ch9

immediate annuities

"single premium immediate annuities (SPIAs) payment starts one month from date of purchase. -has no accumulation period. - only funded by single payments -intended for liquidation of a principal sum -cannot accept periodic funding

corporate owned life insurance is generally treated as a deductable business expense up to ...

$50K

Two-Tiered Annuities

Annuities which have two distribution values contingent upon whether or not the annuity is surrendered in a lump-sum prior to annuitization.

annuity units

At the time the variable annuity benefits are to be paid out to the annuitant, the accumulation units in the participant's individual account are converted into annuity units. what the unit is worth when payments begin will remained fixed for the annuitant.

annuity payout options

Ways that the accumulated funds in an annuity may be received upon annuitization.

Tax-Sheltered Annuity (TSA)

a type of annuity in which employees make contributions. The money is taken out of the employee's pretax income automatically, reducing that person's taxable income. Employers can also make contributions to this plan, and it is considered a fringe benefit of the job. When the employee takes money out of this plan, it is taxed. One type of annuity, covered by the Internal Revenue Code's Section 403(b), offers the employees of certain nonprofit and public education institutions the benefit of a tax-sheltered retirement saving plan. Because these annuity plans are tax-sheltered, investments are deferred from taxes.

when determining the accumulation value of a deferred annuity, the total is calculated by taking the premiums paid plus interest earned minus

expenses and withdrawals

An annuitant is paid $495 per month until the contract value is exhausted at some undetermined date in the future. Which type of annuity payout option is this?

fixed amount. -the annuitant receives a fixed payment until the contract value is exhausted, regarldess of when that will be. if they annuitant dies before the contract is depleted, the beneficiary recieves the remainder

which of the following contracts offer deferred taxation, flexible payments, a guaranteed interest rate, and death benefits equal to the cash value?

flexible fixed annuity

a business may purchase an annuity for all of the following reasons EXCEPT

informally funding a non-qualified deferred compensation plan

tax

interest earned on the delining principal is taxed as ordinary income. resulting in a tax free return of the annuitants investment

which of these pays an income to two or more annuitants until the death of the last annuitant

joint and survivor annuity

John bought a deferred annuity on Mary. John amends the contract years later to name Tom as the recipient of the proceeds if Mary dies. Who is the annuitant for this contract?

mary =bc she is where the proceeds of the annuity will be initially directed -john is policy owner tom is beneficiary

long term care riders

may be attached to an annuity and allows for the payment of a percentage of the death benefit if an individual requires long term care

if the annuitant dies before the payout beings...

most annuitities guarantee death benefit in amount paid into the contract plus interest collected

period certain option

provides a guarantee minimum total benefir for a minimum number of years, regarless of when the annuant dies.

cash refund optoin

provides a guaranteed income to the annuitant for life, and if the person dies before it is depleated the lump sum left will go to the beneficiaries -guarantees total payment paid

Ron recently purchased an immediate, straight life fixed annuity. His benefit payments will discontinue after a stated number of years remain a constant dollar amount for the duration of the annuity period pay a lump sum if the annuitant dies vary according to the underlying investment performance

remain a constant dollar amount for the duration fo the annuity period

which of the following would most likely purchase an immediate annuity

retiree having a lump sum to invest

discouranging the use of deferred annuities

the INTERNAL REVENUE CODE imposes a penalty as well as taxes on early withdrawals and loans from annuities

the exclusion ratio determines

the amount of an annuity payment subject to income tax

sarah, age 88, is a life annuitant who has lived beyond her life expectancy. the funds for additional benefit payments will be derived primarily from funds that were

not distributed to life annuitants who died before life expectancy

insurer credits the annuity fund with a certain rate of interest, making the annuity grow. this credited amount is or is not taxable

not taxabale.

joint and full survivor option

payment of annuity to two people. if one dies, the same income continues to the survivor (nothing changes for them). when the survivor dies, payments stop completely.

