Annuities Flashcards
Life insurance protects people from ______ ___ _____, annuities protect people from _____ ___ _____
Dying too soon; living too long
As a financial product, 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
Two phases of an annuity
-accumulation- “pay-in”
-annuitization- “pay-out”
Annuity Accumulation period
-“pay-in”
-period when the principal and periodic deposits grow
Annuity annuitization period
-“pay-out”
-distribution face of an annuity
One the annuity contract is annuitized, no more..
..contributions can be made
Money paid into an annuity contract during the accumulation period is called a ________
Premium
_________ is credited on the accumulated value in the annuity contract and the accumulated contract value grows beyond the contract owner’s deposits
Interest
During the annuity accumulation period, the owner can generally:
-make additional premium payments or deposits
-take withdrawals from the accumulated value
-surrender the annuity for its cash value
-make other changes to the contract
During the annuitization period, money in the annuity contract is converted into:
A series of regular income payments that can continue for life or for a stated period of time
When the annuitization period starts, the accumulated value no longer belongs to the annuity owner therefore:
-no additional premium payments can be made
-no withdrawals can be taken
-the annuity cannot be surrendered
-the owner can’t change the contract
There are four parties involved in an annuity contract:
- Contract owner
- Annuitant
- Beneficiary
- Insurer
The annuity contract owner has the right to:
-name or change the annuitant
-name or change the beneficiary
-choose the payout option
-add more money or take withdrawals
-surrender or terminate the agreement
Used to determine the amount of the guarantees payments in an annuity
The annuitant’s life expectancy
The annuitant must be an:
Individual- a natural person- and cannot be corporation or a trust
Chosen by the annuity owner to receive the income payments during the annuitization period
Annuitant (insured)
The annuitant does not have the power to
Make withdrawals, deposits, change the names of the parties to the agreement or terminate the contract. They must also sign the annuity contract
The ____ ______ and the annuitant are frequently the same person
Contract owner
The _____ has no voice in the control or management of the annuity and only benefits upon the death of the contract owner
Beneficiary
The _______ is the party who issues the annuity contract
Insurer
Annuities provide ___-_______ savings for retirement
Tax-deferred
If you leave money in an annuity to a beneficiary, they will have to pay taxes on
Any growth (interest) on the money that was out into the contract
An ________ annuity is structured to provide current income and a _______ annuity’s payout is a specific dat win the future
Immediate; deferred
After paying a lump-sum premium, this annuity provides an individual with an income that may begin as soon as a month after purchase may be delayed for up to one year
Immediate annuity/ single premium immediate annuity (SPIA)
The funds in the immediate annuity contract accumulated on
…a tax deferred basis. When payments begin, the portion of each payment that is attributed to interest is subject to taxes; the rest is treated as a return of principal and therefore, is tax free
A single premium immediate annuity (SPIA) pays a monthly income ________
Immediately
The first payment of an immediate annuity would be made after a delay of
One payment interval or period
The earliest an income payment on an immediate annuity could be paid is __ ____. The latest payments can start in ____ ____.
One month; one year
Unlike immediate annuities, ________ annuities do not start an income stream immediately
Deferred
With deferred annuities, the annuity owner chooses the:
Premium amount and the frequency of premium payments
With these types of annuities, accumulated funds may be withdrawn at any time, subject to a possible surrender charge
Deferred annuities
The deferred annuity owner is not required to _________ the contract
Annuitize
Deferred annuities can be purchased with:
A single premium (single premium deferred annuity (SPDA), or ongoing premium payments (periodic or flexible premium deferred annuities (PPDA or FPDA)
With all deferred annuities, the emphasis is on:
The accumulation of money for future use
A withdrawal from an annuity is taxed differently than annuitized payments. When a withdrawal is taken from an annuity, the earnings, or the growth portion, is taxed as
Ordinary income
Annuity surrender or withdrawal
-10% tax if withdrawn before 59 1/2
-surrender period-waiting period
-surrender fee-penalty for early withdrawal
In order for the annuitant to avoid additional fees from the insurance for early withdrawal, there is a waiting period called the
Surrender period
Surrender charges of an annuity are stated in the contract and commonly start at:
10%, declining each year
The deferred annuity death benefit does not provide a surviving family a life insurance policy. Rather, the accumulated contract value is paid to:
A selected beneficiary if the annuity owner dies during the accumulation period
The amount paid as a death benefit on a deferred annuity is the greater of:
-the accumulated value of the annuity
-the total premiums paid to that point, minus any withdrawals
Annuity payout options fall into two categories:
-life annuitie, which have a payment that is guaranteed to last for at least as long as the annuitant lives
-temporary annuities-which do not
Life only annuity payout option (straight life, pure life, life-no refund)
-guarantees income for life- regardless of how long
-death stops payments (even if after one payment)
-largest monthly check from life options
The advantage of the life only annuity payout option is that:
It pays the highest monthly income amount because are no other contingencies and only the annuitant’s life expectancy was considered to determine the amount of the monthly payout
