Chapter 22 - Annuities Flashcards
Annuities (sold by life insurance licenses people, may need a securities license if selling variable plans (stock market).
Annuities: contracts sold by insurance companies wherein the company holds funds and promises to make periodic payments for a set time or for the life of a person or persons. It’s the best way to guarantee a retirement income without living past your retirement savings. Grows tax deferred and can be funded gradually or with lump sum.
Annuitant: person who receives the pay -out from an annuity.
Annuitized: when the annuity begins to pay money out.
Pay in phase- or accumulation phase - owner sends the money to the insurance company and the money is vested.
Pay out phase - or called distribution phase - the insurer pays the annuitant with many different options to choose from.
Nonforfeiture value - amount of the cash value account that the insurers would have to pay if the annuity owners, stops making payments. Surrending prior to 59.5 will enforce taxes on the growth and a 10% penalty.
Pay in options:
-Single premium - lump sum. Inheritance, sold a company, received a death benefit.
-Level (Fixed) premium - a specific amount paid at regular intervals over a set period of time.
-Flexible Premium - permits the owner to fund the pay in with a flexible amount with no set payment intervals. The cash value will depend on how much the owner is funding. THe insurance isn’t on the hook for any guarantees.
Pay out Options:
-Immediate Annuity - begins to pay out immediately after the money is funded. This only works for a lump sum, single premium pay in.
-Deferred Annuity - payments are not made immediately but postponed until some future date.
How will the funds be paid? income tax comes into play and a 10% penalty on top of that if you are younger than 59.5.
- Lump sum
-Annuity Certain -
-Fixed Period annuity certain (such as over 7 years). If you die prior to the time, it goes to your estate.
-Fix Amount annuity certain (such as 5K per month until the money is gone). Same as above with death.
-Life Annuity - pays every month as long as you live.
-Straight life - if you die before the pay out is done, no more payments are made. Insurance company keeps the balance. But you can get more money each month if you don’t name a beneficiary. It’s a gamble
-Period Certain - There is a guaranteed number of years, and then if you outlive the payments continue. If the annuitant dies before the period expires, benefits will go the estate/beneficiary until the guaranteed period is over.
- Amount Certain - also called a refund life annuity - Any money left over if you die early, the beneficiary gets the left over money.
- Joint/Survivor Life Annuity Pay Out - payments continue until both annuitants die. Joint and Full Survivor means you get the full amount if the annuitant dies. There is a Joint and two thirds Survivor and a Joint and One Half Survivor.
Determining the Monthly Pay-Out
- Fixed Dollar Annuity - Insurer puts the premiums into an investment account the insurer chooses. Comes with a rate of return. There is a guaranteed rate of return, if its higher the insurer keeps the excess.
- Variable - allow the owner to choose the investment option. No guaranteed rate.
