Annuities Flashcards
Annuities
Designed to provide a steady cash flow for an individual during their retirement years, and to alleviate fears of outliving one’s assets
Financial product sold by financial institutions
Annuities can be used to
Accumulate funds over a period of time
Evenly distribute a fund over a period of time
Both accumulate a fund and then evenly distribute it over a period of time
2 annuity phases
Pay in - accumulation period when principal and periodic deposits grow with credited interest
Pay out - distribution phase
Accumulation period
Time when annuity is being funded
Interest grows tax deferred
Annuity value belongs to owner
Annuitization
Income generated from accumulated money
Money from accumulation or inheritance, lottery winnings, court settlements, etc.
Money belongs to insurance company
4 parties involved in annuity contract
Contract owner
Annuitant
Beneficiary
Insurer
Contract owner and rights
The person or couple who buy the annuity
Name or change annuitant Name or change beneficiary Choose payout option Add more money or take withdrawals Surrender or terminate the agreement
Immediate annuity vs deferred annuity
Immediate- Structured to provide current income
Deferred- Contracts payout is a specific date in future
Immediate annuity
Purchased with a single premium (spia)
Has no short accumulation period
Surrender penalties or withdrawal charges
10% tax if withdrawn before 59.5
Surrender period is waiting period
Surrender fee - penalty for early withdrawal
Death benefit for an annuity
Accumulated contract value is paid to a selected beneficiary, if the annuity owner dies during the accumulation period
Annuity payout options
Life annuities (payment is guaranteed to last for as long as the annuitant lives)
Temporary (which do not)
Life only annuity option
Guaranteed income for life
Death stops payments (even if only one payment)
Largest monthly check from life options
Life with refund annuity option
Income for life
If Death payments less than contract value
- balance to beneficiary
- lump sum or monthly payments
Life with period certain annuity option
Income for life they live
Choose period such as 10-20 years
- annuity will pay beneficiary if annuitant dies within that period
Joint life and survivor annuity option
Annuitants paid even after one dies
Same amount or reduced
Joint life annuity option
Two annuitants paid until one dies
Factors affecting payment amount
Annuitants age
Annuitants gender
Length of payment guarantee
Assumed interest rate
4 basic types of annuities
Fixed
Variable
Equity indexed
Market value adjusted
Fixed annuities
Values are guaranteed against a loss
Genera account
Long term low risk investments
If annuitized fixed income payments
Money guaranteed by company
Variable annuities
Have potential to keep pace with inflation because they are supported by investments (stocks and bonds)
Historically stocks have raised faster than cost of living, but not guaranteed to always do so
Accumulation units
Value of accumulation unit = total value of separate account/#of existing accumulation units
Equity indexed annuity
Fixed annuity Value is guaranteed by company Interest can go up or down like the stock market Interest tied to S&P 500 No securities license required
Market value adjusted annuities
Single premium deferred annuities
Interest rate for a fixed number of years
Not a variable product (no securities license required)
Common uses for annuities
Lifetime income at retirement
Accumulating funds prior to retirement
Funding individual retirement accounts
Education funds
