Annuity Suitability and Uses Flashcards
Annuity Suitability [NAIC]
While they are ideal solutions for many people looking for assurance that they cannot outlive their income, annuities are not for everyone.
- steep surrender charges can make deferred annuities unsuitable for seniors who are simply interested in a place to hold their savings.
- an immediate annuity may not be suitable for someone with a limited life expectancy.
- regulations that require producers to determine the suitability of all annuity recommendations, especially those involving seniors.
These state regulations generally follow the:
2010 Suitability in Annuity Transactions Model Regulation adopted by the National Association of Insurance Commissioners (NAIC).
The model regulation also requires two types of annuity suitability training for producers who sell annuities:
- carrier-specific training in which insurers provide product training for any producer selling their annuity products
- industry-specific training that requires producers to complete a one-time annuity training program (minimum four hours) provided by an approved education provider
Annuities are most often used for …
Deferred annuities should be reserved for ________ because …
Annuities are used most often for retirement planning purposes:
- to accumulate retirement savings
- to pay out retirement funds on a periodic basis for a period that can be guaranteed to last as long as they do
All deferred annuities offer the guarantee of a death benefit, which is distributed if the owner or annuitant dies during the accumulation period and equals no less than the amount invested in the contract.
Deferred annuities should be reserved for people who have long-term investment goals and time frames because deferred annuities typically impose surrender charges on funds withdrawn during a contract’s early years.
Plus, withdrawals from annuities before the owner’s age 59½ may be subject to a tax penalty.
Because deferred annuity funds accumulate on a tax-deferred basis, it is possible that deferred annuities may realize greater net returns than comparable taxable investments (e.g., certificates of deposit).
The power of compounded interest earnings plus tax deferral can produce large funds over time.
Use Annuities to Fund Life Insurance
The best strategy is to use the ___________ portion of an annuity pay out to fund a life insurance policy where the payments are not _________.
Another way to assure to use a portion of the annuity income payment to purchase life insurance. At the annuitant’s death, the life insurance can be used to provide the beneficiary with a potentially substantial sum of money which itself can be converted into lifetime income.
One approach to this strategy is to use the taxable portion of the annuity to fund the life insurance purchase; which effectively uses money that will be taxed to pay for a life insurance death benefit that is usually not income taxable.
If you use an Annuities to fund a Qualified Retirement Plans then is the premium taxable or not?
An annuity is most suitable for retirement planning when they want to use it to ____________ which is something that other retirement instruments cannot do
Except …
People can use annuities as a vehicle for a qualified retirement plan. Such plans generally include IRAs, SEPs, or 403(b) plans.
He or she may then buy a deferred annuity to fund the plan. If a deferred annuity is used to fund a qualified retirement plan, then the premiums are tax deductible by the plan owner or sponsor.
An annuity is most suitable for retirement planning purposes when the contract owner wishes to use it to provide guaranteed lifetime income (something other retirement planning instruments except traditional pension plans cannot do).
In fact, defined benefit pension plans are required to distribute benefits in the form of lifetime annuitized payments. Pension plan administrators use the participant’s accrued pension benefits to buy a single premium immediate annuity (SPIA). This type of annuity pays out lifetime income to the participant on either a joint-life or single-life basis.
Members of a Group Annuity all hold a _________
When a group members retires what is created?
Annuities can also be used by employers on a group basis.
A group annuity has the same features as an individual annuity except that it is written on a group contract basis.
The individual members of the group the annuity covers hold certificates of participation.
When a group member retires, an individual annuity contract is issued using funds accrued on the participant’s behalf in the group plan.
The contract states the monthly payout amount to be made.
Annuities used to distribute Structured Settlements
Annuities are used to distribute funds from the settlement of lawsuits or from the winnings of state lotteries.
In many cases, the award of a settlement amount is not made all at once. Payments over time may be required.
Similarly, a state lottery board may also offer a person a choice in how they receive the winnings.
Liquidity Provisions and Riders
List 4.
Some provisions and riders spell out conditions in which distributions may be made from a deferred annuity without a surrender charge. Common examples include:
- charge-free withdrawals provision—Some deferred annuities permit contract owners to withdraw a specified percentage (e.g., 10 percent) of the accumulated value annually without a surrender charge.
- terminal illness rider—This rider waives surrender charges if the annuitant incurs a terminal illness. In most cases, death must be expected within one year of diagnosis.
- disability rider—This rider allows the contract owner to withdraw funds without a surrender charge if the owner becomes disabled and remains so for a specified period of time (usually ranging from 60 days to one year).
- long-Term care rider—With this rider, the contract owner can withdraw funds without a surrender charge if confined to a nursing home.
Special Variable Annuity Riders
What is a GMAB? What does “lock-in gains” mean?
What is a GMWB?
What is a GMIB?
What is a GLWB?
Variable annuities (VAs) have special riders that add a guaranteed element to their withdrawal options. Common examples include:
guaranteed minimum accumulation benefit (GMAB) rider—guarantees that the VA’s accumulated value will be at least equal to the sum of premiums paid after a specified period of time (typically five to ten years) minus previous withdrawals.
Some insurers include the ability to lock in gains in the accumulation value at that point in time, so that thereafter the guaranteed minimum accumulation value equals the sum of premiums paid plus the locked-in gains.
- guaranteed minimum withdrawal benefit (GMWB) rider—With this rider, the contract owner can withdraw an amount at least equal to the sum of premiums paid. Annual withdrawals are usually limited to a specified percentage (e.g., 5 to 10 percent) of total premiums paid.
- guaranteed minimum income benefit (GMIB) rider—This rider provides a guaranteed minimum life income regardless of the contract’s accumulated value. It adds a growth factor that assures a guaranteed minimum account value. At a specified future date, the deferred VA may be converted to an immediate annuity that provides income payments based on the greater of the guaranteed minimum account value or the actual accumulated value.
- guaranteed lifetime withdrawal benefit (GLWB) rider—With this rider, the contract owner receives a lifetime income without having to convert to an immediate annuity. This rider usually lets the owner access undistributed contract values in addition to the income payments already received, though doing so will diminish income withdrawals thereafter (since the remaining account balance from which they are drawn will be decreased).
Key Points
- Potentially steep surrender charges can make deferred annuities unsuitable for seniors who are simply interested in a place to hold their savings. Also, an immediate annuity may not be suitable for someone with a limited life expectancy.
- Choosing an annuity to fund a qualified plan should not be based on its tax-deferral feature since the qualified plan itself makes the growth of the funds tax-deferred, with or without the use of an annuity.
- An annuity is most suitable for retirement planning purposes when the contract owner wishes to use it to provide guaranteed lifetime income.
- A group annuity has the same features as an individual annuity except that it is written on a group contract basis.
