ch 7 annuities insurance test

income tax treatment of annuity benefits

annuity benefit payments consist of principal and interest. the portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owners "cost basis" interest income must be reported for federal income tax purposes upon receiving distributions or income benefits from the contract

if the annuitant dies before the annuity start date

the beneficiary receives the premiums paid plus interest earned

annuitant

the income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to this person

what are surrender charges

they are used to discourage withdrawals and exchanges in an annuity

1035 contract exchanges

applies to annuities. if an annuity is exchanged for another annuity. a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However an annuity cannot be exchanged for a life insurance policy

investment configuration

a fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return

who is a senior consumer

a person 65 or older

payout period

a specified number of years, or for life, or a combination of both

equity indexed annuities

a type of fixed annuity that offers the potential for a higher return than a standard fixed annuity. they are sometimes tied to the standard and poor's 500 or the composite stock price index which results in long-term inflation protection. underlying the contract for the duration of its term is a minimum guaranteed rate (ordinary 3 or 4%), so a greater than the minimum rate, that gain becomes the basis for the amount of interest that will be credited to the annuity. at the end of the contracts term usually 5 to 7 years the annuity will be credited with the greater of the guarenteed minimum value or the indexed value.

annuity units

at the time the variable annuity is to be paid out to the annuitant, the accumulations are converted into (annuity fill in) these payouts can vary from month to month depending on the investment results. the number of units doesnt change, but the value does. The amount of each variable annuity benefit paid to an annuitant varies according to the market value of the securities backing it

the policy owner is the only one that can what

can surrender an annuity during the accumulation period.

single-life annuities

characterized by having only one annuitant

variable annuity

does not provide guaranteed rate of return because of the investment risk. a statement must be provided to the owner of the annuity at a minimum of once per year. they can be classified as immediate or deferred. Shift the investment risk from the insurer to the contract owner.

insurers that deal with variable annuities are subject to what

dual regulation by the SEC and the states office of insurance regulation. or be registered with the financial industry regulatory authority and have a state license

the accumulation value of a deferred annuity is ?

equal to the sum of premium paid plus interest earned minus expenses and withdrawls

what are the 2 type of annuity classifications

fixed annuities, and variable annuities

only life insurance companies can do what

guarantee income for the life of the annuitant

date annuity benefit payment begins

immediately or deferred until a future date

accumulation untis

in a variable annuity the value of the accumulation unit varies depending on the value of the stock investment that is part of a variable annuity

the exclusion ratio formula

investment in the contract/expected return

the exclusion ratio definition

is a simple way to determine what portion of each annuity benefit payment is taxable

funding method

is a single lump sum payment or periodic payments over time

what is a qualified annuity plan

is a tax-deferred arrangement established by an employer to provide retirement benefits for employees. the plan is qualified because of having met government requirements. this is an annuity purchased as part of a tax-qualified individual or employer-sponsored retirement plan such as an individual retirement account (IRA)

life with period certain payout option (life income with term certain)

is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. it provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies. for example if an annuitant has a 20 year period certain and dies after 10 years, the beneficiary will receive payments for another 10 years

the "bailout" feature

is sometimes found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below a stated level within a specified time period

partial with-drawl

is taken from an annuity before age 591/2 the withdrawal is considered 100% interest, and is there fore taxable as ordinary income. a 10% tax penalty is applied if a distribution is recieved before the annuitant reaches age 591/2. after this age, withdrawls do not incur the 10% penalty tax, but are taxable as ordinary income

what does life insurance do

its principal function is to create an estate being a sum of money by the periodic payment of money into the contract.

what are the 2 distinct time periods involved in an annuity

1. accumulation period 2. annuity period

the monthly amount of benefit an annuitant receives is based on what factors

1. principle amount 2. rate of interest the annuity earns 3. length of payout period

what are the annuity options

1. the funding method 2. date annuity benefit payment begins 3. investment configuration 4. payout period

benefit payments are initiated when

after the contract becomes annuitized

the nonforfeiture value of an annuity prior to annuitization is

all premiums paid, plus interest, minus any withdrawals and surrender charges

what does an annuity do

its principal function is to liquidate an estate by the periodic payment of money out of the contract. are ways of providing a stream of income for a guaranteed period of time. It is started with a large sum of money that will be paid out in installments over a period of time or until the money is all gone. If (fill in) has a death benefit payable and the annuitant dies before payout begins the amount paid into the contract plus interest credited will be paid

tax-sheltered annuities

limited exclusively for employees of religious, charity, or educational groups. also called 403 b plans, accumulation payments often come from voluntary salary reductions, the annuitant may have an individual account contract

when making recommendations to a senior consumer regarding the purchase or exchange of an annuity an agent must do what

must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. this recommendation should be based on the facts disclosed by the senior consumer. it should include an evaluation of his investments and other insurance products along with his financial situation and needs.

