Ch. 2 - Basic Annuity Designs Flashcards
Renewal rate
The rate that the insurer uses at the end of an initial crediting period for a fixed annuity signifying the new crediting period.
Spread
The difference between what the insurer earns on its invested assets and the interest rate it credits to its fixed annuity products.
Declared interest rate
The interest rates that an insurer advertises upfront for fixed annuities.
The two methods insurers use to determine in credit declared interest rates:
- ) Portfolio based interest crediting
2. ) New money based interest crediting
Portfolio based interest crediting
And interest crediting method insurers to use whereby they place all the funds into one big pot and issue the same interest to all contract holders regardless of economic conditions.
Factors that influence declared interest rates
- ) Insurer’s mortality and expense results
- ) The insurer’s reserve requirements
- ) Competitive market influences
- ) Prevailing interest rates investment returns
Two tiered fixed annuity
An annuity that provides a higher tier of interest if the contract is maintained and annuitized or a lower interest rate if the contract is not annuitized.
Participation rate
The amount or level of the index increase that’ll be credited to the contract.
Margin (spread)
The stated percentage deducted from the percentage change in the index levels before that percentage is applied as an interest rates to the annuity funds.
Cap
The maximum amount of interest that will be credited during any one interest crediting period.
Floor
The minimum amount of indexed linked interest that is to be credited to a contract during any crediting period.
Point-to-Point
This method credits an interest rate based on the increase in the index value from one defined point of time to another.
Interest crediting methods
These defines the period or term over which the index returns will be measured and how these returns will be calculated and applied to the contract.
Long term point-to-point method
Point-to-point crediting method that has a term longer than one year.
High water mark
Crediting method that looks at the index value at various points during the interest crediting period. It compares it to that of the starting period. The difference between the two is the basis for the interest to be credited.
Annual ratchet (annual reset or annual point-to-point)
Crediting method the credits interest based on the performance of an index over a single year. The interest to be credited is based on the change in the value of the index from one point to another.
Monthly average
This crediting method uses an amount of interest based on the average of the index’s monthly returns over a single year or other term.
Variable annuity
And annuity that has no minimum guarantee and allows the owner of the annuity to invest the funds directly into portfolios consisting of stocks, bonds and/or money market accounts.
Accumulation units
Units that represent a proportional share of the net assets purchased with premium dollars in a variable annuity’s sub account. The value of these units can fluctuate based on the performance of underlying investments.
Automatic asset allocation programs
Feature offered by variable annuities that allow insurers to allocate their premiums into subaccounts that match specific investment profiles, such as conservative, moderate, moderately aggressive, and aggressive.
Interest sweeps
Feature of variable annuity that allows the owner to transfer or sweep interest earned on fixed or money market subaccounts into other subaccounts.
