Annuities

Question 1

What is an annuity?

Answer 1

An annuity is a financial contract that provides a stream of income for a specified period or for life, protecting against the risk of outliving one’s money.

Question 2

Who can be the annuitant in an annuity contract?

Answer 2

he annuitant, who receives the benefits, must be a natural person whose life expectancy is considered for payments, even though the owner of the annuity can be an entity like a corporation or trust.

Question 3

What is the accumulation period in an annuity?

Answer 3

The accumulation period is the phase during which the owner pays into the annuity, accumulating funds on a tax-deferred basis.

Question 4

What happens during the annuity (annuitization) period?

Answer 4

During the annuity period, the accumulated funds are converted into a stream of income payments to the annuitant, which can last for life or a specified term.

Question 5

What are the basic types of annuity payment options?

Answer 5

Annuities can have single premium (one-time payment) or periodic payment (installments over time) options.

Question 6

How do fixed annuities differ from variable annuities?

Answer 6

Fixed annuities provide a guaranteed interest rate and stable payments, while variable annuities offer fluctuating returns based on the investment performance of a separate account.

Question 7

What are indexed annuities?

Answer 7

Indexed annuities are fixed annuities that earn interest based on a stock market index performance, with a guaranteed minimum interest rate.

Question 8

What is an immediate annuity?

Answer 8

An immediate annuity begins income payments within one year of purchase, usually funded by a single lump-sum payment.

Question 9

How does a deferred annuity work?

Answer 9

A deferred annuity starts income payments after one year from the date of purchase, which can be funded through single or periodic premiums.

Question 10

What are life contingency annuity options?

Answer 10

Life contingency options include pure life, providing payments until the annuitant’s death, and life with a guaranteed minimum, ensuring that if the annuitant dies before a set amount is paid out, the remainder goes to a beneficiary.

Question 11

What is a joint life annuity?

Answer 11

A joint life annuity provides income for two or more annuitants until the first one dies, after which payments cease.

Question 12

How does a joint and survivor annuity work?

Answer 12

It provides income for two or more individuals, reducing to a smaller amount after the first annuitant dies, ensuring that survivors continue receiving payments.

Question 13

What distinguishes a fixed period annuity?

Answer 13

A fixed period annuity pays out for a specified period, regardless of the annuitant’s life status, with payments ceasing after that period.

Question 14

How are fixed amount annuities structured?

Answer 14

In a fixed amount annuity, the annuitant selects the payment size, and the insurer calculates how long to pay based on account value and earnings.

Question 15

What tax benefits do annuities provide?

Answer 15

Annuities offer tax-deferred growth, meaning the invested money grows without being taxed until it is withdrawn.

Question 16

What is the role of the owner in an annuity contract?

Answer 16

The owner of an annuity contract purchases the annuity, has rights such as naming the beneficiary, and can surrender the annuity, but isn’t necessarily the one who receives the income payments.

Question 17

What is the significance of mortality tables in annuities?

Answer 17

Mortality tables in annuities estimate the life expectancy of the annuitant, which helps in determining the amount and duration of income payments, reflecting longer life expectancies than those used for life insurance.

Question 18

How does the income amount from an annuity get determined?

Answer 18

The annuity income amount depends on the accumulated cash value or premium paid, payment frequency, current interest rates, and the annuitant’s age and gender, with longer life expectancy leading to smaller payments.

Question 19

What are the primary purposes of purchasing an annuity?

Answer 19

Annuities are primarily purchased to provide retirement income or to supplement retirement savings, and they can also fund college education or provide structured settlements, like those from court cases or lottery winnings.

Question 20

How do annuities function in terms of principal liquidation?

Answer 20

Annuities function by liquidating a principal sum, either accumulated through investments or paid as premiums, providing a steady income stream to the annuitant during the payout period.