Life Insurance Unit 5

Cash Refund Annuity -

promises to pay in a lump sum to the beneficiary the difference, if any, between the purchase price of the annuity and the simple sum of the installment payments made prior to the annuitant's death.

Both life insurance & annuities are fundamentally based on the same principals:

• Employ pooling techniques. • Premiums are computed on the basis of probabilities of death & survival as reflected by a mortality table.

Two types of life annuity payouts:

• Pure (aka Straight Life Annuity) • Refund

Options under this classification: Number of Lives Covered

• Single Life Annuity - one person. • Joint & Last-survivor Annuity - provides that income payments continue for as long as either of two or more persons lives. More expensive than single life. • Joint & Two-thirds (or One-half) Annuity - provides that income payments continue for as long as either two or more persons live, but at a reduced rate (two-thirds or one-half) after the death of the first annuitant. • Joint Life Annuity - provides a specific income for two or more named persons, with the income ceasing upon the first death among the covered lives. Relatively inexpensive, but have limited markets.

Exclusions - Deaths resulting from certain illegal activities.

•Deaths in which an accident was involved but in which illness, disease, or mental infirmity was also involved. •Deaths from certain specified causes in which considerable doubt may exist about the accidental character of the death. •Deaths resulting from war. •Deaths resulting from aviation, except for passenger travel on scheduled airlines

Time and Age Limits of accidental death benefit qualification -

death typically must occur within 90 days of an accident.

Guaranteed Insurability Option (GIO) -

developed to permit young individuals to be certain that they would be able to purchase additional insurance as they grew older, regardless of insurability. Gives the insured the option of purchasing additional insurance at stated intervals (3 years) provided the insured has not attained a specified age (generally 40). Special option dates may be provided for such life events as birth of a child and marriage. Limited to a multiple of the policy face amount or a fixed amount whichever is smaller. Maximums were originally $10,000, but many insurer's have increased this to $50,000 or more per option date. Additional policies are not needed if the policy is universal life or other flexible policies.

IRA's -

established after tax year 1986

Purpose of Annuities -

has as its basic function the systematic liquidation of a fund (to protect against the possibility of outliving one's income). In its pure form, a whole life annuity may be defined as a contract whereby for a consideration (the premium), one party (the insurer) agrees to pay the other (the annuitant) a stipulated amount (the annuity) periodically throughout life.

Types of Annuity Contracts

1. Flexible Premium Deferred Annuity (FPDA) 2. Single Premium Deferred Annuity (SPDA) 3. Single Premium Immediate Annuity (SPIA) 4. Variable Annuity (VA)

Types of Refund Annuities

1. Life Annuity Certain & Continuous or Life Annuity with Installments Certain 2. Installment Refund Annuity 3. Cash Refund Annuity

Time When Annuity Income Payments Commence -

An Immediate Annuity is purchased with a single premium and the first benefit payment is due one payment interval from the date of purchase. A Deferred Annuity may be purchased with either a single premium or a periodic premium. There also must be more than one benefit payment interval before benefit payments begin. The longer the deferred period, the more flexibility is permitted in premium payments.

Optional Benefits and Riders Disability Benefits -

waiver of premium and disability income.

Single Premium Deferred Annuity (SPDA)) - two types

Market Value Annuity - guaranteed interest rate over a specified maturity period (3 to 10 years). If kept until maturity, the value reaches the amount guaranteed at issue. If withdrawal occurs, surrender & market value adjustments (MVA) will be applied. The MVA can be positive or negative. If market rates are higher at surrender, the adjustment would be negative (lower, a positive adjustment occurs). While less flexible than other annuities, advantages can be a positive adjustment on surrender, greater sense of security because of the longer guarantee period, and in theory, should be able to offer higher interest credits due to the fact that the buyer bears more risk. Certificate of Annuity - provides for a fixed, guaranteed interest rate for a fixed period of time, typically 3 to 10 years. It is similar to bank issued CD's, except interest earnings are tax deferred. Differs from other annuities in that no unscheduled withdrawals are ordinarily permitted during the guarantee period. The full cash value is available on death & annuitization. At the end of the guarantee period, the owner can renew or select any of the standard annuity options. Normally no front or back end loads. Interest rates are quite competitive due to the lack of a withdrawal feature. Beneficial for those near retirement age.

