Chapter 8 3Qs insurance based products Flashcards

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1
Q

Annuity types and Fixed annuity

A

Contract between an individual and a life insurance company

Tax deferred investment vehicle

Fixed annuity- Guarantees a fixed rate of return

Payout based on current account amount and life expectancy based on mortality tables

Need a life insurance license but not securities

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2
Q

Variable annuities

A

Money put towards a separate account

Annuity unit worth fluctuates with security value

Payout varies, considered a security

Must be registered with FINRA and have an insurance license

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3
Q

Combination annuity

A

Fixed account of the insurance company and a separate account

Guaranteed fixed portion

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4
Q

Index Annuity

A

Credits interest to owners account based on performance of a stock or index (usually 80 to 90% of growth)

Comes with guaranteed performance if index does poorly in exchange for the loss in overall growth (only receive 3% rate if you lagged over entire period)

Usually a cap rate as well where investor loses out on participation

Longer surrender charge period

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5
Q

Crediting methods of index annuities

A

Annual reset- Index value at beginning vs end to find interest amount

High-water mark- Highest point during year vs beginning of year

Point to point- Beginning of contract to end of contract

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6
Q

Purchasing options for annuities

A

Deferred- Single premium deferred annuity

Periodic Payment deferred- Monthly, quarterly or annual payment

Immediate Annuity- Payout begins 60 days after a lump sum is made

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7
Q

Accumulation units

A

Pay in period of an annuity missing payments is not costly

Measure of ownership in separate accounts

No max sales charge on annuities

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8
Q

Annuity Payout options (order of largest to smallest)

A

Life annuity- Periodic payment till end of life

Life annuity with period certain- Payout continues if annuitant dies early

Joint life with Last survivor- Two or more people receive payment till death

Refund annuity- Payment continues till principal is repaid

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9
Q

Annuity units

A

Annuitization causes accumulation units to change to annuity units

Fixed at time of annuitizing

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10
Q

Assumed interest rate

A

Helps to determine the distributions to be received by the annuitant

Higher the better

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11
Q

Taxation of Annuities

A

IRS uses LIFO for random withdrawals and taxes as ordinary income (earnings before contributions)

Lump sum withdrawals- 10% penalty on early withdrawals before 59 1/2 (only on taxable portion)

If 100k value and 60k is gains, person taking out 20k would be taxes on full 20k

If annuitized, the payout is taxed based on percentage of the account being gain

Never a 10% penalty on anuitization

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12
Q

Advantages and disadvantages of annuities

A

May switch annuities tax free under IRS section 1035

No minimum distributions at 70.5

Dis
Taxed at ordinary income

10% early withdrawal at 59 1/2

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13
Q

Life Insurance Policies

A

Financial comp in case of an individual dying

  1. Term Insurance- Least expensive, ends at a specific time or age

Premium for death remains constant
Geared more toward younger individuals

  1. Whole Life- Continues until death, provided the premiums are paid, will only payout face

Carries a cash surrender value unlike term insurance

May take out a policy loan but must return loan for policy to pay out (subtracted from death benefit if person dies)

In effect until 100

  1. Universal Life- Allows for adjustable death benefits and/or premiums based on current need and higher interest rates

Death protection resembles one-year renewable term insurance and cash value grows at current interest rates

Premium payment can be skipped if cash value is available

There is a contract rate (minimum interest rate) and current annual rate. Client receives the higher of the two

2 options on the death benefit

  1. Level death benefit but lower premium
  2. Face amount plus cash value but higher premium

Most allow a partial cash withdrawal

Poor returns could cause premiums to increase

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14
Q

Variable Life Insurance

A

Premiums are put into a separate account instead of a company general account (like whole life)

Cash value of the account is not guaranteed

Provided with a minimum guaranteed death benefit though

Flexible Premium Variable Life- Nothing guaranteed, must maintain a minimum cash balance

Variable Life Has a max sales load of 9% on the premiums imputed over 20 years

Also pay a fee on the separate account for: Mortality risk (living a shorter period of time), Expense Risk fee and investment management fee

SAS: Sales load, admin fee and state premium taxes may be deducted on way in

Total benefit is made up of: guaranteed minimum and separate account return

Guaranteed minimum is held in company general account

Cash value would reflect only what is held in separate account

AIR only effects death benefit, not how separate account is performing

Death benefit is calculated annually, cash value is monthly, separate account value is daily

  • May exchange contract for a universal life contract for at least 24 months
  • No evidence of insurability required
  • everything is stated as if it were done on initial purchase date
  • Get one vote per $100 unlike variable annuities and mutual funds
  • Not sold as an investment
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15
Q

Variable Life Policy Loans

A

May only borrow a certain percentage (usually 75%) and will have to pay interest

SEC Requires that 75% be available, but only after 3 years of holding the produce

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16
Q

Life Settlements

A

Selling the policy to anyone other than the insurance company

Referred to as a viatical investment and is a security