Chapter 12 - Annuities

The Annuity Period

"taking out" time. The period following the accumulation of the annuitant's payments (principal and interest) during which annuity benefits are received.

Life Annuity Certain

Option that does not guarantee a lifetime income to the annuitant. It provides an income for a guaranteed period (or for a fixed amount) regardless of whether the annuitant is alive or not. The guaranteed period could be 5, 10, 15, or 20 years.

Flexible Premium

premiums are made over time, usually years, until annuity benefits are scheduled to begin. The purchaser has the option to vary the amount of each premium payment, as long as it falls between a minimum and maximum amount-for example, between $200 and $10,000.

fixed annuities

provide a fixed, guaranteed accumulation or payout. Fully guaranteed contract, which is backed by funds invested in the insurer's general account

The Accumulation Period

"putting in" time and the growth time. Time between the purchase date and the date benefits begin. For a periodic premium deferred annuity, it includes all the time between the first and last premium payments as well as any additional time before benefits begin.

Single Premium

An annuity purchased by a single lump-sum payment is called a single premium annuity.

Premium Determination

-Annuitant's age -Annuitant's sex -Assumed interest rate -Income amount and payment guarantee -Loading for company expenses

Life Annuity-No Refund

A life only (straight life) option provides for payment of annuity benefits for the life of the annuitant with no further payment following the death of the annuitant. This option will pay the highest amount of monthly income

PURPOSES OF ANNUITIES

Annuities are not life insurance. Annuities are the exact opposite. The principal function of a life insurance contract is to create an estate (sum of money) by the periodic payment of money into the contract. An annuity's principal function is the liquidation of an estate. However, in contrast to life insurance, which is designed to protect against the risk of premature death, annuities are designed to protect against the risk of living too long.

Accumulation Units

During the accumulation period, an owner's units are identified as accumulation units. Value of the annuity units will vary in accordance with the daily performance of the separate account, and periodic benefit checks will fluctuate accordingly

Distribution of a Lifetime Income

Function of an annuity is to systematically liquidate a principal sum over a specified period of time. An annuity is usually purchased as a means to save for retirement.

Joint Life and Survivorship and Joint Life Annuities

Provides benefits for the life of the annuitant and the life of a survivor. A stated monthly amount is paid to the annuitant, and upon the annuitant's death, the same or a lesser amount (such as two-thirds or one-half) will be paid for the lifetime of the survivor. A joint life annuity differs from the joint and survivorship annuity option because it covers two or more annuitants and provides monthly income only until the first annuitant dies. After the first annuitant's death, all income benefits cease.

Level Premium

The premiums are paid in periodic installments over the years before the annuity income begins. Level premiums have a forced savings aspect to them, much like making regular deposits into a passbook savings account.

deferred annuity

benefit payments are postponed until a later date, such as a planned retirement age.

immediate annuity

benefit payments begin within 12 months of purchase.

variable annuity

designed to provide a hedge against inflation through investments in a separate account of the insurer consisting primarily of common stock. A variable annuity is not a fully guaranteed contract. Regulated by both the federal Securities and Exchange Commission (SEC) and state insurance departments.

two-tiered annuity

different values available for distribution at maturity depending on whether the value is taken in a lump sum before annuitization or left with the issuer for periodic payments.

Equity-indexed annuity (EIA)

fixed annuity (meaning the principal and interest are both guaranteed) with an equity-linked rate of return. Excess interest earnings (above the interest rate guarantees) are calculated using an indexing method that is linked both to the stock market as well as the insurance company's overall investment performance.

Market value adjusted (MVA) annuities

individual deferred annuity contracts with underlying assets held in a different account. The values are guaranteed if held for a specific period of time, but the nonforfeiture values may fluctuate according to a market value adjustment formula if held for shorter periods.

retirement income annuity

ordinary deferred annuity, but with an additional feature a decreasing term life insurance rider that provides term life insurance with a face amount that decreases each year the policy is in force.

life Annuities

payout is guaranteed for life.

Refund Life Annuity

will pay the annuitant for life, but if the annuitant dies too soon after the annuity period begins, there will be a refund of any undistributed principal or cost of the annuity. This option assures that the full purchase price of the annuity will be paid out to someone.