Nature of the Variable Annuity -

Rationale is to offer protection against the effects of inflation over the long run. The insurer does not guarantee interest credits. The contract owner bears the investment risk and receives the return actually earned on invested assets, less charges assessed by the insurer. The investments of the separate account are not restricted by state laws as with those in the insurer's general investment account. Each year the premiums less a deduction for expenses are applied to purchase accumulation units in the account, the number of units depending upon the current unit value. Instead of providing for the payment each month of a fixed number of dollars, VA's provides for the payment each month of the current value of a fixed number of annuity units. VA's may be purchased on an FPDA, SPDA, or SPIA basis. In all cases, the usual range of payout options is available, and product expenses & charges are identified.

Types of Accelerated Death Benefits:

Terminal Illness Coverage - provides that a specified maximum % (typically 25 to 50) of the life policy's death benefit can be paid if the insured has been diagnosed as having a terminal illness. Most provisions require that the insured have a maximum of 6 months to 1 year to live. Many insurers make no explicit charge for this provision. May be included in any kind of policy. Catastrophic Illness Coverage (aka Dread Disease Coverage) - provides for accelerated death benefit payments on approximately the same terms & conditions as terminal illness coverage, except that in this case the insured must have been diagnosed as having one of several listed catastrophic illnesses (ex: cancer, heart attack, stroke). Long Term Care Coverage (LTC) - provides that monthly benefits can be paid if the insured is confined because of a medical condition. LTC can be purchased as a stand-alone policy or as a rider to any type of life insurance policy. To qualify for payments, the confinement must be covered, any pre-confinement conditions (30 days after discharge from the hospital) & elimination periods (2 to 6 months) met, and any minimum in-force requirements (3 to 10 years varying by issue age) satisfied. The monthly benefit typically equals 2% of the policy's face amount, subject to some monthly maximum payout and to a total maximum payout (e.g. 50% of policy face amount).

Uses and Limitations of Annuities

Uses in Tax-Qualified Markets - are used as funding vehicles for retirement plans established under various sections of the U.S. IRS Code (sections 401, 403(b), 457) that allow contributions to be excluded from the taxable income of the

Annuity Disposition of Proceeds

a variety of options exist.

Tax Sheltered Annuity -

are available to employees of public educational institutions & certain tax exempt organizations. To a specified limit, plan contributions either by the employer or by the employee, through voluntary salary reduction agreement, are excludable for the employee's taxable income. Employees' rights under such plans are non-forfeitable & must be non-transferable. Withdrawals prior to retirement typically are subject to a 10% surcharge tax, in addition to full income taxation

Regulation of the Variable Annuity -

as a security, subject to the same federal laws as variable life. State laws & regs are not uniform, but many states follow the Model Variable Annuity Regulation of the NAIC. Provides for: • Guidelines for separate account investments. • State clearly the essential elements of the procedure for determining the amount of the variable benefits. • Other policy standards are laid down.

Life Annuity Certain & Continuous or Life Annuity with Installments Certain -

calls for a guaranteed number of monthly or annual payments to be made whether the annuitant lives or dies, with payments to continue for the whole of the annuitant's life if he should live beyond the guarantee period.

Nature of the Insurance Company's Obligations -

can be considered as having an accumulation & a liquidation period. An insurer's obligation upon death of the annuitant ordinarily differs depending on whether death occurs during the accumulation or liquidation period.

Accelerated Death Benefits -

involve the payment of all or a portion of a life insurance policy's face amount prior to the insured's death because of some specified, adverse medical condition of the insured. Such coverage, aka Living Insurance, may take one of three forms (all reduce face amount & cash values):

Classification of Annuities: Number of Lives Covered

involves the question of whether annuity payments are made with reference to a single life or more than one life.

Nature of Annuities

is simply a series of periodic payments. It is an insurance policy that promises to make a series of payments for a fixed period or over someone's lifetime. A Life Annuity is one wherein payments are contingent upon the continued existence of one or more lives, in contrast with an Annuity Certain, wherein payments are not contingent on the annuitants being alive. Life annuities may either be temporary (payable for a fixed period or until the death of the annuitant, whichever is earlier) or whole (payable for the whole of the annuitant's life).

Accumulation Period -

is that time during which annuity fund values accumulate, commonly prior to age 65. During this period, the insurer is obligated to return all or a portion of the annuity cash value if the purchaser dies. Minimum cash values are established by law in most states to be equal to the contributions to date, less withdrawals & expenses, plus interest earnings

Liquidation Period -

is that time during which annuity fund values are paid to the annuitant.

