Unit 12 - Annuities
Accumulation Period
the "putting in" time and the growth time. in a single premium deferred annuity, it is the time between the purchase date and the date benefits begin. in 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. The owner has the ability to make changes during the accumulation period. All types of annuity earn interest, the first year's interest is added to the original principal and earns compounding interest. There is currently no tax on the interest.
Surrender
the contract may be surrendered for its cash value in a lump sum payment. A "back-end load" or surrender charge may be incurred. An annuity can only be surrendered during the accumulation period. If a nonqualified annuity is surrendered during the accumulation period, monies are taxed on a Last In First Out basis, therefore the first monies withrdrawn and are considered to be from the interest earned on the principal and taxed accordingly.
Guaranteed Purchase Rate
the minimum interest rate that is guaranteed for the life of the contract. This will be a fairly modest amount, such as 4-5%. This is the minimum return even if the current annual rate falls below the guaranteed rate. Deferred annuities guarantee a minimum interest rate that contributions will earn. b/c the guaranteed rate is often below prevailing interest rates, the insurer will frequently credit excess interest on the contract which is based on how much the insurer has actually earned on the investments.
Life Annuity (straight life)
the payout is guaranteed for life, but no further payment will follow after the death of the annuitant. has the highest monthly payout but runs the risk of the annuitant not receiving the full amount due to death earlier than expected.
The Annuity Period
this is the "taking out" time. This is the period following the accumulation of annuitant's payments (principal and interest) during which annuity benefits are received. During the annuitization period, the insurance co controls the funds.
Current Purchase Rate
reflects the current interest rates based on current economic conditions. Set annually and can fluctuate.
Deferred Annuity Death Benefits
When the annuitant dies before the start of annuity payments, some companies return the aggregate, net premiums paid by the purchaser of a deferred annuity and a portion of the interest the money has earned. Others deduct enough money from premiums paid to cover the expense incurred in setting up the contract.
Equity-Indexed Annuities
a fixed annuity (principal and interest guaranteed) with an equity-linked rate of return. excess interest earnings are calculated using an indexing method that is linked both to the stock market as well as the insurance company's overall performance. Interest earned is tied to an equity index such as the S&P 500. Benefit is a guaranteed minimum interest rate and it can never decrease in value.
Market Value-Adjusted Annuities
individual deferred annuity contracts with underlying assets held in a different account. values are guaranteed if held for a specific period of time. This is a fixed contract and the interest paid is dependent on the fixed rate and the actual rate of the underlying bonds which are in the General Account. Interest rates are fixed for a specific period of time and an adjustment is only made if the annuity is surrendered. When surrendered, the annuitant will either pay a fee if interest rates are higher, or nothing if lower, hence market value adjustment.
Interest Rate Guarantees
may be two levels of guaranteed interest: a current rate that is guaranteed at the beginning of each calendar year, and a minimum guaranteed rate that will be paid if the current rate falls below the level guaranteed by the current.
Level Premium
premiums are paid in periodic installments over the years before the annuity income begins. Have a forced savings aspect to them. Typically the level premium is the annual premium annuity in which premiums are paid in yearly but they can also be semiannual, quarterly, or monthly.
Fixed annuity (general account assets)
provide a fixed, guaranteed accumulation or payout (principal, interest, and the amount of the benefit payments are guaranteed). premiums are invested in the insurer's general account (conservative investments)
Life Annuity with Period Certain
provides a life annuity with an extra guarantee for a certain period of time. This guarantees a lifetime income but if death occurs within the period certain, an annuity payment will go to a beneficiary on a set period of time: 5, 10, 15, or 20 years.
Temporary Annuity Certain
provides annuity payments for a specified period of time (5 or 10 years) or until death of the annuitant--whichever occurs first.
Joint Life and Survivorship
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 death the same or a lesser amount will be paid for the lifetime of the survivor.
Accumulation of a Retirement Fund
provides for a series of periodic payments that begin on a specific date (stated age) or a contingent date (such as the death of another person) and continue for the duration of a person's life or for a fixed period (usually a lifetime).
Premium Determination
5 factors to determine premiums: -Annuitant's age: younger the lower the premium -Annuitant's sex: women pay higher premiums b/c statistically they live longer -Assumed Interest Rate: insurance companies estimate an assumed interest rate for collected premium dollars -Income amount & payment Guarantee: the higher the amount of periodic income and the longer the guarantee it must be paid, the higher the annuity premium will be. -Loading for Opex: covers overhead/opex.
Tax-Deferred Growth
Annuity benefit payments are a combo of principal and interest. contributions are not taxed, but the portion representing interest earned on the declining principal is taxed. The result, over the benefit payment period, is a tax-free return of the annuitant's investment and the taxing of the balance.
Beneficiary
Depending on the type of annuity and the method of benefit payment selected, a beneficiary may also be named in an annuity contract. In such cases, the annuity payments begin or continue after the death of the annuitant, for the lifetime of the beneficiary, or for a specified number of years.