annuity

payment received every year after an initial lump sum payment -depends upon three factors: starting principle, interest, and income period -they are primarily investment products

temproary annuity certain

payments are guarateed to be made for a specified number of years. so if the person dies before having the payments for that number of years, the beneficiarys recieve the payment for reminder of the years

A life annuity feature which provides benefit payments for a minimum number of years, no matter when the annuitant dies, is called

period certain

deferred annuities

provide payment at a deffered start date (minimun 12 months after made) -accumulate interest -can be funded with single premiums or get periodic payments over time or both -> would then be considered a flexable premium deferred annuitiy (FPDA) -value is sum of premium paid PLUS interest earned MINUS expenses and withdrawals.

if an annuitant dies during teh accumulation period, his or her beneficiary will receive either the accumulated cash value or the total preium paid, whatever is larger

tru

when does interest income for a flexible premium deferred annuity get reported for fenderal income taxes?

upon receiving distrubutions from the contract

exclusion ration

used to determine the amount of the annual annuity income exempt from federal income taxes. investment in the contract (the amount of money paid into the annuity) DIVIDED BY the expected return (the annual guaranteed benefit the annuant receives mulitplied by the number of years of the annuants life expectancy)

joint and two thirds survivor

when first person dies, survivors income is reduced to 2/3 of their original joint income

payout period

when the accumulation of payments stops and now gnerages benefit payments typically monthly.

joint and one half survivor

when the first person dies, survivors income is reduced to one half the origional joint income

accumulation period

when the funds are paid to the annuity

surrender charges

cover costs from selling and issuing contracts and liquidating invesetments at possibly innaproprate times surrender charge is waived if the annuant dies or becomes disabled -surrender charges typically only apply during frist 5-8 years -after those years, there is a "fee withrawal" allowing the owner a certain percentage (typically 10%) with no surrender charge applied.

accumulation units

contributions made during the accumulation period are converted to units equivilant to their value of their stock investment. ex. stock unit currently valued at $10, person makes $200 payment, they got 20 units.

An annuity's accumulation period may

continue after the purchase payments stop

1035 Contract Exchange

A tax-free exchange of one annuity contract for another, one life insurance policy for another, or one life insurance policy for an annuity. The contracts do not have to be issued by the same company

individual uses of annuities

1. individual retirement annuities 2. tax-deferred growth 3. retirement income--primary purpose 4. education funds

straight life income option

aka the income life annuity, pure life, or striaght life annuity -pays a guaranteed income for the annuitants lifetime -if dies before depleated, balance is forfeited to the insurer. -guarantees protection against exhuastion fo savings due to longevity. -if the person lives beyond expectancy, funds come from annuitants who died before expectancy and forefieted their remainder. -typically pays higher than fixed life bc based only on life expectancy. but with high risk of dying before exhaustion

investment configuration

allows for a fixed (guaranteed) rate of return or a variable (nonguaranteed) rate of return.

bailout provision

allows the onwer to surrender the annuity without charges if the interest rate falls below a statel level

which of the following is NOT a valid contract exchange

an annuity exchanged for a life insurance policy -the 1035 exchange does not allow for an annuity to be exhcnaged for a life insurance poliyc. -> not considered an equal exchange, and will be taxed.

a single-life annuity only has ONE

annuitant

fixed amount option

annuitant receives a fixed payment until the contract vlaue is exhausted. -if annuitant dies befoer the contract is depleated, their beneficiary receives the remainder

structured settlements

annuities used to fund lawsuit settlements and lottery winnings. Annuities are perfect funding tools for these situations because they liquidate a large sum of money over a period of time and can be tailored to meet the needs of a claimant. ex. win the lottery, get the money through annuity.

life with period certain option

annuity option that is designed to pay the annuitant an income for life but guarantees a definite minimum period of payments ex. annuant has a life or 10 year annuity, meaning they have guaranteed payments for life or 10 years, whichever is longer. if the indivdual dies after 6 years of monthly payments, the beneficiary revieves those same payments for the remainder 4 years)

Taking a sum of money and decreasing it in size is called

capital liquidation

an individual, age 45, would like to help pay for his daughters college expenses in 10years. which annuity would be appropriate for this individual.