Single Premium Deferred Annuity (SPDA)

it is a deferred annuity contract purchased with a single premium. A minimum crediting interest rate is guaranteed by the contract, with most insurers crediting interest at rates as a function of the insurer's current investment earnings rate & its desired competitive posture in the market. The longer the guarantee period, the lower the rate.

A Deferred Annuity can be purchased with?

may be purchased with either a single premium or a periodic premium. The longer the deferred period, the more flexibility is permitted in premium payments.

Method of Premium Payment

may be single or periodic premiums.

Accidental Death Benefit -

may double or triple face amounts if death of the insured is caused by an accident.

Flexible Premium Deferred Annuity (FPDA)

one of the most popular individual annuity contracts in the U.S., provides for the accumulation of funds to be applied at some future time designated by the contract owner to supply an income, if elected, for the annuitant. A back-end load, known as a surrender charge is assessed in the event of a total surrender (normally stated as a % of the total accumulation value & decreases with duration). Guaranteed crediting of interest at a stated minimum (3.5% to 4.5%). The actual interest rate credited at any time will be a function of the earnings rate of the insurer and its desired competitive position within the financial services marketplace (some use a Bonus Rate in the 1st year). The retirement income is a function of the accumulated fund balance, the annuitant's sex, and the age at which the contract owner elects to have payments commence

Disability Income -

pay monthly 1% of the face of the life policy. Many companies limit the maximum monthly income that they will issue to some stated figure, with a further limit set on the amount the company will participate in within all companies. Six month waiting period is common. Waiver of premium is included.

Installment Refund Annuity -

promises that if the annuitant dies before receiving income installments equal to the purchase price, the payments will continue to a beneficiary until this amount has been paid.

Variable Annuity (VA) -

provides benefits that vary directly with the investment experience of assets that back the contract. Assets backing these annuities are maintained in a separate account with the value directly affected by the account's investment results

Pure (aka Straight Life Annuity) -

provides income payments that continue for as long as the annuitant lives but terminates on the annuitant's death. On the death of the annuitant, no refund is payable no matter when the death occurs after the commencement of annuity income payments.

Waiver of Premium -

provides that in the event the insured becomes totally & permanently disabled before a certain age (typically 65), premiums on the contract will be waived during the continuance of disability beyond a specified waiting period (customarily 6 months). All premiums are waived during disability, not just those falling due after the waiting period (differs from disability income and individual health insurance policies).

Single Premium Immediate Annuity (SPIA) -

provides that payments to the annuitant commence immediately after the insurer has received a single premium payment. Growing in importance in the marketplace as consumers seek ways of enhancing the security of their economic future. Are typically used by those who have large sums of money & desire to have the fund liquidated for retirement income purposes. Life insurance death proceeds are often paid out in installments via a SPIA. Structured Settlement Annuities are those bought by liability insurers to minimize their loss payouts whereby the life insurer will pay the plaintiff periodic payments in exchange for a lump sum from the liability insurer (defendant).

Refund Annuity -

recognizes that part of the purchase price of the annuity is applied to meet the cost of guaranteeing a minimum amount of benefits, irrespective of whether the annuitant lives to receive them. Thus for a given premium outlay, a refund annuity will provide a smaller periodic payment due to this feature than a pure annuity.

Definition of Accidental Death -

resulting from bodily injury effected solely through external, violent, and accidental means independently & exclusively of all other causes, with the death occurring within 90 days after such injury.

Public Employee Deferred Compensation Plans -

section 457 - may be established for persons who perform services for states, political subdivisions of states, agencies or instrumentalities of states or their political subdivisions, and certain rural electric cooperatives.

Definition of Disability -

the insured's injury or illness must be total and permanent. Total generally means when because of the insured's illness or injury he is unable to pursue his own occupation or any job for which he is reasonably suited by education, training, or experience. Permanent generally means that a total disability lasting continuously for a stated waiting period shall be presumed to be permanent until recovery.

Annuity Denomination of Benefits

traditionally have been expressed in fixed dollars

Uses of Annuities in Non-Qualified Markets -

used to fund 'unfunded' deferred compensation plans with private employers under which an employee agrees to defer the receipt of current compensation until a later date. Generally limited to a select group of highly compensated employees. Annuities are also purchased for purposes unrelated to employment.