The disadvantage of the life only annuity payout option is that:
The annuitant many die before their life expectancy and the total payout they received was much less than the total amount paid into the contract
Under the life with refund annuity payout option, if the annuitant dies and the total payments received are:
Less than the amount paid for the annuity, the difference is paid to the beneficiary
Under the life with refund annuity payout option, the money may be paid either as a:
-lump sum, called a cash refund
-continuation of payments in the same amount as was being paid to the annuitant, called an installment fund
The life with period certain annuity payout option
Pays an income for as long as the annuitant is alive. In addition, the annuitant selects a payment period, typically 5, 10, or 20 years, and payments are guaranteed to be made for at least that number of years
Under the life with period certain annuity payout option, if the annuitant dies before the end of the selected period, payments:
Continue to the beneficiary for the rest of the period certain. No payments are made to the beneficiary if the annuity live past the period certain
With the joint and survivor annuity payout option, the insurer promises to:
Make payments until the last survivor of the two annuitants dies
Under the joint life and survivor annuity payout option, the owner can choose for continued payments in the same amount for the survivor, or…
….in a lesser amount such as 2/3 or 1/2 of their monthly payout
The joint life annuity options pays:
Income until the death of the first of two or more annuitants
Factors in determining a life annuity payment amount
-annuitant’s age
-annuitant’s gender
-payment guarantee
-assumed interest rate
There are 4 basic types of annuities:
-fixed
-variable
-equity-indexed
-market value adjusted
________ annuity values are guaranteed against loss. Aside from surrender charges that may apply, the value of a ______ annuity will never be less than the amount paid into the contract
Fixed; fixed
Fixed annuities are supported by the insurer’s _________ __________
General account
With fixed annuities, the investment risk is born by:
The insurer
During a fixed annuity’s accumulation period, accumulated values earn a interest rate that is:
Competitive with prevailing rates on other interest-bearing investments. Current rate usually declared at the beginning of the year and guaranteed for the year
During the annuity period, fixed annuities provide a ______ payment amount
Level
Fixed Annuities
-general account
-long term low risk investments
-if annuitized- fixed income payments
-money guaranteed by company
________ annuities have the potential to keep pace with inflation because they are supported by investments (stocks and bonds)
Variable
Variable annuities have ___________ _____ because values are not guaranteed against loss
Investment risk
Insurers are not allowed to bear the risk of _______ annuities
Variable
The assists that support variable annuities are kept in a _______ ________ where the investment risk is borne by the annuity owner
Separate account
With a variable annuity, the owner makes the various investment choices called ___-_____, which resemble mutual funds
Sub-accounts
The accumulated values of variable annuities are expressed as ________ _____, similar to shares purchased in a mutual fund
Accumulation units
The value of a variable annuities accumulation unit is found by:
Dividing the total values of the separate account by the number of existing accumulation units
When the annuity period of a variable annuity begins, the accumulation units are converted to ______ ______
Annuity units
With a variable annuity, after annuity period begins the number of annuity units stays the same throughout the annuity period, however the value of an annuity unit varies with:
The values of the investments in the separate account
Dual regulation of variable annuities
Variable annuities are regulated as insurance products and also regulated as securities
To sell variable annuities, a producer must have:
A life insurance license, a special variable annuities certification (in certain states), and both a federal and state securities registration
Equity-indexed annuity (EIA) is a type of
tax-deferred annuity whose credited interest is linked to an equity index- typically the S&P 500. It guarantees a minimum interest rate, typically between 1-3%, if held to the end of the surrender term and protects against a loss of principal
Equity indexed annuities
-are fixed annuities
-value is guaranteed by company
-interest earned can go up or down like the stock market
-interest tied to stock market need (S&P 500)
-no securities license required
A fixed annuity with a market value adjustment feature, also referred to as a modified guaranteed annuity, offers the flexibility of:
Various guarantee terms combined with the potential for higher interest rates than traditional fixed investments
Market Value Adjusted Annuities
-single premium deferred annuities
-interest rate for a fixed number of years
-early surrender (withdrawal penalty, interest penalty may be higher or lower)
-not a variable product, no securities license required
The most common annuity contract is one that has:
Tax deferred investment gains with the promise that the investment savings and gains will provide income in the future in the form of regular distributions
Earnings on annuity accumulated values are tax ______ until distributions begin
Deferred
Flexible premium annuities are designed to be used for funding:
Individual Retirement Accounts (IRAs)
Uses of annuities
-life income
-tax favored savings
-funding individual retirement accounts (IRA)
-education funds
Annuities are designed to accept ______ contributions made to the retirement plans set up for their employees
Employer
Group annuities
-funded by employer contributions
-distributions determined by employer
