NM Chapter 6 Annuities

Fixed annuity provides the following 3 features

-Guaranteed minimum rate of interest to be credited to the purchase payment -Income (annuity) payments that do not vary from one payment to the next -The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant (with fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called level benefit payment amount. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation)

What percent is the guaranteed minimum typically

3%

Market value (market value adjusted) annuity

Also known as modified guaranteed annuity, is a single premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years. In an MVA, penalties for a premature surrender depend upon current interest rates at the time of surrender.

Lump sum settlements

Annuities may serve as an ideal financial vehicle for someone who comes into a large lump sum of money, such as inheritance, lottery etc. In this case, a person may purchase a single premium immediate annuity, which will convert the lump sum into a series of periodic payments, providing a stream of income for the annuitant

True or false: Annuities pay a face amount up the death of the annuitant

False, The payments stop upon the death of the annuitant. Annuities use mortality tables, but these table reflect a longer life expectancy than the mortality tables used for life insurance

Annuities can also be classified according to when the income payments from the annuity begin. What are the 2

Immediate annuity Deferred annuity

Education funds

In addition to providing income for retirement and estate liquidation, annuities can be used to accumulate funds for college education. An annuity can provide savings on a tax deferred basis for the education expenses of the annuitant.

Retirement income

Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans, which means thyme the IRS guidelines to receive favorable tax treatment. Qualified retirement annuities can be individual (Individual retirement accounts- IRAs) and group (tax sheltered annuity-TSA, or profit sharing pension plans)

The annuity income amount is based upon the following (4)

The amount of premium paid or cash value accumulated The frequency of the payment The interest rate The annuitants age and gender

True or false: Annuities are marketed by life insurance companies

True

True or false: If an annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either the cash value or the total premiums paid, whichever is greater. If a beneficiary is not named, the benefit will be paid to the annuitants estate

True

Annuity

A contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving his or her money. Annuities are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate.

Immediate annuity

Is one that is purchased with a single, lump sum payment and provides income payments that start within one year from date of purchase. Known as a single premium immediate annuity SPIA

Annuity period

Also known as the annuitization period, liquidation period, or pay out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter

Indexed (or equity indexed) annuities

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the standard and Poor's 500. Generally, the insurance companies reserve the initial returns for themselves but pay the excess to the annuitant.

The first way to classify annuities can be based on how they can be funded. There are 2 options...

Single payment: Lump sum Periodic payments: Installments over a period of time (they can be either level premium, in which the annuitant/owner pays a fixed installment, or a flexible premium, in which the amount and frequency of each installment varies)

Annuity Payment options

Specify how annuity funds are to be paid out

Uses of annuities

The principal use of an annuity is to provide income for retirement; However, an annuity may be used for any accumulation of cash or simply to liquidate an estate. Because of the various uses of annuities, agents should always assess how well a recommended product will meet the applicant's needs and resources- the suitability of a product.

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust, or other legal entity

True or false: an annuitant whose life expectancy is longer will have smaller income installments

True

Surrender charge

Is levied against the cash value, and is generally a percentage that reduces over time. A common surrender charge might be 7% the first year 6% the second year etc

To ensure suitability, producers must make a reasonable effort to obtain relevant information from the consumer and evaluate the following 8 factors

age annual income financial and tax status investment objectives liquidity needs and liquid net worth intended use of annuity financial experience risk tolerance

Nonforfeiture

A deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization

Deferred annuity

An annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (single premium deferred annuities SPDA) or through periodic payments (Flexible premium deferred annuities FPDA) The longer the annuity is deferred, the more flexibility for payment of premiums it allows.

General account

Fixed annuity premiums are deposited into the life insurance company's general account. The general account is comprised mostly of conservative investments like bonds. These investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide

Accumulation period (pay in period)

The period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax deferred basis.

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Annuitant

The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. The annuitant must be a natural person