Chapter 3 - Annuity Contracts Flashcards

1
Q

Annuity Contracts

A

Life insurance is defined as the creation of an estate

The annuity is defined as just the opposite, the liquidation for an estate

The original purpose of the annuity is to:
- create an income stream that one cannot outlive
- Protect the annuitant from living too long

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Two sides of the annuity

A

Accumulation side:
- like a savings account with an insurance company
- owner controls the money
- tax deferred growth
- guaranteed minimum rates
- penalties may apply

Annuity side:
- owner chooses when and how to annuitize
- the insurer guarantees an income stream, either a life annuity or temporary annuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Parties to the Annuity

A

Owner - controls the policy, has all the rights, makes all the choices:
- who is the annuitant
- who is the beneficiary
- when and if to annuitize
- the income options

Annuitant - who the policy is based on
- annuitant and owner could be the same person
- when the annuitant dies, the policy ends

Beneficiary - recipient of a death benefit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Premium payment methods

A

Single premium - the annuity is purchased with one single payment, The annuity (income) may begin:
- immediately or
- annuitization may be deferred until a later time

Flexible premium - periodic payments will be made over time of unequal amounts at sporadic times. Annuitization will be deferred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Cash Value Growth

A

Current interest rates are paid

A minimum return will be guaranteed

Nonqualified (standard) annuities:
- principal is not tax deductible
- growth only is tax deferred

Qualified (retirement) annuities:
- principal is tax deferred
- growth is tax deferred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Tax Consequences during Accumulation Period

A

Withdrawals are on a LIFO (last in first out) basis

Tax deferred money will be taxed as it is withdrawn

Funds withdrawn prior to 59.5 will experience a 10% penalty. Exceptions:
- death
- disability

Surrender charges - addition disappearing penalty by the insurer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Section 1035 Exchanges

A

Allows cash value to be moved from one company to another without tax consequences

Allowable transactions include:
- annuity to annuity
- life policy to life policy
- life policy to annuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Life Annuity

A

Income streams that cannot be outlived

Straight life annuity - pays for life with no minimum guarantees

Life with period certain - pays for life with a guarantee based upon a minimum period of time

Refund life annuity - provides an income for life with a guarantee based upon the amount annuitized
- cash refund annuity
- installment refund annuity

Joint and survivor life annuity - guarantees payments throughout multiple lives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Temporary Annuity/Annuity Certain

A

Fixed period annuity - pays a regular income of interest and principal for a set amount of years

Fixed amount annuity - pays a regular income (fixed amount) of interest and principal until money runs out

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Annuity premium determining factors

A

Include:
- income amount chosen
- minimum guarantee
- age
- sex
- fixed interest rate
- company expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Exclusion Ratio

A

Method used to establish the taxable amount of each payment during the income stream
- a portion of each payment will be taxed as growth
- a portion of each payment will be generated from previously taxed principal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Types of annuities

A

Fixed annuities

Variable annuities

Equity indexed annuities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly