Annuity Flashcards
Deferred annuities
Deferred annuities are purchased with either a single lump sum payment or as a series of premium payments made over time. Deposits are made now but the payout is deferred until later than one year after purchase. There will typically be many years between the time the annuity contract is established and the time the payout period begins therefore deferred annuities may have a long accumulation phase.
Immediate annuities
Immediate annuities provide annuitants with a guaranteed income. The distribution phase of payments to the annuitant begins immediately, after a single cash payment has been received. Distributions usually begin within thirty days after the contract is funded, but if payouts begin within one year of the date the contract is established, it is considered an immediate annuity.
accumulation phase
The accumulation phase starts once the deferred annuity is purchased and typically lasts until annuitization- when the owner begins receiving regular annuity payments, according to the annuity payout option. The accumulation phase can be as brief as thirty days but it ends when the owner dies, the contract is surrendered or the distribution phase begins. Deferred annuity contracts commonly require annuitization by a specific date or age by specifying a maximum annuity starting date or a maturity date in the contract.
distribution phase
Annuities that are in a distribution phase are in payout status. A distribution phase occurs when deferred annuities have been annuitized and it applies to all immediate annuities. Payouts to an annuitant during the distribution phase are a systematic liquidation of the principle and interest paid back to the owner in a series of payments made over time.
Annuity taxation
The drawback to annuities is that investors are taxed on their distributions at their tax bracket. Had the investor invested in the stock market and held the stocks for over a year, when they sell the shares, they would be taxed at the lower long-term gain tax instead.
Use of Annuities
The primary purpose of annuities is to convert assets into a stream of income that cannot be outlived. They provide tax-sheltered accumulation of assets which reduce income taxes during the accumulation period.
Fixed Annuities
A fixed annuity is an annuity in which the principal is guaranteed. The interest rate on fixed annuities is also guaranteed which is often locked in by the policyholder for a specific period of time. A fixed annuity will provide a set monthly payment, determined at the beginning of the annuity payout period.
Variable Annuities
A variable annuity will also pay out over a lifetime but the dollar value of the monthly payment will fluctuate based on market performance of a specified investment fund. The principal in a variable annuity is invested in a portfolio of securities.
Why choose Variable Annuity over Mutual Funds
Investors choose variable annuities over mutual funds when:
They want guaranteed life-long income that cannot be outlived .
They want to purchase risk management features such as guaranteed death benefit amounts or living benefits.
They want interest to accumulate tax-deferred during the accumulation phase, which could lower their Adjusted Gross Income (AGI).
Guaranteed Investments Contracts
Guaranteed Investment Contracts (GICs) are large denomination debt instruments offered by insurance companies. It is a contract between an insurance company and a corporate profit-sharing or pension plan that guarantees a specified rate of return on the invested capital over the life of the contract.
Single Life time annuity pay out option
The single life annuity provides a set monthly payment for the person’s entire life. The payment ends upon the death of the annuitant. If you die after one year, the payments cease. Alternatively, if you live to be 100, so do your payments.
Annuity for life with period certain
Under an annuity for life with period certain a person will receive payments for life, but if he or she dies before the end of a certain period, which is generally either 10 or 20 years, payments will continue to beneficiaries until the end of that period. Because a minimum number of payments must be made (payments must continue until the end of the period certain), an annuity for a life with a period certain pays a smaller amount than a single life annuity. In addition, the longer the period certain is, the smaller the monthly amount.
Joint and survivor annuity
The joint and survivor annuity provides payments over the life of both the annuitant and his/her spouse or a designated survivor. An advantage of joint and survivor annuities is that you and your spouse will continue to receive benefits regardless of how long you live. A disadvantage is that there is no inflation protection. Although you know for certain how much you’ll receive each month, the spending power is continuously eroded by inflation.
Level-premium deferred annuity
A level-premium deferred annuity is a series of fixed payments that will be made for a period of time before annuity payments actually begin.
Flexible-premium deferred annuity
A flexible-premium deferred annuity is purchased by unequal payments over a fixed period of time, before annuity payments begin. This method of payment allows for smaller payments to be made by the annuitant, which are within minimum contribution limits set by the insurer. The annuitant often pays an expense charge for the administrative costs associated with this contract, which is a front-end load charge.
