Chapter 9 Flashcards
What are the 3 uses of annuities?
- Accumulate funds over a period of time
- Evenly distribute a fund over a period of time
- both accumulate and distribute a fund and then evenly distribute it over a period of time
What are the two phases of an annuity contract?
- Accumulation Phase - “Pay-in”
2. Distribution Phase - “Pay-Out”
What is the accumulation or “pay in” phase?
The period when principal and periodic deposits grow with credited interest
What is the “pay-out” or distribution phase?
The annuitization period - the period when the contract generates an income stream from its accumulated value
Can an annuity be used for both the pay-in and pay-out phases at the same time?
No - once the contract is annuitized, no more contributions may be made
The accumulation phase is the period when an annuity is being funded - before the payout begins.
Note
Who issues annuities?
Life insurance companies
The money paid into an annuity is called what?
a premium
is interest credited on the accumulated value of the contract - and the accumulated contract value grows beyond the contract owner’s initial deposit
Yes - note
During the accumulation period, is it true that owners can generally (1) make additional premium payments or deposits (2) take withdrawals from the accumulated value (3) surrender the annuity for its cash value (4) make other changes to the contract
Yes
With an annuity, does interest grow tax deferred?
Yes
What is the annuitization period?
The annuitization period is the “Pay-Out” phase of the contract
With an annutization period, money in the contract is converted to what?
A series of regular income payments that can continue for life or for a stated period of time
When an annuitization period starts, does the accumulated value belong to the annuity owner?
No
The annuitization period is the “pay-out” phase of a contract
Note - money in the contract is converted into a series of regular income payments that can continue for life or for the stated period of time
What 4 things occur when annuitization starts?
- No additional premium payments can be made
- No withdrawals can be taken
- The annuity cannot be surrendered
- The owner cannot change the contract
What are the 4 parties involved in an annuity contract?1
- Contract Owner
- Annuitant
- Insurer
- Beneficiary
What 5 rights does the contract owner have?
- Name or change the annuitant
- Name or change the beneficiary
- Choose the payout option
- Add more money or take withdrawals
- Surrender or Terminate the agreement
Who is the “annuitant” in an annuity contract?
The party who is insured (similar to the insured in a life insurance contract)
-receive the payments during the annuitization period
What determines the amount of payments for an annuity?
The annuitants life expectancy
Can an annuitant be a corporation or a trust?
No - must be a natural person
Must the annuitant also sign the annuity contract?
Yes
Are the contract owner and annuitant frequently the same person?
Yes
Does the annuitant have the power to make withdrawals, change the names of the parties to an agreement, or terminate the contract?
No (unless the annuitant and the contract owner are the same person)
Does the beneficiary of an annuity contract have any voice or control or management of the annuity?
No - the beneficiary only benefits upon the death of the contract owner
Can the beneficiary of an annuity contract be a natural person or an entity like a trust/corporation
Yes
The insurer is the party who issues the annuity contract - representing the insurer may be a local bank, financial planner, a brokerage firm, or an agent/broker
Note
Effectively, annuities can be used to liquidate an estate - t/f?
True
With life insurance, will the beneficiary receive the funds tax-free when the insured dies?
Yes
If you leave money in an annuity to a beneficiary, will they have to pay taxes on any growth (interest) on the money that was put into the contract
Yes (note, this contrasts life insurance, where proceeds are paid out tax free)
What is the difference between an immediate and a deferred annuity?
- Immediate annuity: Structured to provide current income
2. Deferred annuity: Contract payout is a specific date in the future
What is an immediate annuity?
After paying a lump-sum, an immediate annuity or single premium annuity (SPIA) provides an individual with an income that may begin as soon as a month after purchase or may be delayed for up to one year
In an immediate annuity, do funds accumulate on a tax-deferred basis?
Yes
When payments begin with an annuity, the portion that is attributed to interest is subject to taxes - t/f?
True - but the rest is treated as a return of principal and therefore is tax free
What is a single premium immediate annuity (SPIA)?
Pays a monthly income immediately - the first payment would be made after a delay of one payment interval or period
For a single premium immediate annuity (SPIA) is the first payment made after a delay of one payment interval or period?
Yes - the earliest a payment could begin is one month
What is the latest payments payments can begin for a single premium immediate annuity?
One month
What is a deferred annuity?
A contract that does not start an income stream immediately - with deferred annuities, the annuity owner chooses the premium amount and the frequency of premium payments
WIth a deferred annuity, can funds be withdrawn at any time?
