Chapter 8: Vocab

Question 1

accumulation phrase

Answer 1

the period over which annuity funds are accumulated

Question 2

annual reset method

Answer 2

the index-linked interest crediting rate is determined each year my 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

Question 3

annuitant

Answer 3

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

Question 4

annuitiization

Answer 4

the time when annuity funds are exchanged for a stream of income guaranteed for a period of time

Question 5

annuitized

Answer 5

the time when regular, periodic (such as monthly or annual) payments begin for life or for a specified period of time in excess of one year

Question 6

annuity

Answer 6

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

Question 7

beneficiary

Answer 7

those persons entitled to the death benefit of the annuity

Question 8

cap rate

Answer 8

some indexed annuities impose an upper limit on the index-linked interest rate

Question 9

cash refund annuity

Answer 9

guarantees that the annuitant or the annuitant’s family will receive the premium payments made to purchase the annuity, but 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

Question 10

deferred annuity

Answer 10

an annuity contract that does not begin payments immediately, but waits until some future time to start payments

Question 11

equity-indexed annuity

Answer 11

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

Question 12

50% joint and survivor annuity

Answer 12

pays the survivor 50% of the annuity payment after the death of the first annuitant. The initial annuity payment will be larger than with a 100 or 75% joint and survivor annuity

Question 13

fixed annuity

Answer 13

the most conservative type of annuity that earns a minimum guaranteed rate of return

Question 14

flexible premium annuity

Answer 14

allows the insured the options to vary premium deposits

Question 15

floor crediting rate

Answer 15

an indexed annuity is the minimum index linked interest rate that will be credited too the contract in a given period

Question 16

free withdrawal provision

Answer 16

allows the contract holder the right to withdraw up too a stated % (usually 10) of the contract value annually without incurring a surrender charge

Question 17

guarantee funds

Answer 17

run by the state insurance commission, they act as the payor of last resort in the case of an insurance company failure

Question 18

high watermark approach

Answer 18

determining index-linked interest is accomplished by comparing the value of the index at various points during the term (usually on anniversary dates)

Question 19

immediate annuity

Answer 19

an instrument created when the contract owner trades a sum of money in return for a stream of income that begins immediately

Question 20

index term

Answer 20

the period over which index-linked interest is calculated for equity indexed annuities

Question 21

indexing method

Answer 21

the approach used to measure the amount of change, if any, in the index. some common indexing methods include:
1. the annual reset (ratcheting) approach
2. the high watermark approach
3 the point to point approach

Question 22

inflation

Answer 22

the increase in the general price level and is often measured by the CPI

Question 23

initial rate

Answer 23

the first rate of interest that is earned under a fixed annuities contract and is guaranteed for a specified period of time

Question 24

installment refund annuity

Answer 24

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

Question 25

IRD assets

Answer 25

assets that have a deferred income tax liability that was not paid prior to the date of the owner’s death

Question 26

joint and survivor annuity

Answer 26

promises to make payments over the lives of two or more annuitants. annuity payments are made until the last annuitant dies. This is commonly used to fund the retirement cash-flow needs of married couples. A 100 percent joint and survivor annuity pays the specified monthly payment to the annuitants while both are alive and continues to make the same payment to the survivor after the first death. A 75% joint pays 75% after first death.

Question 27

life annuity contracts

Answer 27

protect clients from outliving their assets by providing a series of periodic payments to the annuitant, typically for as long as the annuitant lives

Question 28

longevity insurance

Answer 28

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

Question 29

minimum interest rate

Answer 29

the minimum rate to be paid on a fixed annuity’s principal balance for the duration of the annuity contract

Question 30

non-qualified annuities

Answer 30

annuity contracts purchased with funds outside of qualified retirement plans or IRAs

Question 31

100% joint and survivor annuity

Answer 31

pays the survivor 100% of the annuity payment after the death of the first annuitant

Question 32

owner

Answer 32

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

Question 33

participation rate

Answer 33

determines how much of the increase in the index will be used to calculate the index linked interest

Question 34

parties to annuity contract

Answer 34

the annuitant, the bene, the owner, and the insurance company

Question 35

point to point index linked crediting method

Answer 35

based on the difference between an index value at the end of the term compared with the index value at the start of the term

Question 36

pooling of risk

Answer 36

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

Question 37

prospectus

Answer 37

disclosure document provided to purchasers of variable annuities and variable life insurance products that contains important information about the contract, including fees and charges, investment options and objectives, risks, death benefits, living benefits, and other important info

Question 38

qualified annuities

Answer 38

purchased with funds in a qualified retirement plan or IR

Question 39

renewal rate

Answer 39

the interest rate offered on a fixed annuity after the expiration of the initial rate

Question 40

retirement life expectancy

Answer 40

the period between retirement and death

Question 41

risk based capital

Answer 41

the investment risk assessment undertaken by the insurance company in investing the money backing up the annuity pool

Question 42

secondary market annuities

Answer 42

called pre-owned annuities or in force annuities. these annuities can be purchased from the original owner at a discount or from a third party, in which the steam 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