Unit 15

Policy Exchange

24 month right to exchange to any form of permanent policy No physical required; based on original age

An owner of an equity index annuity would be wise to use the high-water crediting method if the underlying index was expected to A) change its objective. B) decline. C) be volatile. D) remain steady.

An advantage of the high-water crediting method is that the interest is calculated using the highest value of the index during the term. Therefore, in a volatile market, where prices are going up and down, it picks up the highest price. U15LO3

Index Annuity Crediting Methods

Annual reset. -In this method, the interest to be credited to the account is computed by comparing the index value at the end of the year to the value at the beginning of the year (hence the term annual). -Annual reset generally has a lower participation rate than point to point. High-water mark. -In this method, the highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year. -This option can provide the highest gains. Point-to-point. -In this method, the interest is computed based on the value of the index at the end of the contract compared to the beginning. -A variation is annual point-to-point. Averaging. -The most common is a monthly average and this can be the best options when markets are expected to be highly volatile.

Policy surrender options

Cash value Reduced paid up -Death benefit decreased and no future payments are required Extended term insurance -Full face amount if owner dies in a fixed number of years

Index annuities

Cash values tied to the performance of an index -Participate (generally with a cap) in the gains but not the losses Designed to reduce the purchasing power risk of fixed annuities without the market risk of a variable annuity -Monthly averaging generally best in volatile market -Annual reset generally lowest participation rate Not regulated as a security -Registered personnel selling these must comply with suitability and disclosure requirements

Taxation on Annutiy withdrawals

Everything above cost basis is taxed as ordinary income upon distribution -10% penalty < 59.5 -Only penalty on earnings not cost basis -ONLY for LUMP sum withdrawals Random withdrawals are taxed LIFO -Earnings are last in Annuitized withdrawals -Exclusion ratio -Distributions are part principal and part earnings -Only earnings part is taxed -If prinicpal has fully been paid out then whole distribution is taxable

Whole Life

Fixed premium Guaranteed death benefit and cash value

Universal Life

Flexible premiums and face amount (Option B) -Option A is a level face amount -Option B keeps pace with inflation Cash value not guaranteed - May be overfunded Guaranteed minimum rate of interest allow policy-owners to adjust the death benefits and/or premium payments based on current needs assessment. subject to two different interest rates: the current annual rate and the contract rate.

Fixed annuity

Insurance company guarantees both the rate of return (the interest rate) and the payout to the investor Interest rate can change - contract explains conditions -Rates can increase but is guaranteed at a minimum Not a securities product -Because of guarantees

Variable annuity

Insurance product -Mortality guarantee (lifetime income) Securities product -Separate account with sub-accounts -Specifically for variable annuities -Wide range of objectives available -Creditors do not have access to these accounts -Possible hedge against inflation

Policy loans

Minimum 75% of cash value after third year

Deductions from the Separate Account

Mortality Risk fee -the risk that the insured may live for a period shorter than assumed. Expense risk fee -covers the risk that the costs of administering and issuing the policy may be greater than assumed Investment management fee

Variable annuity separate account versus mutual fund

Purchase units rather than shares Tax deferral versus current taxation -All growth within annuity is tax deferred -Participate in the equities market with expenses generally higher than mutual fund with the same objective

Annuity Distribution options

Random withdrawals Annuitize -Straight life -Life with period certain -Joint life with last survivor Refund annuity -Distributions are paid out after death until the full principal has been repaid M&E charge ceases once the contract is annuitized.

Variable Life

Scheduled (fixed) premium Minimum guaranteed minimum death benefit Cash value not guaranteed -Based on performance of separate account Insured can choose investments in account Only policy with voting rights -one vote per $100 of cash value

Methods of Funding an Annuity

Single premium deferred annuity -Accumulation units Periodic payment deferred annuity -Accumulation units Single premium immediate annuity -Annuity units Bonus annuity

Charges deducted from the gross premium include:

State premium taxes Administrative fee -One time fee Sales load -The maximum allowable sales load on variable life insurance is the equivalent of an average of 9% of premium per year, computed over a 20-year period.

If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is A) universal life. B) index annuity. C) variable life. D) term life.

Universal life (not universal variable life) does not invest in the market through a separate account. That is only true of life insurance policies using the word "variable." These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner). Term life cannot be overfunded and annuities of any type are not life insurance policies. U15LO6

Universal variable life insurance

type of variable life insurance with flexible premiums (and thus flexible death benefit).