Yes - subject to a possible surrender charge
Are deferred annuity owners required to annuitize a contract?
No
Can deferred annuities be purchased with either a single premium or ongoing premium payments?
Yes - SPDA (single premium deferred annuity) or PPDA/FPDA (periodic or flexible pay deferred annuity)
With all deferred annuities, the emphasis is on what?
The accumulation of money for future use
Withdrawals from annuities are fully taxable - t/f?
True - up to the amount by which the annuity has grown, so, if cash value is 45,000 and you put in 20,000, the first $25,000 would be taxed as ordinary income
Surrender periods are periods where surrender charges may apply - they generally start higher and decline over time
Note
A deferred annuity death benefit does not provide a surviving family a life insurance policy - rather, the accumulated contract value is paid to a selected beneficiary if the annuity owner dies during the accumulation period
Note
The amount paid as a death benefit is the greater of what (with respect to an annuity in the accumulation phase)
- The accumulated value of the annuity
2. The total premiums paid - less any withdrawals
If an owner has not named a beneficiary for the death benefit, where will it be paid?
To the owner’s estate
The period during which a person receives the benefits of an annuity is known as what?
The annuitization period (not the “payout period” - for the sake of exam questions)
What are the 2 different payout options for annuities?
- Life annuities
2. Temporary annuities
What is a life annuity?
Have a payment that is guaranteed to last for as long as the annuitant lives
What is a temporary annuity?
Do not have a payment that is guaranteed to last for as long as the annuitant lives
What is the “life only” option?
Sometimes called a “pure life” income, payments stop when the annuitant dies - regardless of when that occurs
What is the advantages of a “Life-only” option?
Pays the highest monthly income amount - no contingencies and only the annuitant’s life expectancy was considered to determine the amount of the monthly payout
What is the disadvantage of a “life-only” option?
The annuitant may die before their life expectancy and the total payout they received was much less than the total amount paid into the contract
What is the “life-only” option also referred to as?
- Straight Life
- Pure Life
- Life-No Refund
Under the “life with refund option”, if the annuitant dies and the total payments received are less than the amount paid for the annuity, what happens to the difference?
The difference is paid to the beneficiary
The money from a “life with refund option” may be paid out is 2 ways - what are those?
- Lump Sum/Cash refund
2. Continuation of Payments in the same amount as was being paid to the annuitant (called an INSTALLMENT REFUND)
What is the “life with period certain” annuity option?
Pays income for as long as annuitant is alive + annuitant selects payment period (5, 10, or 20 years and payments are guaranteed to be made for at least that number of years). If the annuitant dies before the end of the selection period, payments continue to the beneficiary for the rest of the period certain.
With a “life with period certain” option, are payments made to a beneficiary if the annuitant lives past the period certain timeline?
No
What is the “Joint life and survivor” option for annuity payments?
The insurer promises to make payments until the last survivor of two annuitants dies. For example, if the two annuitants were a married couple and the husband died first, payments would continue to the spouse for the rest of her life
Can the owner of a joint life and survivor option annuity choose continued payments in the same amount for the survivor, or in a lesser amount such as two-thirds or one-half of their monthly payout?
Yes
What is a joint life annuity?
Pays income until the death of the first of two or more annuitants - while the monthly payment is greater than other joint annuities, it is not considered suitable as a joint annuity because the survivor is left without an income
What are the 4 factors used to determine the payout of an annuity?
- Annuitant’s age (older people receive higher payments)
- Annuitant’s gender (men receive higher payments because they don’t live as long)
- Payment Guarantee (refund option will lower the payment - longer the period, the lower the payment)
- Assumed Interest Rate: Insurer assumes that it will earn some rate of interest on the funds used to buy the annuity - the lower the assumed rate, the lower the payment
Fixed period and fixed amount annuities are both types of what?
Temporary annuity (not life-period certain annuities)
What are the 4 basic types of annuities?
- Fixed
- Variable
- Equity Indexed
- Market Value Adjusted
What are fixed annuities?
Guaranteed against loss - aside from surrender charges that may apply, they are guaranteed against loss - the value of a fixed annuity contract will never be less than the amount paid into the contract
What are fixed annuities supported by?
An insurer’s general account - investment risk is thus borne by the insurer (typically invested in debt securities and other fixed-rate investments that provide a steady stream of returns for many years
Accumulated values earn a current rate of interest that is competitive with prevailing rates on other interest-bearing investments. The current rate is generally decelared at the beginning of the year, and guaranteed for the year.
