Chapter 6: Annuities - Exam FX
What are the 2 options for payment method?
- Single Premium (lump-sum) - Periodic (fixed installment or flexible premium where the amount and frequencies of each installment varies)
What is annuity income amount based upon?
1. Amount of premium or cash value paid 2. Frequency of payment 3. Interest Rate 4. The annuitant's age & gender
What are the 2 types of refund life annuities
1. Cash refund 2. Installment refund
What are the 4 Classification of Annuities?
1. Premium Payment Methods 2. When income payments begin 3. How premiums are invested 4. Disposing of proceeds
What are the 3 options for Disposing of Proceeds?
1. Pure Life 2. Annuity Certain 3. Life Refund Annuity
What is Annuity?
A contract that provides a regular income, for a certain amount of time or as long as the person lives.
Variable Annuities Feature: Underlying Investment
Fixed Annuity: General Account Variable Annuity: Separate account (No guarantees)
Variable Annuities Feature: Expenses
Fixed Annuity: Guaranteed Variable Annuity: Guarantee
Variable Annuities Feature: Income Payment (annuities)
Fixed Annuity: Guaranteed Variable Annuity: No guarantee
Variable Annuities Feature: Intrest Rate
Fixed Annuity: Guaranteed Variable Annuity: No guarantee
Variable Annuities Feature: License Needed
Fixed Annuity: Life Insurance Variable Annuity: Life Insurance PLUS securities
Settlement Options: Life Only (straight life)
Guaranteed lifetime income with the largest payout, but there is no beneficiary feature. This is a life expectancy based option, at the end of life expectancy the insurance company continues to pay.
Settlement Options: Refund Life Annuity
Guaranteed lifetime income, but with beneficiary feature. If annuitant dies before 80 years old the remaining balance is "refunded" (given) to beneficiary. (the lowest paying per month)
Investment Options: Fixed Annuities
Has a guaranteed interest rate to grow the money. Consistant payment received from the annuity during the annuity period.
Annuity Payment Options: Life with Guaranteed Minimum
If annuitant dies before the principal is paid out, the remainder of principle will be refunded to the beneficiary
What are the 2 options for income payments?
Immediate: purchased with a lumpsum payment and provides income payments 1 year from date of purchase (Single Premium Immediate Annuity) Deferred: income payments begin after 1 year from the date of purchased. Funded with either payment option
If an Annuitant does during the accumulation period what happens to the money?
The insurer gives the beneficiary either the cash value or the total premiums paid (whichever is greater)
Interest Rate Guarantees
rate may not drop below a policy's guaranteed minimum (typically 3%)
Annuity Period
the payout period of an annuity
What is the main use of Annuities?
to provide retirement income
Define: Qualified plan
A retirement plan that meets the IRS guidelines for receiving favorable tax treatment
What plan should be purchased with Lump-sum investments?
A single premium immediate annuity - this will provide a stream of income for the annuitant
Guaranteed Minimum Withdrawal Benefit (GMWB)
A type of rider or contract attached to some annuity insurance policies. It guarantees the policyholder a steady stream of retirement income regardless of market volatility.
When do income payments from a Deferred Annuity begin?
After 1 year from the date of purchase
Education Funds
An annuity can provide savings on a tax-deferred basis for the education expenses of the annuitant
Settlement Options: Fixed Amount
Annuitant selects how much each payment will be, and insurer determines how long the benefits will be paid. You can always outlive this settlement options!
How are Annuity's Priced?
Annuities are based on the life expectancy of an annuitants, must be a natural person, regardless of who owns the policy.
Guaranteed Living Benefit Rider
Assures that the annuitant will receive at least the amount of money invested or a certain amount of income even if the market declines account value.
How does surrendering Annuity work?
At surrender the owner gets the premium, plus interest, minus the surrender penalty and surrender charge. (surrender penalty is a % that decreases as years in contract go on)
How are annuities & life insurance similar?
Both purchased with premiums
Define: Liquidation of an estate
Converting a person's net worth into a cash flow
Settlement Options: Joint Life
Covering 2 people on the same annuity, whoever dies first gets the payout
How is Guaranteed Interest Rate created?
Created from the higher of either the guaranteed min rate or current rate
Define: Life Contingency
Dependent upon wether or not the insured is alive
An agent selling variable annuities must be registered with..?
FINRA
What are the 2 options for Invested Premiums?
Fixed & Variable
Where are Fixed Annuities premium's deposited?
In the company's General Account
Define: IRS
Internal Revenue Service - A government agency responsible for collecting taxes, and enforcement of internal revenue code.
Investment Options: Variable Annuities Features
Invested through separate account, purchases mutual funds. 1. Intrest Rate 2. Underlying Investment 3. License Needed 4. Expenses 5. Income Payment
Why is Equity Indexed Annuity considered to be a Fixed Annuity?
It has a guaranteed minimum interest rate
What is the process of an Annuity?
Owner -> Accumulation -> Annuity -> Annuitization -> Annuitant
Settlement Options: Lump-Sum
Paid out in one payment; all interest accumulated is taxable. (expensive)
Settlement Options: Joint & Survivor
Pays for multiple people (2) on the annuity. When the 1st person passes away the second person still gets paid until they die
Long Term Care Rider
Policyowner receives both the income provided by the annuity and long-term care benefit should that be necessary. This can be added to an annuity for additional Premium
Annuity Payment Options: Pure Life
Provides the highest monthly benefit, but payment ceases at the annuitant's death so there is no guarantee the principle will be paid out
Payout Options: Annuities Certain
Short term annuities that limit the amount paid to a certain fixed period or until a certain fixed amount is liquidated
How are annuities paid out based on age?
Shorter life expectancy = higher benefit Longer life expectancy = lower benefit
Settlement Options: Fixed Period
The annuitant selects the time period for the benefits, and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified amount of time only, whether or not the annuitant is living.You can always outlive this settlement options!
Accumulation Period
The time over which the annuitant makes payments or investments in an annuity, and when those payments earn interest tax deferred.
Investment Options: Equity Indexed Annuities
This mirrors an Index in the stock market (lik S&P 500), invest on an aggressive basis in order to yield higher results. - Lock in of account value is offered yearly to provide a guaranteed death benefit
Payout Options: Cash refund
When the annuitant dies, the beneficiary receives a lump-sum refund of principal - benefit payments already made to the annuitant. (does NOT guarantee to pay any intrest)
Payout Options: Installment Refund
When the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.
How is an Immediate Annuity Purchased?
With a single premium
Define: Deferred
Withheld or postpones until a specified time or event in the future
Settlement Options: Life with Period Certain
You chose 10 year period to receive the Annuity payments, if you die before the full 10 years your beneficiary receive the remaining payments.
Define: Natural Person
a human being
Define: Suitability
a requirement to determine if an insurance product or an investment is appropriate for a particular customer.
Market Value Adjusted Annuity (MVA)
a single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period. (3-10 years)
