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Life & Health Insurance (MA) > Annuities > Flashcards

Annuities Flashcards

1
Q

What are the 3 Primary uses for an Annuity?

Annuities

A
  1. Accumulate Funds
    (over a period of time)
  2. Distribute Funds (Evenly)
    (over a period of time)
  3. Accumulate then Distribute Funds
    (over a period of time)
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2
Q

What are the 2 Phases/Periods of an Annuity?

Annuities

A
  1. Pay-In Period
  2. Pay-Out Period
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3
Q

Definition:
Pay-In Period

2 Sub-Parts

Annuities

A

(a.k.a. The Accumulation Period)

When an Annuity is being funded (i.e. the Premium is paid)

  • Interest is credited (on the accumulated value) so that the value grows beyond the owner’s deposits
  • Interest grows tax deferred
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4
Q

What is allowed during the
Accumulation Period?

4 Parts

Annuities

A

(The Annuity/Cash Value belong to the Policyowner)

The Policyowner is allowed to:
* Make additional Premium payments/deposits
* Take withdrawals from the Accumulated Value
* Surrender the Annuity for its Cash Value
* Make changes to the contract

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5
Q

Definition:
Pay-Out Period

Annuities

A

(a.k.a. The Annuitization Period)

Money (within the contract) is converted into income payments that can continue for life or for a stated period of time.

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6
Q

What is not allowed during the
Annuitization Period?

4 Parts

Annuities

A

(The Annuity/Cash Value belong to the Insurance Company)

The Policyowner can no longer:
* Make additional Premium payments/deposits
* Take withdrawals from the Accumulated Value
* Surrender the Annuity for its Cash Value
* Make changes to the contract

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7
Q

Who are the 4 Parties involved in an Annuity Contract?

Annuities

A
  1. Contract Owner
  2. Annuitant
  3. Beneficiary
  4. Insurer

Some of these may be the same person

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8
Q

Annuity Contracts:
Who is the Contract Owner?

Annuities

A

The person/couple who buy the Annuity

Contract Owners Rights:
1. Name/Change the Annuitant
2. Name/Change the Beneficiary
3. Choose the Payout Option
4. Add Money or Take Withdrawals
5. Surrender/Terminate the Agreement

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9
Q

What are the Contract Owners Rights?

6 Parts

Annuities

A
  1. Name/Change the Annuitant
  2. Name/Change the Beneficiary
  3. Choose the Payout Option
  4. Add additional Money
  5. Take Withdrawals
  6. Surrender/Terminate the Agreement
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10
Q

Annuity Contracts:
Who is the Annuitant?

3 Parts

Annuities

A

(Similiar to the Insured in a life insurance policy)

  • Chosen by the owner to receive the income payments
    (during the Annuitization Period)
  • Must be a Natural Person - Cannot be a Corporation or Trust
  • Contract Owner and Annuitant are frequently the same person
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11
Q

What is the Annuitant Prohibited from doing
and Required to do

Prohibited - 4 Parts / Required - 1 Part

Annuities

A

The Annuitant is not allowed to:
1. Make Withdrawals
2. Make Deposits
3. Change the Contract or Named Individuals
4. Terminate the Contract

The Annuitant is Required to:
1. Sign the Annuity Contract

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12
Q

Annuity Contracts:
Who is the Beneficiary?

3 Parts

Annuities

A

The Beneficiary:
1. Benefits upon the death of the contract owner (only)
2. Has no voice in the control/management of the annuity
3. Must be a Natural Person - Cannot be a Corporation or Trust

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13
Q

Annuity Contracts:
Who is the Insurer?

4 Sub-Parts

Annuities

A

The party who issues the annuity contract

Representation could be:
* A Local Bank
* A Financial Planner
* A Brokerage Firm
* An Agent/Producer

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14
Q

What are the Differences?:
Annuities vs. Life Insurance

3 Parts each

Annuities

A

Annuities
* Coverage: Living
* Protection: Living too long
* Premium: Provides an Income / Accumulates Fund

Life Insurance
* Coverage: Death
* Protection: Dying too soon
* Premium: Buys the Death Benefit

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15
Q

What is the main Difference?:
Immediate vs. Deferred Annuities

Annuities

A

Immediate Annuity
* Structured to provide current income

Deferred Annuity
* Payout at a specific date in the future

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16
Q

Key Points:
Immediate Annuity

3 Parts

Annuities

A

1. Provides “immediate” income
* Begins within 1-12 months of purchase

2. Funds Accumulate:
* On a Tax-Deferred basis

3. Payments are taxed “pro rata”:
* Accrued Interest - Subject to Taxes
* Return of Principal - Tax-Free

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17
Q

Key Points:
Deferred Annuity

3 Parts

Annuities

A

1. Owner chooses:
* Premium Amount
* Frequency of Premium Payments

2. Accumulated funds may be:
* Withdrawn at any time
* Subject to Surrender Charges

3. Owner not required to:
* Annuitize the contract

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18
Q

Acronym:
“SPIA”

Annuities

A

Single Premium Immediate Annuity

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19
Q

Acronym:
“SPDA”

Annuities

A

Single Premium Deferred Annuity

20
Q

Acronym:
“PPDA”

Annuities

A

Periodic Premium Deferred Annuity

21
Q

Acronym:
“FPDA”

Annuities

A

Flexible Premium Deferred Annuity

22
Q

Key Points:
Withdrawals/Penalties

2 Parts

Annuities

A

LIFO

1. Earnings/Growth (used first)
* Taxed as Ordinary Income

2. Early Withdrawals (prior to age 59½)
* Additional 10% Penalty on Earnings/Growth

23
Q

What are the Differences?:
Surrender Period vs. Surrender Fee

1 Part each

Annuities

A

1. Surrender Period
* Waiting Period before penalty-free withdrawals are allowed
(Typically 2 - 12 Years)

2. Surrender Fee
* Penalty charged for withdrawals within the Surrendor Period

24
Q

Key Points:
Death Benefit
(Deferred Annuities)

