Chapter 5 Annuities
Natural person
A human being
Suitability
A requirement to determine if an insurance product or an investment is appropriate for a particular customer
Qualified plan
A retirement plan that meets the IRS guidelines for receiving favorable tax treatment
Yes!
Are any unpaid annuity benefits, following the death of an annuitant, taxable when paid to the beneficiary.
Yes. Equity indexed annuities are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.
Are equity indexed annuities less risky than a variable annuity or mutual fund?
No. During the accumulation period, funds are paid INTO the annuity. During the annuity period, funds are paid OUT to the annuitant.
Are funds paid out of the annuity during the accumulation period?
Liquidation of an estate
Converting a person's net worth into a cash flow
Life Contingency
Dependent upon whether or not the insured is alive
No. With fixed-amount installments, the annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. This option pays a specific amount until funds are exhausted, whether or not the annuitant is living.
Do fixed-amount installment option payments end when the annuitant dies?
No. The fixed-period option pays for a specific time only, whether or not the annuitant is living.
Do fixed-period option payments stop when the annuitant dies?
Yes. Shorter life expectancy = higher benefit; longer life expectancy = lower benefit.
Does a longer life expectancy pay a lower annuity benefit?
An immediate annuity is purchased with a single premium
How many premiums are paid for an immediate annuity?
An immediate annuity is purchased with a single premium.
How many premiums are paid into an immediate annuity?
Income payments from a deferred annuity begin sometime after 1 year from the date of purchase.
Income payments from a deferred annuity begin sometime after X years from the date of purchase?
Single Premium Deferred Annuities — SPDAs
What are SPDAs?
Indexed (or equity indexed) annuities are fixed annuities that invest on a relatively aggressive basis to aim for higher returns.
What are indexed annuities?
Fixed Annuities - guaranteed, fixed payment amount; premiums in general account Variable Annuities - payment not guaranteed; premiums are in separate account, and invested in stocks and bonds Indexed Annuities - interest rate tied to an index; earn higher rate than fixed annuities, not as risky as variable annuities or mutual funds
What are the 3 types of annuities?
Premium payment method: single premium vs. periodic When income payments begin: immediate vs. deferred How premiums are invested: fixed vs. variable Disposing of proceeds: pure life, annuity certain, or life refund annuity
What are the Classifications of annuities:
Current
What interest rate, guaranteed or current, is paid to the annuitant, when the company's own investment is better than expected?
Retirement annuities may offer a Guaranteed Minimum Withdrawal Benefit (GMWB) option to the annuitant. With this option, the annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered. This option protects the annuitant against investment losses.
What is a GMWB option?
Single Premium Immediate Annuity (SPIA).
What is a SPIA?
The annuitization date is the time when the annuity benefit payouts begin (trigger for benefits).
What is the annuitization date?
The principal use of an annuity is to provide income for retirement; however, an annuity may be used for any accumulation of cash
What is the principal use of an annuity?
The annuity period, also known as the annuitization period, liquidation period, or pay-out period
What is the time called, during which the sum that has been accumulated during the accumulation period, is converted into a stream of income payments to the annuitant?
Income payments from a deferred annuity begin sometime after 1 year from the date of purchase.
When do income payments from a deferred annuity begin?
Fixed annuity premiums are deposited into the life insurance company's general account.
Where are fixed annuity premiums deposited?
Pure life annuity provides the highest monthly benefit, but there is no guarantee that the entire principal will be paid out.
Which annuity payout option provides the highest monthly benefit?
Joint life
Which annuity settlement option does this describe: 2 or more annuitants receive payments until first death, then payments cease.
Life with period certain
Which annuity settlement option does this describe: for life and a specific period of time (e.g., Life plus 10-year certain). If the annuitant dies before the payment period is up, the payment goes to beneficiary.
Refund life annuity
Which annuity settlement option does this describe: guaranteed lifetime income. If the annuitant dies, the balance is "refunded" to the beneficiary. The installment refund option pays the beneficiary until the purchase amount is paid out. The cash refund option refunds the balance of the original annuity purchase amount minus payments made to the annuitant.
Joint and survivor
Which annuity settlement option does this describe: income for 2 or more that cannot be outlived. Often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount.
Life Only
Which annuity settlement option does this describe: insured cannot outlive income. Any monies not paid out are retained by company at insured's death. Pays highest monthly amount
Lump sum
Which annuity settlement option does this describe: paid at annuitization, and all interest accumulated is taxable. Additional 10% penalty can be imposed prior to annuitant's reaching 59 1/2.
Annuities certain
Which annuity settlement option does this describe: payments guaranteed for a fixed period or until a certain fixed amount is paid out. NO LIFE option.
In fixed annuities, the insurer bears the investment risk.
Who bears the risk In fixed annuities?
Free look; After an annuity contract is delivered, a contract holder has a free-look period of 10 days, or 30 days if the contract holder is 65 years of age or older on the date of the application. f the buyer's guide and disclosure document are not provided at or before the time of application, the applicant is entitled to a free-look period of at least 15 days. Reinstatement; An annuity or pure endowment contract may be reinstated at any time within 1 year from the date it defaulted due to nonpayment of premiums, unless the cash surrender value has been paid. Disclosure; Face to face meeting: provide both the disclosure document and the buyer's guide at or before the time of application; Direct solicitation through the mail: disclosure documents can part of the mailing that invites prospective applicants to apply for an annuity contract; Through the Internet: the insurer must make the documents available for viewing and printing online; or By any other means: send both the disclosure document and the buyer's guide to the applicant no later than 5 business days after the completed application is received by the insurer.
Most provisions are the same in life insurance and annuities, with the exception of 3. Name them and describe their differences.
Yes. Because annuities are based on the life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy.
Must the annuitant be a natural person?