Annuities Flashcards
1
Q
What is the importance of understanding the annuity contract?
A
- When the owner of an annuity enters into an agreement they must always understand all of the terms to the best of their ability.
- If there are additions, withdrawals, or a complete annuitization to be made, there may be restrictions or penalties.
2
Q
Describe the authority of an annuitant in an annuity contract.
A
- Even though every annuity contract must designate an annuitant, the annuitant has no voice or control over the investment or its disposition, unless the annuitant is also the contract owner.
- If the contract is a variable annuity, and if the annuitant dies, this may create certain insurance company guarantees.
3
Q
Describe the mandatory annuitization period.
A
- Some annuity contracts require a distribution or “orderly annuitization” of the funds once the annuitant reaches a certain specified age, typically 80 or 85.
- The death of an annuitant may require annuitization within a specified period, usually five years.
4
Q
Describe who must be designated when entering into an annuity contract.
A
- When the original investment is made, the owner(s), annuitant, and beneficiary(s) must be designated.
- Only the annuitant has to be a natural person. The person can hold more than one title.
5
Q
Describe
“Immediate Annuity”
A
- With an immediate annuity, payments commence after a predetermined period.
- Payments can be made monthly, quarterly, semiannually, or annually.
6
Q
Describe a
“Deferred Annuity”
A
- With annuitization, the payment period is scheduled to begin at some future date.
- The period when the contract annuitizes is called the “maturity date.”
- Conversely, the period prior to the maturity date is called the “accumulation period.”
- The period following the maturity date, during which payments are made, is the “annuitization” or “distribution period.”
7
Q
What happens if the annuitant dies before annuitizing the contract?
A
- If death occurs before the annuitization period stated in the contract, the cash value paid to the annuitant’s beneficiary would equal the amount of premiums paid in.
- However, most contacts provide for payment to the beneficiary of at least the amounts paid in plus interest, regardless of sales charges.
8
Q
Describe
“Annuity Certain”
A
- An “annuity certain” specifies the amount and number of benefit payments.
- This option will guarantee a minimum amount that the insurance company will pay on an annuity.
- The annuity has a death benefit that provides for payment to be made to the designated beneficiary upon the annuitant’s death and will continue as long as the beneficiary lives.
- However, if the annuitant should survive the period certain, then the annuity performs as a life annuity.
9
Q
Describe
“Life Annuity Certain”
A
- A “life annuity certain” is an annuity that guarantees a given number of income payments whether or not the annuitant is alive to receive them.
- If the annuitant is living after the guaranteed number of payments has been made, the income continues for life.
- If the annuitant dies within the guarantee period, the balance is paid to a beneficiary.
10
Q
Describe
“Life Annuity”
A
- Life annuities are the most common type of annuity.
- The simple “straight life annuity” provides for guaranteed periodic payments that terminate upon the death of the annuitant.
- In the event the annuitant dies during the accumulation period (i.e. the time that payments are being made on the annuity, but prior to annuitization) proceeds will revert to the beneficiary, or if none is named, to the estate.
- Because this limits potential payouts, it provides a higher return than other plans.
11
Q
Describe the two types of
“Life Annuity with Refund Annuity”
A
- Cash Refund: The company agrees that if the annuitant dies, it will refund the difference between the income the annuitant received and the amount paid in premiums, plus interest earned.
- Installment Refund: The company agrees to continue to make payments to the beneficiary until the total of the payments made to the annuitant and beneficiary equals the amount the owner paid for the annuity, plus the interest earned. The longer the payouts continue after the annuitant’s death, the smaller the payments to the beneficiary.
12
Q
Describe
“Withdrawal Options of 10%”
A
- Generally, an annuity will allow withdrawals of up to 10% per year without any penalty or other cost.
- The “free” withdrawal is usually based on a percentage of the principal (not the current value). If, for example, an annuity owner invests $25,000 into an annuity, and then later adds another $25,000, the owner may withdraw up to $5,000 every year, without penalty.
- Even with investment growth, this would be the maximum they could withdraw without penalty.
- However, some annuities do allow a free withdrawal, which is based upon the greater of (a) the current value, or (b) the principal contribution(s).
13
Q
Describe
“Joint and Survivor Annuities”
A
- Under this arrangement, two people are annuitants, usually a couple. The two types are
- Joint and two-thirds survivor: the surviving spouse receives two-thirds of the income paid to the original annuitant.
- Joint and one-half survivor: surviving spouse receives half of the income.
14
Q
Describe
“Life Annuity with Refund Annuity”
A
- The life income with refund type of annuity states that in the event of the annuitant’s death, the company will pay an amount at least equal to the total dollars paid into the annuity.
- The company will continue to pay the guaranteed amount of monthly income for as long as the annuitant lives.
15
Q
What is the disadvantage of annuitizing an annuity?
A
- Once annuitization begins, it cannot be changed.
- With a variable annuity, the investment “ups and downs” are risks of the person receiving the checks, which is usually the contract owner/annuitant and is not that of the insurer.
