Chapter 7: Key Terms Flashcards
Accumulation Phase
The period over which annuity funds are accumulated
Annual Reset Method
The index-linked interest crediting rate is determined each year by comparing the index value at the end of the contract year with the index value at the beginning of the contract year. Interest is then added to the annuity each year during the term
Annuitant
The individual upon whose life the contract is dependent. It is generally the life expectancy of the annuitant that affects the timing and amount of payout under the contract
Annuitization
The time when annuity funds are exchanged for a stream of income guaranteed for a period of time
Annuitized
The time when regular, periodic (such as monthly or annual) payments begin for life or for a period of time
Annuity
A contract between an individual (annuitant) and an insurance company which promises to pay an income on a regular basis for a specified period of time
Beneficiary
Those persons entitled to the death benefit of the annuity
Cap Rate
Some indexed annuities impose an upper limit on the index-linked interest rate
Cash Refund Annuity
Guarantees that the annuitant or the annuitant’s family will receive the premium payments made to purchase the annuity, instead of continuing to make periodic payments until there is a full recovery of the premium, the balance is paid in cash at the annuitant’s death
Deferred Annuity
An annuity contract that does not begin payments immediately, but waits until some future time to start payments
Equity-Indexed Annuities
Have characteristics of both fixed and variable annuities, either immediate or deferred, that earn interest or provide benefits that are linked to an external equity reference or an equity index
50% Joint and Survivor Annuity
Pays the survivor 50% of the annuity payment after death of the first annuitant. The initial annuity payment will be larger than with a 100% or 75% joint and survivor annuity
Fixed Annuity
The most conservative type of annuity that earns a minimum guaranteed rate of return
Flexible Premium Annuity
Allows the insured the option to vary premium deposits
Floor Crediting Rate
An indexed annuity is the minimum index-linked interest rate the will be credited to the contract in a given period
Guarantee Funds
Run by the state insurance commission, they act as the payor of last resort in the case of an insurance company failure
High Watermark Approach
Determining index-linked interest is accomplished by comparing the value of the index at various points during the term (usually on anniversary dates)
Immediate Annuity
An instrument created when the contract owner trades a sum of money in return for a stream of income that begins immediately
Index Term
The period over which index-linked interest is calculated for equity-indexed annuities
Indexing Method
The approach used to measure the amount of change, if any, in the index. Some common indexing methods include:
(1) Annual Rest
(2) High Watermark Approach
(3) Point-to-point Approach
Inflation
The increase in the general price level and is often measured by the Consumer Price Index (CPI)
Initial Rate
The first rate of interest that is earned under fixed annuities contracts and is guaranteed for a specified period of time
Installment Refund Annuity
A special type of term certain annuity whereby the insurer promises to continue periodic annuity payments after the annuitant has died until the sum of all annuity payments made equals the purchase price of the annuity
IRD Assets
Assets that have a deferred income tax liability that was not paid prior to the date of the owner’s death
Joint and Survivor Annuity
Promises to make payments over the lives of two or more annuitants. Annuity payments are made until the last annuitant dies. This commonly used to fund the retirement cash-flow needs of married couples. A 100% Joint and Survivor annuity pays the specified monthly payment to the annuitants while both are alive and continues to make the same payments to the survivor. A 75% Joint and Survivor annuity pays only 75% of the specified amount to the survivor. A 50% Joint and Survivor annuity pays only 50% of the specified amount to the survivor. The 50% will have a larger payment while both annuitants are alive, whereas 100% will have the smallest while both are alive.
Life Annuity Contracts
Protect clients from outliving their assets by providing a series of periodic payments to the annuitant, typically for as long as the annuitant lives
Longevity Insurance
A sophisticated name for a deferred annuity purchased by an individual at or before retirement that will not begin to make payments until that person reaches an advanced age.
Minimum Interest Rate
The minimum rate to be paid on a fixed annuity’s principal balance for the duration of the annuity contract
Non-Qualified Annuities
Annuity contracts purchased with funds outside of qualified retirement plans or IRAs (from investment accounts or private accounts)
100% Joint and Survivor Annuity
Pays the survivor 100% of the annuity payment after the death of the first annuitant
Owner
Person, trust, or company that owns the annuity contract and names the annuitant and beneficiaries. The owner could also be the annuitant and/or the beneficiary
Participation Rate
Determines how much of the increase in the index will be used to calculate the index-linked interest
Parties to Annuity Contract
The annuitant, the beneficiary, the owner, and the insurance company
Point-to-Point Index-Linked Crediting Method
Based on the difference between an index value at the end of the term compared with the index at the start of the term
Pooling of Risk
The spreading of risk among a large number of similar contributors to the pool. Protection is provided to the entire pool of contributors. With annuities, the risk that is being spread is the risk of outliving retirement funds, or superannuation
Qualified Annuities
Annuity contracts purchased with funds in a qualified retirement plan or IRA
Renewal Rate
The interest rate offered on a fixed annuity after the expiration of the initial rate
Retirement Life Expectancy
The period between retirement and death
Risk-Based Capital
The investment risk assessment undertaken by the insurance company in investing the money backing up the annuity pool
Secondary Market Annuities
Called pre-owned annuities or in-force annuities. These annuities can be purchased from the original owner at a discount from a third party, in which the stream of income is assigned to the purchaser. These typically offer a rate of return or yield that is well above the yield available on standard fixed annuities, immediate annuities, or even bonds of a similar credit quality
75% Joint and Survivor Annuity
Pays the survivor 75% of the annuity payment after the death of the first annuitant. The initial annuity payment will be larger than with a 100% join and survivor annuity
Single Life Annuity
Also known as a straight life annuity, provides a stream of income to the annuitant for life
Single Premium Annuity
An annuity purchased with a single lump sum
Straight or Pure Life Annuity
An annuity that provides a stream of income to the annuitant for life
Superannuation
The risk of running out of money before death due to long life and can be mitigated by using annuities
Term Certain Annuity
Acts as a hedge against the mortality risk retained when an individual purchases a single life annuity by preserving some or all of the capital for distribution to the annuitant’s heirs, but this hedge comes at a cost. The annuity will pay for a specified term (such as 20-years), if the annuitant dies prior the heirs will receive payment until the 20 year mark, should the annuitant live past 20 years, payments will be received by the annuitant until death, upon death the heirs will not receive payment.
Variable Annuities
Provide consumers with an opportunity to individually tailor the types of investments backing up the annuity contract to their unique needs.