Note - the current rate may rise or fall from year to year, but it will never be less than a guaranteed minimum rate that is stated in the contract
During the annuity period, do fixed annuities provide a level payment amount?
Yes - annuitants can count on getting a specified dollar amount of income on a regular basis
Is it notable that purchasing power can decline, so fixed benefits may become inadequate to live on even though the dollar amount is the same?
Yes
What are variable annuities?
Annuities supported by stocks and bonds (thus, able to keep pace with inflation)
Do variable annuities have investment risk?
Yes
The assets that support variable annuities are kept in a separate account, where the investment risk is borne by the annuity owner.
Note
The owner of a variable annuity makes various investment choices, called what?
sub-accounts, which resemble mutual funds
The accumulated value of variable annuities is expressed as what?
accumulation units - similar to shares purchased in a mutual fund
How is the value of an accumulation unit found?
By dividing the value of the separate account by the number of existing accumulation units
When an annuity period begins, the accumulation units are converted to what?
Annuity units
The value of an annuity unit varies with the value of the investments in the separate account
Note
If the value of a separate account goes up, the amount of the annuity payment does what?
It increases
If the value of a separate account goes down, the amount of the annuity payment does what?
It decreases
Are variable annuities regulated as both securities and insurance products? What is this called?
Yes - dual regulation
To sell variable annuities, what must a producer have?
A life insurance license, a special variable annuity license (in certain states), and both federal and state securities registration
Under federal securities law, insurers must register separate accounts with the SEC and comply with certain requirements for selling securities. One important provisions of those laws is what?
Producers are required to provide investors with a prospectus - a document containing a detailed description of the product being offered - before beginning a sales presentation
What is an equity indexed annuity (EIA)
Tax deferred annuity whose credited interest is linked to an equity index - guarantees minimum interest rate, if held to the end of the surrender term and protects against a loss of principal
EIA returns may be higher than Fixed annuities, but how will they compare to variable annuities?
returns will not be as high as variable annuities - EIAs are a form of fixed annuity, and, therefore, the guarantees in the contract are backed by the insurers general account (not a separate account)
Are equity indexed annuities fixed annuities?
Yes
For an equity indexedannuity, can interest go up or down like the stock market?
Yes
What is a market value adjusted annuity?
Also referred to as a modified guaranteed annuity, offers the flexibility of various guarantee terms combined with the potential for higher interest rates than traditional fixed investments. The guarantee terms range from shorter term to longer term and typically credit higher interest rates for longer-term commitments. A guarantee fixed rate is declared for the length of each guaranteed term
With a market value adjusted annuity, is the guaranteed rate only valid if it is held until maturity?
Yes - investments may be split amongst several guarantee terms to match various time horizons when funds may need to be accessed.
With respect to market value adjusted annuities, withdrawals made before maturity of the guarantee term may be subject to a contingent deferred sales charge (CDSC) and/or market value adjustment (MVA).
Note - typically the length of the CDSC schedule matches the duration of the guarantee term
Are market value adjusted annuities an example of a variable product?
No - thus, no securities license is required
What are the 4 most common uses of annuities?
- Funding Retirement
- Accumulating Funds Prior to Retirement (tax favored)
- Funding IRAs
- Accumulating Education Funds
Flexible premium annuities are designed to be used for funding individual retirement accounts (IRAs); a tax favored retirement savings plan set up through the bank, securities firm, or insurance company
Note
What are employer sponsored retirement plans?
Annuities are designed to accept employer contributions made to the retirement plans set up for their employees. The annuity payout options can provide a lifetime income for the employee and their spouses
Can annuities have both GROUP and INDIVIDUAL applications?
Yes
May employer sponsors retirement plans be funded with “group annuities”
Yes - the retirement plan owns the group annuity, and the retirement plan document describes the benefits to which the employees are entitled
Who determines the distributions in an employer sponsored group annuity?
The employer
How are employer sponsored group annuities funded?
Through employer contributions
Is there a 10% tax if withdrawn before 59.5 years old?
Yes
Does an equity indexed annuity guarantee a minimum rate of return?
Yes - it is an annuity that offers a guaranteed minimum rate and a guarantee against loss if the contract is held to term. (Example - however, if the S&P 500 moves upward, the annuity might end up accruing more than the guaranteed minimum interest rate
