Annuities Flashcards
What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and ceases at the annuitant’s death?
Pure Life
Who bears the investment risk in a fixed annuity?
The insurer
Who possesses all the right in an annuity?
Annuity owner
What is the main reason for purchasing an annuity?
To provide income that the annuitant cannot outlive
If the current interest rate on an annuity is higher than the guaranteed rate, which rate will the annuity owner receive as part of the annuity payment?
Current
What is a disadvantage of owning a fixed annuity, as opposed to variable?
In times of inflation, the benefit of a fixed annuity will have decreased purchasing power.
What type of annuity can be purchased with a single premium?
Immediate annuity
What are two phases of an annuity?
Accumulation And Annuitization (or pay-in and pay out)
What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and also guarantees payment for a specified number of years?
Life income with period certain
What type of annuity is suitable for someone who wants to select the benefit option that will pay the largest amount only for as long as the annuitant lives?
Straight life
An individual has a contract that will provide him with a certain amount of income for the rest of his life. However, this is not a life insurance policy. What type of contract does this person have?
Annuity
Who receives income payments from the annuity?
The annuitant
What is the difference between a single premium and a flexible premium payment options in a deferred annuity?
The number of payments that purchase the annuity
With a single premium differed annuity, when will the annuity payments become available?
No sooner than 1 year after the annuity purchase
What are two classifications of annuities according to the time when annuity payments begin?
Immediate and deferred
What type of license(s) is /are required in order to sell annuities?
A life insurance license and a securities license
How long is income paid under a pure life annuity?
Only for the life of the annuitant
How long will a life annuity with a 15-year period certain pay?
For the life of the annuitant, unless he/her she dies within the first 15 years of the annuitization; then the payments will last for 15 years.
What are the accumulation units in annuities?
Ownership interest in the separate account (instead of buying share, annuity holder purchases accumulation units)
How soon can income payments begin in an immediate annuity?
No later than 1 year from the time of annuity purchase
How are annuities classified depending on how many lives they cover?
Single life and multiple life annuities
If the annuitant dies before the annuitization period starts, what will the beneficiary receive?
Either the amount paid into the annuity or the cash value, whichever is greater.
What causes a variable annuity benefit to vary?
The annuity’s underlying investments
Whose life expectancy is taken into consideration in an annuity contract
Annuitant
What type of annuity credits its interest based upon an index such as S&P 500?
Equity indexed annuity
If the annuitant dies during the period, who will receive the annuity benefits?
Beneficiary
If there is no named beneficiary for the annuity benefits, to which entity will the benefits be paid?
Annuitant’s estate
What are the two types of refund life annuities?
Cash refund and installment refund
Can a business or corporation be an annuitant?
No, an annuitant must always be a natural person
If an annuity provides a set amount of income for two or more persons, with the income ceasing upon the first death, what type of annuity is that?
Joint life annuity
Regarding annuity payments, what is the difference between the annuitant and the beneficiary of an annuity?
The annuitant received payments from the annuity during the annuitization period; the beneficiary receives benefits after the annuitant’s death.
An annuity purchased with multiple payments that begin income payments after one year from the moment of purchase is known as what type of annuity?
Flexible premium deferred annuity
In an annuity, the accumulated money is converted into a stream of income, during which phase?
Annuitization period
What type of annuity requires an agent to have a securities license?
Variable annuity
In flexible premium payment annuities, the term “flexible” refers to what?
Amount of premium
Owner
The purchaser of the annuity contract, but not necessarily the one who receives the benefits.
The owner of the annuity has all the rights, such as naming the beneficiary and surrendering the annuity.
The owner of the annuity may be a corporation, trust, or other legal entity.
Annuitant
The person who received benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written.
The Annuitant and the contract owner do not have to be the same person, but most often are.
A corporation, trust, or other legal entity may own an annuity, but the annuitant must be a natural person.
Annuities
Are based on the life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy.
Accumulation period
Also known as the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. This is also the time during which the payments earn interest on a tax-deferred basis.
Annuity period
Also, known as the annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant.
During the accumulation period
Funds are not paid into the annuity. During the annuity period, funds are paid out to the annuitant.
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
Premium payment options
- Single premium (one-time lump-sum payment)
* Periodic payments, in which the premiums are paid in installments over a period of time.
Immediate annuity
One that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase. And is also known as a single premium immediate Annuity (SPIA).
Deferred annuity
An annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (Single Premium Deferred Annuities -SPDAs) or through periodic payments (Flexible Premium Deferred Annuities -FPDAs).
Fixed annuity
- 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; and
- The insurance company guarantees the specified dollar amount for each payment and the length of period of payments as determined by the settlement option chosen by the annuitant.
Variable Annuity
- Interest Rate –> No guarantee
- Underlying Investment –> Separate account (equities, no guarantee)
- License Needed–> Life insurance Plus securities
- Expenses–> Guaranteed
- Income Payment–> No guarantee
Pure Life Annuity
Provides the highest monthly benefit, but there is no guarantee that the entire principal will be paid out.
Annuity Settlement options
- Life only -insured cannot out live income. Any monies not paid out are retained by the company at the insured’s death. Pays the highest monthly amount.
- Refund Life -Guaranteed lifetime income. If the annuitant dies, the balance is “refunded” to the beneficiary.
- Life with Period Certain -Specific monthly payment for life and specific period of time. If the annuitant dies before the payment period is up, payment goes to the beneficiary.
- Joint and Survivor -Income for 2 or more that cannot be outlived. When one annuitant dies, the other received either 1/2 or 2/3 of the original payment amount.
- Lump-sum -Paid at the annuitization; all interest accumulated is taxable. Additional 10% penalty imposed to annuitant’s reaching 59 1/2.
- annuities Certain -Payment guaranteed for fixed period or until certain fixed amount. No life option.
Interest Rate
Guaranteed -company must pay this minimum percentage. Typically, around 3%.
* Current -exceeds guaranteed rate. Paid to annuitant when a company’s own investment is better than expected.
