Chapter 9 Flashcards
Annuity
Accumulation Period
The Accumulation Period is when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased, but the payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units.
Annuity Period
The annuity period, also known as annuitization, begins when the contract owner surrenders control of the funds in the contract in exchange for a guaranteed stream of monthly income from the insurer.
Accumulation Units
Accumulation Units make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is a credit to the individual’s account and varies depending on the value of the underlying stock investment.
Annuity Unit
Annuity Units are converted into accumulation units once variable annuity benefits are paid out to the annuitant. The annuity unit calculation is made at the time of the initial payout. From then on, the number of annuity units remains the same for that annuitant
What is the difference between annuity units and accumulation units?
In the context of an annuity, “accumulation units” represent the value of your investment during the period when you are contributing money to the annuity (accumulation phase), while “annuity units” represent the value of your investment once you start receiving payouts, meaning when the annuity enters the payout phase; essentially, accumulation units are converted into annuity units when you begin withdrawing money from the annuity.
Cash Refund Option
A cash refund annuity returns any sum left over to a beneficiary should the person who purchased the annuity—called the annuitant—die before breaking even on what they paid in premiums. Such a provision is typically included as a rider on a life annuity (also known as a “pure life annuity” or “straight life annuity”).
If an annuity is purchased for $50,000 and the annuitant dies after receiving $40,000 in payments, the beneficiary would receive a $10,000 payment.
Deferred Annuity
A deferred annuity is a binding contract with an insurance company to help your money grow tax-free for a period of time, then convert it into a series of smaller, guaranteed income payments.
Many deferred annuities are structured to provide income for the rest of the owner’s life and sometimes for their spouse’s life as well.
Equity Indexed Annuity
Equity-indexed annuities are fixed-deferred annuities that offer the traditional guaranteed minimum interest rate and an excess interest feature based on the performance of an external equities market index.
Exclusion ratio in Annuity
The exclusion ratio is a metric that determines the percentage of an annuity payment that is not taxed. It calculates how much of an annuity’s income is subject to taxes when an individual begins receiving periodic payments in retirement.
For example, if $100,000 is invested into an annuity, the expected return each year is $7,500 and the life expectancy is 20 years. The total expected return is $150,000 ($7,500 x 20) and, therefore, the exclusion ratio is 66.66% or rounded up to 67% ($100,000 ÷ $150,000). Since the payment each year is $7,500, 67% of that amount ($5,025 in this case) is excluded from taxes and the remaining $2,475 ($7,500 – $5,025) is taxable.
Fixed Annuity
Fixed annuities provide a guaranteed rate of return. The insurer declares the interest payable for any given year in advance and guarantees it will be at least the minimum specified in the contract. With fixed annuities, the insurer bears the investment risk.
Immediate Annuity
An immediate annuity is a financial product that converts a lump sum of money into a guaranteed income stream for a set period of time or for your lifetime.
Joint life and survivor option
A Joint and full survivor option provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit.
Life with Period Certain Annuity
A Life with Period Certain or life income with a term-certain option is designed to pay the annuitant an income for life but guarantees a definite minimum period of payments.
Are annuities qualified for tax?
Non-qualified annuities are funded with after-tax dollars, and while income and growth are tax-deferred, premiums are not tax-deductible. These annuities, purchased outside of qualified pension plans, do not offer tax-favored treatment on contributions.
** Qualified annuities ** are part of tax-qualified retirement plans, where premiums may be tax-deductible if an employer contributes. Employees can also fund these plans through salary reduction, using pre-tax dollars, which lowers taxable income. The growth (interest earned) is tax-deferred in both annuities.
What is the most important reason for investing in Annuities.?
The most important reason for purchasing an annuity is to provide income at retirement. As examined later, an annuity protects an individual against outliving her income. Only a life insurer can guarantee income for the life of an annuitant.
Annuity Premium
Annuities have mortality tables that differ from those used for life insurance. Items considered include the interest rate paid, the amount of total contributions or accumulations, and the selected settlement option.
Single Premium Annuity
Single premium annuities are funded entirely by a one-time lump-sum payment. The annuitant can start receiving monthly income payments immediately (within 30 days of the single premium) or at a later date (i.e., deferred). When the annuity is funded with a single, lump-sum payment, the principal is created immediately.