when filling out an annuity contract application the owner does what

names his own beneficiary and also the annuitants beneficiary. An owner may be the annuitant, the beneficiary or neither

cash refund payout option

pays a guaranteed income to the annuitant for life. If the annuitant dies before the annuity fund (principal) is depleted, a lump sum cash payment of the remaining balance is made to the annuitants beneficiary. The beneficiary receives an amount equal to the beginning annuity fund less the amount of income already paid to the deceased annuitant.

installment refund payout option

pays a guaranteed income to the annuitant for life. if the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments. if the annuitant lives to receive payments equal to the principal amount no future payments will be made to a beneficiary

period certain option

pays guaranteed income payments for a minimum number of years such as 10, 15, or 20 years regardless of when the annuitant dies, at the end of the specified term payments cease

joint and full survivor payout option

pays out the annuity to 2 or more people until the last annuitant dies. if one of them dies, the other will continue to receive the the same income payments. when the surviving annuitant dies, no further payments are made to anyone.

straight life income payout option

pays the annuitant a guaranteed income for the annuitants lifetime. when the annuitant dies, no further payments are made to anyone. If the annuitant dies before the annuity fund is depleted the balance is forfeited to the insurer.This annuity offers protection against exhaustion of savings due to longevity. When a life annuitant dies before life expectancy. this method will pay the largest monthly benefit to a single annuitant because it is based on life expectancy

fixed annuity

provide a guaranteed rate of return. Has a credit interest at a rate no lower than the guaranteed rate. during the period in which the annuitant is making payments to fund the annuity(the accumulation period) the insurer invests these payments in conservative, long term securities typically bonds. this allows the insurer to credit steady a steady interest rate to the annuity contract

immediate annuities

purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. also called single-premium immediate annuities and is intended for liquidation of a principal sum. An annuity cannot simultaneously accept periodic funding payments by the annuitant and pay out income to the annuitant

what can a spouse beneficiary do if the annuity contract owner dies

she can continue the contract with deferred taxation as contingent owner

joint and two-thirds survivor

survivor will have payments reduced to 2/3 of the original payment

joint and one-half survivor

survivor will have payments reduced to one half of the original payment

the portion of the annuity benefit that is interest earned on the declining principal is

taxable as ordinary income

contract owner

the individual who purchases the annuity pays the premiums and has rights of ownership.

before a deferred annuity contract can be terminated for its surrender value what must happen?

the insurer must first obtain authorization from the owner

cost basis

the owners investment in the contract is the amount of money paid into the annuity (the premium). the expected return is the annual guaranteed benefit the annuitant receives multiplied by the number of years of the annuitant life expectancy. the resulting ratio is applied to the benefit payments, allowing the annuitant to exclude from income a like percentage from income tax.

accumulation period

the pay-in period, where the contract owner makes the purchase payments. The accumulation period of any annuity normally may continue after the purchase payments cease

a single lump sum premium

the principal sum is created immediately. for example individuals nearing retirement whose financial priority is retirement income could surrender their whole life policies and use the cash value as a lump sum premium to fund an annuity

annuities can be defined by what

their investment configuration, which affects the income benefits they pay.

annuity period

this is also called the liquidation period, annuitization, or pay-out period. This is the time when the annuity ceases to accumulate and begins to generate benifit payments at regular intervals. Typically paid out monthly, quarterly, semiannual, or annual payment arrangement

periodic payments

this will eventually create the annuity principal fund.

structured settlements

used to distribute funds of lawsuit winnings or lottery winnings usually paid in 10 through 20 years

surrender charges

when a deferred annuity is cancelled during the early contract years, the insurer normally will assess a back end load. this covers the costs associated with selling and issuing contracts as well as costs associated with the insurer's needs to liquidate underlying investments at a possibly inappropriate time.

deferred annuities

will start providing income payments after the first year. are usually purchased with either a single lump sum payment known as a single premium deferred annuity or from monthly payments known as flexible premium deferred annuity. They accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date (normally within a minimum 12 months after date of purchase). Can be funded with periodic payments over time. no taxes are imposed on the annuity during the accumulation phase, taxes are imposed when the contract begins to pay its benefit