5.2 Annuities Terms Flashcards
Deferred
withheld or postponed until a specified time or event in the future
IRS
Internal Revenue Service: a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code
Life contingency
dependent upon whether or not the insured is alive
Liquidation of an estate
converting a person’s net worth into a cash flow
Natural person
a human being
Qualified plan
a retirement plan that meets the IRS guidelines for receiving favorable tax treatment
Suitability
requirement to determine if an insurance product or an investment is appropriate for a particular customer
annuity
- a 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 rather a vehicle for the accumulation of money liquidation of an estate.
- do not pay a face amount upon the death of the annuitant. They do opposite
- use mortality tables reflect a longer life expectancy than the mortality tables used for life insurance
Mortality tables
indicate the number of individuals within a specified group (e.g. males, females,smokers, nonsmokers) starting at a certain age, who are expected to be alive at succeeding age
List ht parties in an annuity
Owner
Annuitant
Beneficiary
Owner
The purchaser of the annuity contract, but not necessarily the one who receives the benefits
Annuitant
- person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is
written. - not always the contract owner, but mostly
- corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person
how does the beneficiary receive annuity assets
by either the amount paid into annuity or the cash value
-whichever is greater
KNOW: Because the annuities are based on the life expectancy of the annuitant, the annuitant must be a natural person (regardless of who owns the policy.
Cool
accumulation period
- also known as pay-in period
- period of time over which the owner makes payments/premiums into an annuity.
- also period during which payments earn interest tax-deferred.
annuity period
- “annuitization/liquidation/payout period”
- time during which sum accumulated converted to a stream of income payments to the annuitant.
During the accumulation period, funds are paid ___ the annuity
INTO
During the annuity period, funds are paid ____ to the annuitant.
OUT
The annuity income amount is based upon what?
- amount of premium paid or cash value accumulated
- frequency of the payment
- interest rate
- annuitant’s age and gender
KNOW THIS:
Shorter life expectancy = higher benefit
Longer life expectancy = lower benefit
cool
If an annuitant dies during the accumulation period, the insurer is obligated to what?
return to the beneficiary either the cash value or the total premiums paid, whichever is greater.
What are the types of annuities?
Fixed
Variable
Indexed
Fixed Annuities
- guaranteed
- fixed payment amount
- premiums in general account
Variable Annuities
- payment not guaranteed
- premiums are in separate account
- invested in stocks and bonds
Indexed Annuities
- interest rate tied to an index
- earn a higher rate than fixed annuities
- not as risky as variable annuities or mutual funds
Classification of annuities
Premium Payment Method
When income payments begin
How Premiums are invested
Disposing of proceeds
Know this: Classification of Annuities
- Premium payment method: single premium vs. periodic
- When income payments begin: immediate vs. deferred
- How premiums are invested: fixed vs. variable
- Disposing of proceeds: pure life, annuity certain, or life refund annuity
war to classify annuities can be based on how they can be funded(paid for). There are 2 options
- single premium (lump sum)
- periodic payments (installments over period of time)
Periodic payment annuities can be either:
level premium (fixed installment) flexible premium (amount and frequency varies)
immediate annuity
an annuity purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase
-“Single Premium Immediate Annuity (SPIA)
deferred annuity
an annuity in which the income payments begin sometime after one year from the date of purchase
-funded by lump sum or periodic (flexible)
An immediate annuity is purchased with a
____ premium
single
ncome payments from a deferred annuity begin sometime after ____ from the date of purchase.
1 year
nonforfeiture law
deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization
surrender charge
purpose is to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity
At surrender, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge. Ex:
Annuity Owner paid: 700 in premium
Accumulated: $35 in interest
(Premium+Interest)-Surrender Charge=Annuity Value
If Annuity surrendered prematurely:
($700 Premium + $35 Interest) - $70 Surrender Charge
Annuity value at surrender: $665
A fixed annuity provides the following features:
- Guaranteed minimum rate of interest to be credited to the purchase payment(s)
- Income (annuity) payments that do not vary from one payment to the next
- insurance company guarantees the specified dollar amount for each payment and period length as the annuitant chose settlement option
level benefit payment amount
With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period.
-Disadvantage: purchasing power that they afford may be eroded over time due to inflation (as all fixed annuities)
Fixed annuity premiums are deposited into
the life insurance company’s general account
in fixed annuities, who bears the investment risk
the insurer
-may not drop below guaranteed minimum (3%)
Indexed (or equity indexed) annuities
fixed annuities that invest on a relatively aggressive basis to aim for higher returns
-has a guaranteed minimum interest rate
variable annuity
serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity
3 main characteristic of variable annuities
Underlyring investment
Interest RAte
License Requirements
Underlying Investment (variable annuity)
the payments that the annuitant makes into the variable annuity are invested in the insurer’s separate account, not their general account. The separate account is not part of the insurance company’s own investment portfolio and is not subject to the restrictions that are applicable to the insurer’s own general account
Interest Rate (variable annuity)
issuing insurance company does not guarantee a minimum interest rate.
License Requirements (variable annuity)
a variable annuity is considered a security
-regulated by SEC (Securities Exchanged Commission)
Variable premiums purchase ____ in the fund
accumulation units, which is similar to buying shares in a Mutual Fund
upon annuitization, the accumulation units are converted to ___
annuity units
Differences in the features of Fixed vs Variable Annuity. KNOW
Image
pure life (straight life or life-only), ceases at the annuitant’s death. This option provides the ____monthly benefits
highest.
*althouh provides the highest, there’s no guarantee that the entire principal/benefit will be paid out
what are the two types of refund life annuities
cash refund - lump sum
installment refund - installments until paid out
explain the cash refund life annuity option
when the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant.
-option does not guarantee to pay any interest.
explain the installment refund life annuity option
when the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out
explain the life with period certain (another life contingency payout option)
annuity payments guaranteed for the lifetime of annuitant and for a specific period of time for the beneficiary.
ex: 20-year period certain option
single annuities cover ___ while multiple life annuities cover ____.
- one life
2. 2 or more lives
explain joint life and survivor arrangement
modification of life income option
- guarantees an income of two recipients can outlive
- common “joint and 1/2 survivor
- like life income option, no guarantee all proceeds will be paid out if both beneficiaries die shortly after installments begin
annuities certain
short-term annuities that limit amounts paid to certain fixed period or a certain fixed amount is liquidated.
fixed period installments
annuitant selects time period for benefits and insurer determines payments amount (based on the value of account and future earning projections)
-option pays for a specific amount of time only, regardless if the annuitant is living.
Know Annuities Options
Image
principal use (personal use of annuities)
provide income for retirement, agents should always assess how well product will meet applicant’s needs and resources (suitability of product)
What are the personal uses of annuities
- lump sum settlements
- Retirement income
- Long Term care Needs
Retirement annuities may offer a
____ option to the annuitant.
Option allows annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered.
Guaranteed Minimum Withdrawal Benefit (GMWB)
-protects annuitant against investment losses