3 Parts

Annuities

A

1. Paid to Beneficiary
(If Owner dies during the Accumulation Period)

2. Amount of Death Benefit:
(whichever is larger)
* The Accumulated Value or
* The Premiums Paid (minus any withdrawals)

3. No Beneficiary Named:
* The Death Benefit is paid to the owner’s estate

25
What are the 2 Categories of **Annuitization Payout Options**? ## Footnote Annuities
1. Life Annuities 2. Temporary Annuities
26
What are the 2 Types of **Temporary Annuity Payout Options**? ## Footnote Annuities: Annuitization Payout Options
*(No "Payment for Life" Option)* 1. Fixed Period 2. Fixed Amount
27
What are the 6 Types of **Life Annuity Payout Options**? ## Footnote Annuities: Annuitization Payout Options
*(similiar to Life Insurance "Settlement Options")* 1. Life (only) 2. Life (with Refund) 3. Life (Period Certain) 4. Joint Life 5. Joint Life and Survivor 6. Joint Life and Survivorship
28
Key Points: **Life (only)** | 3 Parts / 3 Other Names ## Footnote Annuities: Annuitization Payout Options
1. Income for Life *(regardless of how long)* 2. Death stops payments *(even if after 1 payment)* 3. Largest monthly check *(out of all "Life" options)* Other Names: * Straight Life * Pure Life * Life (No Refund)
29
Key Points: **Life (with Refund)** | 3 Parts ## Footnote Annuities: Annuitization Payout Options
1. Income for Life *(regardless of how long)* 2. If Annuitant dies before "Contract Value" is reached *(Remaining balance is paid to Beneficiary)* 3. Refund Options *Lump Sum ("Cash Refund") or Monthly Installments*
30
Key Points: **Life (Period Certain)** | 2 Parts ## Footnote Annuities: Annuitization Payout Options
1. Income for Life *(regardless of how long)* 2. Guaranteed Payment Period *(Annuity pays the Beneficiary if Annuitant dies within that period)*
31
Key Points: **Joint-Life** | 2 Parts ## Footnote Annuities: Annuitization Payout Options
1. The Insurer promises to pay until the first annuitant dies 2. Largest monthly check *(out of all "Joint" options)*
32
Key Points: **Joint-Life-and-Survivor** | 2 Parts / 2 Sub-Parts ## Footnote Annuities: Annuitization Payout Options
The Insurer promises to pay until the last annuitant dies Payments to Survivor *(May Change)* : * Same Amount * Reduced Amount
33
Key Points: **Joint-Life-and-Survivorship** | 2 Parts ## Footnote Annuities: Annuitization Payout Options
1. The Insurer promises to pay until the last annuitant dies 2. Payments to Survivor *(Won't Change)*
34
Factors used to determine a **Life Annuity Payment Amount** | 4 Parts ## Footnote Annuities: Annuitization Payout Options
1. Annuitants Age 2. Annuitants Gender 3. Length of Payment Guarantee 4. Assumed Interest Rate *(Lower Assumed Rate = Lower Payment)* *(Higher Assumed Rate = Higher Payment)*
35
What are the 4 (Basic) Types of Annuities? ## Footnote Types of Annuities
1. Fixed 2. Variable 3. Equity-Indexed 4. Market Value Adjusted
36
Key Points: **Fixed Annuities** | 5 Parts ## Footnote Types of Annuities
1. Supported by the Insurer's "General Account" *(Invested Conservatively - Debt Securities/Fixed-Rate Investments)* 2. Insurer bears the Investment Risk 3. Guaranteed Minimum Interest Rate *(Accumulation Period)* 4. Fixed Income Payments *(Annuitization Period)* 5. **Values Guaranteed Against Loss** *(The value will never be less than the amount paid into the contract)*
37
Key Points: **Variable Annuities** | 4 Parts ## Footnote Annuities: Variable Annuities
1. Supported by Investments in a "Separate Account" *(Stocks and Bonds - Tends to keep pace with inflation)* 2. Insured makes the investment choices *(using "sub-accounts")* 3. Insured bears the Investment Risk 3. Values are not guaranteed against loss
38
Definition: **Accumulation Units** ## Footnote Annuities: Variable Annuities
The "Accumulated Value" of a Variable Annuity *(Similar to shares of a Mutual Fund)*
39
Definition: **Annuity Units** ## Footnote Annuities: Variable Annuities
Once Annuitization begins, the Accumulation Units are converted to Annuity Units
40
Formula: **Accumulation Units** ## Footnote Annuities: Variable Annuities
# of Exisiting Units (Total) Value of Separate Account ÷ Number of Existing Accum. Units
41
Key Points: **Annuity Units** | 3 Parts ## Footnote Annuities: Variable Annuities
Once converted: 1. The **number** of Annuity Units will not change *(through the entire Annuity Period)* 2. The **value** of an Annuity Unit may change *(based on the value in the Separate Account)* Separate Account Values: * Increase - Annuity Payment Increases * Decreased - Annuity Payment Decreases
42
Regulation of Variable Annuities | 2 Parts / 4 (Registration/License Requirements) ## Footnote Annuities: Variable Annuities
# of Exisiting Units **Dual Regulation** - Regulated as Insurance Products and as Securities Agents/Producers Required Certificates/Licenses: * Life Insurance * Variable Annuities (Special) Certification *(only required in some states)* * Federal Securities Registration (FINRA) * State Securities Registration (SEC)
43
Definition: **Equity-Indexed Annuities** | 5 Parts ## Footnote Types of Annuities
1. A Tax-Deferred Annuity whose credited interest is linked to an Equity Index (typically the S&P 500) 2. Guaranteed Minimum Interest Rate (if held to end of Surrender Term) *(typically between 1% - 3%)* 3. Protects against a loss of Principal 4. Higher Returns than Fixed Annuities 5. Lower Returns than Variable Annuities
44
Definition: **Market Value Adjusted Annuities** | 3 Parts ## Footnote Types of Annuities
1. Single Premium Deferred Annuities (SPDA) 2. Interest Rate is fixed for a specific number of years *(If held to Maturity) 3. Early Surrender Penalties *(Withdrawal Penalty)* *(Interest Penalty)*
45
What are the 4 most common uses of an Annuity? ## Footnote Annuities
1. Lifetime Income *(at/during Retirement)* 2. Tax-Favored Savings *(before Retirement)* 3. Funding IRA's 4. Funding Education
46
Definition: **Group Annuities** | 2 Parts ## Footnote Annuities
1. Funded by Employer Contributions 2. Distributions Determined by Employer

Life & Health Insurance (MA) (14 decks)

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