Annuities
Compatibility and Suitability
In recommending to a consumer the purchase if an annuity or exchange of an annuity, the producer must make sure that the policy is suitable for the consumer on the basis of the facts disclosed by the consumer as to the consumer's investment objectives and consumer's financial situation and needs.
Annuity Products
1. Fixed Annuities: Fixed rate of return. Guaranteed minimum interest. For the first year the insurance company will pay a guaranteed higher "current rate" of interest, but after the first year the interest rate can fluctuate but never go below the minimum rate. 2. Variable Annuities: Monthly payment will vary during the Annuity(Pay-Out) Period. Invested in Separate Account. Annuitant bears investment risks because the funds are invested into the stock market. 3. Market Value Adjusted Annuities: Type of Variable annuity where the policy owner commits a sum of money for a certain period of time, usually 1, 2, or 3 years. The longer the commitment the higher the interest rate. The value at the end of the term is guaranteed, but if the annuitant withdraws the funds prior to the end of the period, then a "Market value adjustment" may be made which could make the value go positive or negative. 4. Equity Indexed Annuity: Fixed annuity where both interest and principal amounts are guaranteed. However, excess interest earnings may go beyond the guaranteed rate since performance is calculated using and indexing method.
Standard Annuity Provisions
1. Grace Period: Both individual and Group deferred annuity contracts must contain a provision that gives a Grace Period of at least 1 month, but no less than 30 days. 2. Incontestability: Contract is contestable for the first 2 year after issue of contract, afterwards it is incontestable. 3. Incontestability after Reinstatement: Contract is contestable for period of 2 years are reinstatement, afterwards it is incontestable. 4. Entire Contract: The contract shall constitute the entire contract, or if an application is attached to the contact, then the application and the contract constitutes the entire contract. 5. Misstatement of Age 6. Misstatements in Group Annuity Contracts: Sames as above Misstatement of Age 7. Reinstatement: Contract may be Reinstated within 1 year from the default in making the stipulated payments to the insurer, unless cash surrender has been paid, but all overdue premiums and interest on those premiums must be paid back. 8. Free Look: The annuitant can return the contract with a full refund within 10 days after contract is delivered. If annuitant is age 65 or older then they can return the contract within 30 days. 9. Disclosure:If Annuity application is taking place face to face, disclosure and buyer's guide shall be provided. If application is taking place other than face to face, then required disclosure documents and buyer's guide must be given no later than 5 business days after completed application has been received by the insurer.
Uses of Annuities
1. Lump Sum Settlement: Immediate Annuities are often used in structured settlements. For example, if you won $1mil from a lawsuit, the defendent's insurance company will ask you to accept an annuity instead of a lump sum payment b/c it would save the insurance company money. Lottery payouts, sports contracts, and some real estate transactions utilize immediate annuities paid out over a period of time, such as 10 or 20 years instead of for life, rather than lump sump payment for tax reasons. 2. Qualified Retirement Plans: Qualified Annuities(Paid with before tax dollars) are sometimes used in connection with tax-advantaged retirement plans, such as defined benefit pension plan 3. Tax Sheltered Annuities (TSAs): Employees of public educational institutions (Public schools and universities), tax exempt non-profit organizations and church organizations are eligible to enroll for TSAs. They contribute before tax dollars and contributions are tax deductible. If withdrawn prior to 59 1/2, 10% penalty apply. This provides members with annuity upon retirement. 4. Individual Retirement Annuities: Used if employers are not profitable enough to contribute to employer sponsored retirement plan. There is maximum contributions are subject to specified annual limitations by the IRA. Funds must be distributed no later than the age of 70 1/2. Depending upon income level, contributions may be tax deductible.
Annuity (Benefit) Payment Options
1. Pure(Straight) Life Annuity: This option pays the annuitant for as long as they live once the annuitant annuitizes, but payment will stop entirely upon the death of the annuitant. So there is no beneficiary. But if the annuitant lived long enough, they could get back more than they paid in. This is the most risky option. 2. Life income Annuity with Period Certain: This annuity payment options is similar to Pure Life Annuity, except that this option guarantees benefits will be paid for a fixed minimum period of time to be selected by the annuitant when they annuitize, say 10 years. If the annuitant dies during the period certain, the beneficiary would receive what the annuitant would have received if he lived until the end of the period certain. If annuitant lives beyond period certain, there is no more beneficiary. 3. Refund Life Annuities (Cash or Installments): The insurance company promises to make a refund of the balances of the account if the annuitant dies before collecting it all. If you had 100k account balance, and you die after collecting 50k, your beneficiary would receive the remaining 50k either in lump sum in cash, or periodic installments. 4. Joint and Survivor Annuity: Payment is paid for the lifetime of two or more annuitants, usually husband and wife. If one annuitant dies, then the payment will continue for the second annuitant. So if either husband or wife dies first, payment will continue for whoever is still living. 5. Join Life Annuity: Similar to Join and Survivor Annuity except payment will stop entirely when either annuitant dies. It doesn't continue for the surviving annuitant. So if husband and wife are both under this Join life annuity, and husband dies, then payment will stop and the wife won't receive anymore payment. The monthly payment, however, will be higher since risk of death is higher. 6. Fixed Period and Fixed Amount Payment Options: this is not a lifetime payment option since Fixed Period would mean the annuitant decides how long they want to receive their payment for, and Fixed Amount Payment is annuitant chooses how much they want to receive monthly and the insurance company will make the same payment chosen by the annuitant until the balance is exhausted.
Annuity Surrender Charge
Most annuities have surrender period. Surrender period usually runs somewhere around 5 to 10 years. If the policy owner takes out more than 10% of their contract's value each year, then they will face a surrender charge which is usually around 7%.
