Annuities Flashcards
Annuity
Insurer receives money from a consumer and is expected to pay it back with interest to the person either in a large sum or in regularly scheduled installments
Annuities are often used to provide…
Regular income that can’t be outlived
Unlike LI, annuities address risk of…
Living too long
Owner
Person who pays for and controls the annuity; also typically pays taxes on it
Annuitant
Person whose life expectancy determines the size of payments from insurer and usually received payments
Beneficiary
Person who might receive death benefits if annuitant dies with money left over
Deferred Annuities
For people who want consistent income in the future
Prior to income stream, deferred annuities go through an accumulation period and are…
Credited with tax-deferred interest
Immediate Annuities
For people who want a steady stream of income now
Immediate annuities have a minimal chance for…
Tax deferral
Fixed Annuities
Guarantee full return of principal investment and fixed rate of compound interest
Variable Annuities
Offer potentially more growth in exchange for more risk
Variable annuities guard against…
Possible inflation
Variable annuities don’t always guarantee…
Return of principal
Variable annuities don’t guarantee…
Interest
Variable annuities require what licenses?
Securities and LI
Stepped-Up Death Benefit
Locks in the death benefit at the current account value regardless of future performance
Guaranteed Minimum Income Benefit (GMIB)
Guaranteed minimum amount will be paid regularly at annuitization
Guaranteed Minimum Withdrawal Benefit (GMWB)
Account will be worth a guaranteed minimum amount immediately prior to annuitization
Equity Indexed Annuity
Combines features of fixed and variable annuities
EIA: Offers interest rates that are linked to…
Economy or stock market performance
EIA: Contains…
Minimum guarantees of the principal and interest
EIA: Most are still considered fixed products and…
Don’t require securities license
Spread
Percentage of change in the index that the insurer keeps for admin expenses (often 1% or 3%)
Participation Rate
Percentage of change in the economic index (post-spread) that the annuity might be credited with (50-100%)
Cap
Max percentage of change in the economic index that can be credited to the annuity (often 10% or less)
Annuitization/Payout
Regular payments of money out of the annuity to the consumer
Annuitization: Single Life/Straight Life Annuity
Payments for the rest of person’s life (most common)
Annuitization: Period Certain
Payments for only a certain number of years even if the person lives longer
Annuitization: Life with Period Certain
Payments for the rest of person’s life or a certain number of years, whichever is greater
If death occurs during accumulation period/prior to annuitization…
Owner’s principal investment minus withdrawals or overall value of annuity at death, whichever is greater
If the annuity is greater than the owner’s principal investment…
Beneficiary pays taxes on the difference
If death occurs after accumulation period/during annuitization: Straight life/single-life annuity
No death benefit
If death occurs after accumulation period/during annuitization: Single life with period certain
Payments will continue to beneficiary but only if period certain hasn’t ended
If death occurs after accumulation period/during annuitization: Cash refund/installment refund
Beneficiary gets remaining original investment in lump sum or in pieces but no interest
If death occurs after accumulation period/during annuitization: Joint life and survivorship
Payments continue until beneficiary dies too
Insurer Surrender Charges
Percentage-based deduction from the owner’s account if withdrawals or surrenders happen too soon
Insurer surrender charges often start at 7% and decrease…
By a certain percentage each year, for 7 years
Up to 10% can be withdrawn based on…
Schedules set by the insurer
Crisis Waiver/Rider
Can allow withdrawals beyond 10% in cases of disability, LTC, serious illness, or unemployment
No taxes on annuities until…
Money comes out
Amounts from annuities bought with pre-tax dollars are…
Fully taxable to owner
Amounts from annuities bought with after-tax dollars will be…
Partially taxable to the owner
Each non-qualified annuity payment will be considered…
A return of principal (non-taxable) and income (taxable)
Non-taxable portion is the…
Exclusion Ratio
Exclusion Ratio
Amount invested divided by total amount expected to be received over life of annuity
Non-qualified annuity death benefits are taxed on the difference between…
Received amount and what the owner put into the annuity
Prior to annuitization, for early withdrawals/surrenders, all interest will…
Come out first and be taxable
Early withdrawals/surrenders might also result in…
10% tax penalty if accessed before 59.5
No 10% IRS penalty (but maybe regular income taxes) if…
Withdrawals occur after 59.5; annuitization is occurring at any age; Withdrawals are due to disability
