitization the contract owner is permitted to withdraw money from the annuity, but once an annuity has been annuitized those funds are no longer available for withdrawal (other than in the form of the scheduled income payments to the annuitant). -Because annuity payments are made for a guaranteed period of time, up to the annuitant's lifetime or even longer, annuities are popular retirement-planning products.

Nature and Purpose of Annuities

An annuity is a contract between a person (the annuity owner) and a life insurance company (the annuity issuer) to accumulate and distribute a sum of money. -opposite of life insurance. Life insurance CREATES an estate. Annuities LIQUIDATE an estate. -how it works --a sum of money called the principle is invested into an insurance company. At the later date the money is liquidated to provide an income that cannot be outlived -two distinct phases --Annuity Accumulation Period= money is deposited into annuity upon the annuitization no more money is deposited into the annuity and the payout period begins. --Annuity Payout Period=The annutiant receive periodic income payments for life.

Overview

Annuities are popular financial products used to distribute a sum of money over an extended period of time. They are sold by life insurance producers and issued by life insurance companies, but annuities are not life insurance. In fact, annuities serve a purpose that is just the opposite of life insurance. The purpose of life insurance is to create an estate (i.e., a sum of money). But the purpose of annuities is to liquidate a principal sum over a certain period. Annuities achieve this goal by converting a sum of money into a series of income payments. The lessons in this unit explain the basics of annuities: their structure, design, and uses.

Tax-Deferred Accumulation

Annuity cash values accumulate on a tax-deferred basis. This means that interest earnings and growth are not taxable to the owner while they accumulate in the contract. This tax-deferral feature is one of the main advantages to annuity ownership. The period during which funds are paid out in the form of periodic income payments is known as the annuity payout period. As we will discuss, one of the unique features of an annuity is that it can guarantee income will be paid for any period the owner wants. This period can be a set number of years or for the length of one's life.

Annuity Riders

As is the case with life insurance policies, riders are additional benefits that people can add to an annuity for an additional cost. Riders can take several forms and can address different needs: -A *guaranteed income rider* ensures that the annuitant will receive a regular payment every month, quarter, or year from the deferred annuity, without having to annuitize the contract. 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 without irreversibly committing funds through annuitization. An annual fee is usually charged to the deferred annuity for this feature before payments begin. -A *death benefit rider* 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. A *return of premium rider* 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 if still alive at end of the policy. Returned premiums do not include interest. These riders are most relevant with variable annuities (discussed in a separate lesson). Like variable life insurance, variable annuities invest funds in securities-based subaccounts that are not guaranteed. As such, it is possible that the accumulation value of a *variable annuity* could be less than the sum of premiums paid. The value of these riders in that scenario is obvious.

Annuity Accumulation Period vs. Annuity Payout Period

Funds the owner deposits into the annuity—the contract's premium payments—grow tax-deferred through interest earnings or through the growth of the investments into which the funds are deposited. At a given point, those accumulated funds can be annuitized. At that point, the funds are turned into a series of ongoing, periodic income payments to the annuitant. The annuitant is the person upon whose life the annuity payments are based. Prior to annuitization the contract owner is permitted to withdraw money from the annuity, but once an annuity has been annuitized those funds are no longer available for withdrawal (other than in the form of the scheduled income payments to the annuitant). So, an annuity serves two purposes: 1. It can accumulate cash. 2. It can distribute income of a guaranteed amount for a guaranteed period. The period during which premiums are paid into the contract is known as the accumulation period. This can be a very long period—many years—or it can be as short as a month. Annuitization begins the annuity's distribution period. Because annuity payments are made for a guaranteed period of time, up to the annuitant's lifetime or even longer, annuities are popular retirement-planning products. --annuitant= Person an annuity owner chooses to receive the periodic annuity payments when the contract annuitizes. --annuitization= Process in which the funds are turned into a series of ongoing, periodic income payments.

Quiz

You answered 75% of the questions correctly Question 1 Which of the following statements best describes the purposes that annuities serve? Annuities are income distribution instruments that are not able to accumulate money. Annuities collect premiums to pay them back to the annuitant in a lump sum sometime in the future. *Annuities accumulate and/or distribute sums of money. Annuities are a form of life insurance that ensures lifetime income. Annuities are major product offerings for the life insurance industry, but annuities are not life insurance products. However, they are sold by life insurance agents and are issued by life insurance companies. Question 2 What is the name of the period during which premium funds are paid into an annuity contract? the annuity payout the benefit period the annuity period *the accumulation period The period during which premium funds are paid into the contract is the "accumulation period."" Question 3 All of the following statements about annuities are generally correct, EXCEPT: An annuity converts a sum of money into a series of income payments. Annuities are sold by life insurance agents and are issued by life insurance companies. Annuities are not life insurance. *The historic purpose of annuities is to create estates over a certain period. The purpose of life insurance is to create an estate. But the historic purpose of annuities is to liquidate an estate over a certain period. Question 4 Which of the following would be most appropriate for Haley, 55, if her primary objective is to ensure having an income she cannot outlive? mutual funds life insurance *an annuity CDs Annuities provide benefits during one's life. They ensure that one's income cannot be outlived. Question 1 Which of the following would be most appropriate for Haley, 55, if her primary objective is to ensure having an income she cannot outlive? mutual funds CDs life insurance -an annuity Annuities provide benefits during one's life. They ensure that one's income cannot be outlived. Question 2 Annuities are often referred to as "insurance against living too long" for all of the following reasons, EXCEPT: -The annuity contract includes a face amount that pays a death benefit whether death occurs before or after annuitization. The insurer guarantees income payments for whatever annuity payout period the annuitant selects. The insurer can provide a guaranteed stream of income for a single life or for a joint life, based on life expectancies and its mortality experience. Annuities provide income payments that annuitants cannot outlive even if they surpass their life expectancy. Deferred annuities pay death benefits if the owner/annuitant dies before annuitization. Question 3 Which of the following statements best describes the purpose of the annuity payout period? to distribute funds in the form of periodic payments over a time not to exceed the annuitant's age of 120 years. to distribute funds in the form of guaranteed periodic payments over a specified number of years not to exceed ten years -to distributes funds in the form of guaranteed periodic payments over a time period selected by the annuity owner, throughout the annuitant's lifetime and even afterward. to distribute funds in the form of guaranteed periodic payments over a specified number of years selected by the insurance company based on the annuitant's life expectancy at the time of annuitization The period during which funds are paid out in the form of periodic income payments is known as the annuity payout period. Income payments are guaranteed for any period the owner wants, from a set number of years to the annuitant's remaining lifetime, or even longer in the case of joint and survivor annuities. Question 4 What is the name of the period during which funds are paid out of an annuity contract in the form of periodic income payments? the annuity payout the benefit period -the annuity payout period the accumulation period The period during which funds are paid out in the form of periodic income payments is called the "annuity payout period."

Insurance Aspects of Annuities

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. Annuities are often promoted as "insurance against living too long." Based on life expectancies and its mortality experience, the insurer can provide for a guaranteed stream of income for a single life or for a joint life. The insurer can also guarantee any refund or term certain factor. These guarantees assure annuitants they cannot outlive their income. They are possible because annuity purchase rates (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 rate=The amount of on-going income that $1,000 of the annuity contract value buys.