Ch. 9 - Annuities Flashcards
403(b) Plan
A retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers.
1035 Contract Exchange
1035 Contract Exchange applies to annuities. If an annuity is exchanged for another annuity, a “gain” (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment, or annuity to a new policy, without having to pay taxes.
Accumulation Period
The Accumulation Period is when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased, but the payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units.
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
One to whom an annuity is payable or a person upon the continuance of whose life further payment depends.
Annuity Units
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
The Cash refund option provides that, upon the death of an annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries.
Deferred Annuity
Deferred annuities 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.
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.
Exclusion Ratio
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
Fixed annuities 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
Immediate annuities 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 and Survivor Option
A Joint and full 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 Wit Period Certain Annuity (life income with term-certain option)
A Life with Period Certain or life income with term-certain option is 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 Market Value Adjustment can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to market conditions. Instead of having the annuity’s interest rate linked to an index as with the equity-indexed annuity, an MVA annuity’s interest rate is guaranteed fixed if the contract is held for the period specified in the policy. The market-value adjustment feature applies only if the contract is surrendered before the contract period expires. Otherwise, the annuity functions the same way a fixed annuity does.