deferred annuity

annuities classified by date in wihc payments begin

either immediatly or pushed off to a future date

tori has an annuity that pays her $500 per month income benefit for life or for 10 years, whichever is longer. what kind of annuity is this?

fixed life annuity with period certain -designed to pay the annuitiant a fixed income for life, but guarantees a definite minimum period of payments

a large corporation pension plan purcahsed an accumulation annuity contract whereall the participating employees received certificates of participation. what is this contract called?

group deferred annuity -the employer holds the master contract and the certificates of participated are given to the persons covered by the plan

Guaranteed Minimum Withdrawal Benefit (GMWB)

guanratees the policyholder a steady stream of retirement income regarless of market volatility. during market downs, the person can withdraw a max % of their entire invemstments in the annuity.

Fixed Annuities

guaranteed rate of return. during the accumulation period, the insurer invests payments in investments in conservative securities (typically bonds). this allows for steady interest rate to add, at a guanrenteed liminum. so there is a guaranteed minimum interest rate and the actual current interest rate. since benefit amount is fixed, purchasing power of income paymnets may decline over the years due to inflation.

annuity role in retirement planning

guaranteeing that an annuitant cannot outlive the payments from a life annuity ->provides them a stream of income.

corporate owned annuities

if a corporation owns an annuitiy and names a nonnatural person as the annuitant, such as company itself, then the interest earned is taxable as ordinary income. exceptions to this rule: -if the owner of the annuity itself isnt a natural person (held by a trust or corporation) -the contract is aquired by someones estate following the death of that person -is held under a qualifiied retirement plan -it is an immediate annuity purchased with a single premium

a single premium deferred annuity sometimes contains a bailout feature. which statement regarding this feature is correct?

if the interest rate falls below a specified level, the surrender charge is waived. -this is referred to as a "bail-out" option. the amount withdrawn may be subject, at least in part, to income tax and a 10% IRS penalty.

preiodic payments (flexible premiums)

minimum amount required at initial purchase, after that the onwer can make deposites as often as desired. -benefits expressed in terms of accumulated value at that point ex. a plan guaranteing payments of $5.06 per 1K would grow up %506 payments when the plan reached 100k

measurable life

natural person -a person- that an annuity is left to.

installment refund option

same as cash refund where if annuant dies before amount exhausted, remainder paid the beneficiaries, only in this option the remainder is paid in installments not a lump sum.

what does a fixed life annuity offer protection again

savings depletion due to longevity

variable annuities

shift investment risk from insurer to contract owner. -if investments doing well, get paid more than they would in fixed annuity contract, or way less if there is a recession. -invest deferred annuity payments in a separate account - Payments fluctuate according to the value of an account invested primarily in common stocks - provides conservative to aggressive investments that are not guaranteed

market value adjustment

shifts some of the investment risk to the owner by adjusting surrender value in accordance to interest rates at time of surrender

funding method

single lump sum payment -sum of money starting the annuity is called the principal sum. either payed immediately in full one preium payment or over time with a series of preiodic premium payments

annuity investments and senior citizens

standard and procedures for recommendations make to senior consumers. agent is required to make reasonable efforts to obtain info concerning the seniors financial status, tax status, and risk tolerance.

what happens to the cash value of a market value adjusted annuity if its surrenedered prior to the end of the stated guarantee period?

subject to makret value adjustment. -comes into play only if the annuity owner decides to surrender the annuity contract early.

which of these annuity contract features is meant to discourage withdrawals and exhchanges

surrender charges

qualified annuity plans

tax defereed arrangement established by an employer to provide retirement benefits to employees.

The interest credited to the cash values of personally-owned non-qualified annuities is considered

tax-deferred -interest credited to the cash values of annuities is deferred until distribution

how are monthly life annuity benefit payments treated under a tax sheltered annuity (TSA)

taxed as ordinary income in the year received.

what determines how much an annuitant is paid for a vairable annuity

the market value variations of the securities backing it

which statement concerning a deferred annuity contract is correct

the owner can be the beneficiary, annuitant, or neither