Ch. 7 Flashcards
403(b) plan (TSA)
a retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers
Income derived from the TSA are treated as ordinary income and are income taxed
1035 contract exchange
A 1035 contract exchange refers to a tax-free exchange of one life insurance policy, endowment policy, or annuity contract for another, as permitted under Section 1035 of the U.S. Internal Revenue Code
Accumulation period
The segment of time where contributions are made to the annuity. This can be done in one lump sum or with payments (premiums) over time
Annuitization phase
The period of time when the annuitant starts to receive income payments from the annuity
Accumulation units
Accumulation Units make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is a credit to the individual’s account and varies depending on the value of the underlying stock investment
Annuitant
The individual who receives the payments from an annuity. The annuitant is usually the same person who purchased the annuity, but it can also be a different individual designated by the purchaser
Annuity units
Annuity Units are the converted accumulation units once variable annuity benefits are to be paid out to the annuitant. At the time of the initial payout, the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant
Cash refund option
if the annuitant (the person who owns the annuity) dies before receiving a certain amount of payments, the remaining funds will be returned to the beneficiary or their estate
Equity indexed annuity
Equity indexed annuities are a fixed deferred annuity that offers the traditional guaranteed minimum interest rate and an excess interest feature that is based on the performance of an external equities market index. Lower floor than fixed annuity but can have a higher ceiling
Deferred Annuity
provide for postponement of the payment of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased on either a single-premium or flexible premium basis. Deferred annuities typically do not begin making income payments for at least one year after the date of purchase
exclusion ratio
The Exclusion ratio is a fraction used to determine the amount of annual annuity income exempt from federal income tax. The exclusion ratio is the total contribution or Investment in the annuity divided by the expected ratio
Fixed Annuity
provide a guaranteed rate of return. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. With fixed annuities, the investment risk is on the insurer
Immediate annuity
provide for payment of an annuity benefit at one payment interval from the date of purchase. Immediate annuities can only be purchased with a single payment. Immediate annuities typically begin paying income within one month of purchase
Joint life & survivor option
provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit
Life with period certain annuity (life income with term-certain option)
designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. The life with period certain option provides income to the annuitant for life but guarantees a minimum period of payments. Thus, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period
Market value adjustment
a type of fixed annuity that includes a feature designed to adjust the contract’s value based on changes in interest rates
Period certain annuity
annuity income option that guarantees a definite minimum period of payments. IE: 10 years
Periodic payment annuity (flexible premium)
an annuity owner making multiple premium payments to accumulate principal. Typically, after the initial premium, these payments are flexible with frequency and amount
Principal
the original sum of money paid into an annuity through premium(s)
Single premium annuity
an annuity for which the entire premium is paid in one sum at the beginning of the contract period. This can be a deferred or immediate single premium annuity
Straight life annuity
provides guaranteed payments to the annuitant for the rest of their life. Payments continue as long as the annuitant is alive, but upon their death, the payments stop, and no further benefits are paid to any beneficiaries
Variable annuity
shift the investment risk from the insurer to the contract owner. Variable annuities are similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of the account invested, primarily in common stocks
Annuity period
Begins once the contract owner starts receiving income
Qualified Annuity
funded with pre-tax dollars. The entire distribution from a qualified annuity is taxable as ordinary income when withdrawn because no taxes have been paid on the contributions or earnings
Nonqualified annuity
Funded with after-tax dollars. The principal is not taxed but the part that gains interest is taxed
Level premium annuity
characterized by level or constant annual payments to fund the annuity. For example, a 35-year-old purchases a level premium annuity with an annual premium of $1,200. The contract owner will pay that level amount each year until retirement at age 65. At that time, he will begin to receive monthly income payments. This type of annuity is also referred to as an annual premium annuity
Flexible premium annuity
characterized by periodic premiums that may be in variable amounts each year. In this case, the contract owner will contribute an amount with which he’s comfortable each year. These premiums are paid until the contract owner wants to begin receiving income after retirement. As long as a minimum payment is made, the contract owner is permitted to determine the amount he can afford to contribute each year. The future income benefit will be based on the total amount of funds saved once the plan is annuitized (i.e., when income payments begin)
Installment refund option
will pay the beneficiary the same monthly income benefit that the annuitant was receiving until the remaining principal is depleted
Individual or single life annuity
An individual or single life annuity is the most common form of an annuity. It is a pure life annuity, covering one life, with no survivorship (beneficiary). It provides income to the recipient, once it commences, for life with no refund paid to the annuitant’s family upon his or her death
Joint life annuity
type of multiple life contract that’s designed to pay benefits to two or more annuitants at the same time. However, all benefits will end once the first annuitant dies
Long term care rider on annuity
allow the annuity holder to access funds early or receive increased payouts if they need long-term care, such as nursing home care or assisted living. This rider provides financial support and helps protect other savings from being depleted by high care costs
Guaranteed minimum withdraw benefit (GMWB) rider
ensures the annuity holder can withdraw a specified amount of money annually, regardless of the annuity’s market performance. This rider provides a guaranteed income stream, offering protection against market downturns and helping to secure financial stability during retirement
Guaranteed minimum income benefit (GMIB) rider
guarantees the annuity holder a minimum level of income, regardless of how the underlying investments perform. After a specified waiting period, the GMIB allows the holder to convert their annuity into a guaranteed stream of income, even if the account value has decreased due to poor market performance
Guaranteed minimum accumulation benefit (GMAB) rider
guarantees the annuity holder a minimum account value after a specific period, typically 10 years, regardless of the market performance of the underlying investments. If the actual account value is lower than the guaranteed minimum at the end of the period, the insurer will make up the difference
Market value adjusted annuity (MVA)
shifts some (but not all) of the investment risk from the insurer to the contract owner since the annuity account value will fluctuate with the changes in market interest rates
Tax-sheltered annuity