Exclusion Ratio
Investment in the contract divided by the expected return equals the exclusion ratio. The ratio is applied to the benefit payments, allowing the annuitant to exclude from income a like percentage.
Variable Payout
Payout can fluctuate depending on the investment experience of the principal
Annuitant
The insured (the person on whose life the annuity contract has been issued) and is usually the owner of the contract. The intended recipient of the annuity and whose life expectancy the payments will be based. In an annuity, only the owner can: -change the beneficiary, make withdrawals, or surrender the annuity -pay the premium -make changes to the contract during the accumulation period.
Level Benefit Payment
When converted to a payout mode, fixed annuities provide a guaranteed fixed benefit amount to the annuitant, typically stated in terms of dollars per $1,000 of accumulated value. The is due to the interest rates payable on the funds being fixed and guaranteed. Provides financial security but could be eroded by inflation due to the fixed interest rate at the time of annuitization.
Tax-Sheltered Annuities (TSA)
a pension plan for employees of a nonprofit organization under the IRS section 501(c)(3) and 403(b). Tax deferment is very similar to a qualified pension or profit-sharing plan.
Deferred Annuities
accumulate interest earnings on a tax-deferred basis. Taxes are imposed when the contract begins to pay its benefits. Early loans and withdrawals before age 59 1/2 have a 10% penalty tax and may be treated as income
Single Premium
aka single premium annuity - an annuity purchased by a single lump-sum payment. the insurance company promises to pay the annuitant an amount each period (monthly, quarterly, semiannually, or annually).
Bail out provision
allows the annuity owner to surrender the annuity without surrender charges if interest rates drop a specific amount within a specific time period.
Nonforfeiture Options
an annuity contract owner's rights to the cash value accumulation in the annuity.
Immediate Annuity
benefit payments begin within 12 months of purchase. Frequently, an immediate annuity is purchased with life insurance proceeds, an inheritance, or a settlement received for injuries.
Accumulation of Education Funds
besides retirement income accumulation, annuities can be used to accumulate funds for a college education.
Annuity
designed to protect against the risk of living too long. May be purchased in an individual or group basis. Individual annuities are purchased to provide retirement income, group annuities are most often used to fund employer-sponsored retirement plans for employees.
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. Can have large swings and is therefore marketed as a variable benefit payable to the annuitant. Are regulated by the SEC, contracts are approved by state insurance commissioners and producers must be FINRA licensed.
Joint Life Annuities
differs from join and survivorship becase it covers two or more annuitants and provides monthly income only until the first annuitant dies. after death all benefits cease.
Life Annuity Certain
does not guarantee a lifetime income but provides an income for a guaranteed/fixed period regardless of whether the annuitant is alive or not. If the annuitant outlives the period (5, 10, 15, 20 years), the payments cease, if the annuitant dies during the period, the proceeds to go a beneficiary.
Accumulation Units (Variable Annuity Measurement)
during accumulation period, an owner's units are identified as accumulation units. number of units and value vary in according with the amount of premium payments made and the performance of the separate account.
Fixed Payout
for a fixed annuity, the cash value accumulation at the beginning of the annuity period is simply converted into a stream of periodic payments. The result is a fixed dollar amount payout that remains the same for the rest of the contract
Annuity Company aka Insurer
most often a private insurance company because annuities are generally sold by life insurance companies.
Refund Life Annuity
will pay the annuitant for life, but if they die too soon after the period begins, there will be a refund of any undistributed principal or cost of the annuity. This option assures the full purchase price of the annuity will be paid out to someone. Can be paid out as installments or one lump sum.
Calculating guaranteed interest rates
Premiums or payments made during the accumulation period earn a guaranteed return on a tax-deferred basis.
Two-Tiered Annuities
has different values available for distribution at maturity depending on whether the value is taken in a lump sum before annuitzation or left with the issuer for periodic payments. Offers high rates but only if the owner holds the contract for a set number of years before it is annuitized.
Lump Sum Settlements
if an annuitant dies before the annuity fund/principal is depleted, a lump-sum cash payment of the remainder is made to the beneficiary
Nonforfeiture Provisions
if premium payments stop during the accumulation period, the policy-owner does not lose the value.
Contract Owner
like an insurance policy, an annuity is a contract between a purchaser and an insurance company. The purchaser pays the premium and generally is the contract owner.
Flexible Premium
premiums are made over time until annuity benefits are scheduled to begin. Difference from level is that the purchaser has the option to vary the amount of each premium payment as long as it falls between a minimum and maximum amount. Good for those with fluctuating incomes. The disadvantage is that the actual total that will be paid by the annuity is unknown and call only be projected.
Distribution of a Lifetime Income
the basic function of annuity is to systematically liquidate a principal sum over a specified period of time. cash accumulated in an annuity grows tax deferred.
Deferred Annuity
the benefit payments are postponed until a later date, such as a planned retirement age.
Annuity Units
when the annuity period begins, the accumulation units are converted to annuity units. value will vary in accordance with daily performance of the separate account and benefit checks will vary as a result.