5.0 Annuities Basics Flashcards
annuity
contract that provides income for a specified period of years, or for life.
- protects a person against outliving his or her money.
- not life insurance, but accumulation of money and the liquidation of an estate
- marketed by life insurance companies.
- licesned life insurance agents are authorized to sell some types of annuities
Life contingency
dependent upon whether the insured is alive
IRS what would do they do?
Internal Revenue Service -a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code
mortality tables
indicate number of individuals in a specified group starting at a certain age and their life expectancy
(ex group: males, females, smoker, nonsmokers
What are the annuity phases?
accumulation period annuitization period
difference between accumulation period and annuitization period
Accumulation period
- payments in, to insurer Annuitization period
- payments out, to insured
who are the parties of annuities
Owner Annuitant beneficiary
annuitant
insured; policy issued on annuitant’s life; must be a person
beneficiary (annuity)
will receive any amount contributed to annuity (plus any gain) if annuitant dies during accumulation period
Owner
has all rights to policy (usually annuitant); can be corporation or trust
What are the types of annuities
Fixed Annuities Varaible Annuities Indexed Annuities (fixed or equity indexed)
fixed annuities
guaranteed, fixed payment amount; premiums in general account
variable annuities
payment not guaranteed; premiums are in separate account, and invested in stocks and bonds
Indexed Annuities
interest rate tied to an index; earn higher rate than fixed annuities, not as risky as variable annuities or mutual funds
Know
two types of premium payments
single
periodic
single premium payment
ONE lump-sum payment. The principal is created immediately (used for both immediate and deferred annuities).
periodic flexible premium payment
multiple payments; annuity principal fund is created over time (used for deferred annuity only)
two types of income payments
immediate
deferred
Immediate Income Payment
purchased with a single premium. Income payments start within one year from the date of purchase
Deferred Income Payment
purchased with either lump sum or periodic-payments premium. Benefits start sometime after one year from the date of purchase (often used to accumulate funds for retirement).
Settlement options
- lump sum
- life only
- refund life annuity
- joint life
- joint and survivor life with period certain
- annuities certain
Lump-sum
at annuitization, and all interest accumulated is taxable. Additional 10% penalty can be imposed prior to annuitant’s reaching 59 1/2.
life only
insured cannot outlive income. Any monies not paid out are retained by company at insured’s death. Pays highest monthly amount
Refund Life Annuity
- guaranteed lifetime income. If annuitant dies,balance is “refunded” to beneficiary.
- Installment option gives beneficiary payments until purchase amount is paid out.
- Cash refund gives refund of balance of original annuity purchase amount minus payments made to annuitant
Joint Life
2 or more annuitants receive payments until first death, then payments cease
Joint and Survivor
income for 2 or more that cannot be outlived.Often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount
Life with Period Certain
specific monthly payment for life and a specific period of time (e.g. Life plus 10-year certain). If annuitant dies before payment period is up, payment goes to beneficiary
Annuities Certain
payment guaranteed for fixed period or until certain fixed amount paid. NO LIFE option
Different interest rates
Guaranteed Current
Guaranteed
company must pay this minimum percentage. Typically around 3%.
Current
exceeds guaranteed rate. Paid to annuitant when acompany’s own investment is better than expected.
