Annuities

Question 1

How are annuities characterized by?

Answer 1

1. Payout (variable or fixed)
2. Premium flexibility and frequency
3. Tax considerations and funding vehicles

Question 2

Annuity Phases

Answer 2

1. Accumulation

2. Annuitization

Question 3

Annuity Advantagages

Answer 3

1. lifetime income
2. eliminated superannuation risk
3. May provide protection from creditors ‘
4. Earning are tax-deferred
5. Investment options for fixed or variable earnings

Question 4

Annuity Disadvantages

Answer 4

1. Complexity-difficult for investors to understand
2. Costs/fees
3. Once funds are exchanged for annuities, they are no longer available
4. Taxable benefits consists entirely of ordinary income

Question 5

Annuitant

Answer 5

The individual upon whose life the annuitized income stream is dependent

Question 6

Immediate Annuity

Answer 6

When the contract owner trades a sum of money in return for a stream of income that begins immediately

Question 7

Deferred Annuity

Answer 7

Does not begin distributions immediately, but waits for some time in the future to start payments.

Question 8

Flexible Premium

Answer 8

insured can vary premium deposits over time

Question 9

Single Premium

Answer 9

annuity purchased with lump sum

Question 10

Single Life Annuity

Answer 10

pays as long as the annuitant is alive

Question 11

Installment Refund Annuity

Answer 11

pays as long as the annuitant is alive, but id dies before receiving full premium, payments will go to the beneficiary

Question 12

Cash Refund Annuity

Answer 12

similar to installment refund, however beneficiary will receive refund in lump sum

Question 13

Life with Term Certain Annuity

Answer 13

pays as long as annuitant is alive, but if dies before a certain amount of payments are received, the beneficiary will receive payments until term is met.

Question 14

Joint and Survivor Life Annuities

Answer 14

payments made over the lives of 2 annuitants, until second one dies.
Survivor will receive a percentage of the joint amount

Question 15

Fixed Annuity

Answer 15

most conservative
ensures principle protection and guarantees rate of return
fixed interest via initial rate
once initial interest rate guaranty period expires, a renewal rate will go into effect

Question 16

Variable Annutity

Answer 16

Allows for participation in equity markets
higher costs and fees
tax-deferred earnings
inflation protection
higher returns that fixed annuities, however more risk

Question 17

Equity-Indexed Annuity

Answer 17

guaranteed min rate

earnings based on a type of index

Question 18

Types of Indexing Methods

Answer 18

annual reset (ratcheting) method
high watermark method
point-to-point method

Question 19

Annual Reset (Ratcheting) Method

Answer 19

compared index value at end of year vs beginning of the contract year
interest earned is locked in and index value is reset at end of year
future decreases will not affect interest already earned

Question 20

High Watermark Approach

Answer 20

compares the value at different times during the terms

interest credited is based on the highest index value and the index value at the start of the term

Question 21

Point to Point Index

Answer 21

• difference between an index value at the end of a term compared with the value at the start of the term.
• permits a higher participation rate
• since the term is typically 6-7 years, the annuitant may not receive index-linked interest until the end of the term

Question 22

GMAB

Answer 22

Guaranteed Minimum Accumulation Benefit:
guarantees that for a specified period of time, an investors contract value will be at least equal to a certain minimum percentage of the amount invested regardless of investment performance

Question 23

GMIB

Answer 23

Guaranteed Minimum Income Benefit:

• Designed to provide the investor with a minimum amount of lifetime income during retirement, regardless of investment performance.
• guarantees an income stream based on a minimum benefit base.
• Generally, investors must wait for a period of time (often ten years) before annuitizing.
• The rider guarantees the income even if the benefit base goes to zero.

Question 24

GMWB

Answer 24

Guaranteed Minimum Withdrawal Benefit

• Guarantees that a certain percentage of the amount invested can be withdrawn annually until the entire amount is completely recovered, regardless of the investment performance of the underlying asset base.
• If the underlying investments perform poorly or if the account value drops to zero, the investor can still continue to take withdrawals until the full amount of the original investment is recovered.
• There is often a step-up feature that permits the investor to lock in a higher benefit base if the underlying investments perform well.