Chapter 9: Annuities Flashcards
Define annuity
- Provides income for a specific period if time
- Protects a person against outliving their money
- A way of liquidating and estate
- Primarily for retirement income
Annuity vs. Insurance
Insurance: Create a sum of money by periodic payments
Annuity: Liquidate or terminate sum of money by periodic payments of money out of a contract
Annuity owner and Annuitant
Annuity owner: Purchaser of the annuity
Annuitant: Receives payments from the annuity
Accumulation period
Period if time in which the annuitant makes premium payments to the annuity
Earns interest
Aka Tax-deferred growth
Annuity period or Annuitization phase
The time during which the money that has accumulated during the accumulation period is converted into incime payments to the annuitant
Note: If annuitant dies during accum. Period the beneficiary will receive the cash value or total premiums paid, whichever is greater
Annuity Funding (2 types)
- Single Payment or Lump Sum
- Periodic Payments, premiums paid in installments over period of time
Immediate Annuity
Purchased with one lump sum payment
Payments begin 1 month after purchase
Deferred Annuity
- Income payments begin sometime after the first year
- Can be funded with single payment or through periodic payments
What are the purpose of Annuity Payout Options?
To determine how policy proceeds will be distributed to beneficiaries
Straight Life Income option
- Pay a specific amount for the entire life of the annuitant
- Highest monthly benefits for an individual annuity
- No guarantee that all proceeds will be fully paid out since payments stop after annuitants death
- No residual value
Life with Period Certain
- Contingent on annuitant dying
- Guaranteed for lifetime of annuitant and for a period of time to the beneficiary
Types of annuity classifications (two)
Fixed annuities: Payments do not vary and minimum rate of interest
Variable Annuities: Hedge against inflation, not a guaranteed payout
Two special things to know about Variable annuities
- regulated by sec (securities and exchange commission)
- Agency offering this type of annuity needs to have a securities license in addiction to life insurance license
Accumulation Units
Variable annuity premiums are invested and begin to grow
Annuity Units
Payout phase of the Variable Annuity
Annuity Taxes
A portion of each annuity benefit payment is taxable (tax base) but another portion is not (cost base)
Nontaxable portion is the anticipated return of the principal paid in (known as Cost Base)
What happens to interest earned if the annuitant dies before the payout start date?
It is taxable
During the accumulation period who can surrender an annuity?
The policyowner
Which annuity require a premium payment that varies from year to year?
Flexible premium deferred annuity
Define cash refund payout option
Returns the difference between the annuity value and the income payments already made to the beneficiary
Temporary Annuity Certain
- Payments will be made for a specified number of years
- The annuitants beneficiaries will receive payments if annuitant dies before time period is up
Annuity certain
- Guaranteed accumulation or payout
Period Certain
Pre-determined number of benefits payments
Fixed amount payout option
Fixed payments until the contract value is exhausted
Beneficiary receives remainder when annuitant dies
Straight life Income payout option
Guarantees payments for entire life
Installment refund option
Remainder of funds goes to beneficiary paid in installments instead if one large sum
Joint and full survivor payout option
- Payment annuity to two people.
- When all annuitants die there are no further payouts
Which type of annuity stops all payments after death of annuitant?
Life annuity
Define Tax-Deferred
Investment earnings such as, interest, dividends or capital gains that accumulate with no taxes until profits are received
Define dividends
An amount of money paid regularly
How do interest earnings accumulate in a deferred annuity?
On a tax-deferred basis
