Deferred and Immediate Annuities Flashcards
2 main types of Annuity
- Deferred Annuity
- Immediate Annuity
Describe what a Deferred Annuity is:
(3 main things beyond the obvious)
Tax deferred accumulation vehicle
Has a future option to either:
- surrender for cash,
- make systemic/irregular cash withdrawals, or
- convert funds into a stream of periodic payments
A Deferred Annuity is typically a contract between ___ and ___.
Individual and Insurance Company
Who are deferred annuities typically suitable for?
Those who max out employer sponsored retirement plans, buy who still want to save more long term investments with tax deferral
What’s the difference between qualified annuity and non-qualified annuity?
Qualified - 401k, IRA, 403b, etc. (retirement accounts)
Non-qualified - personal brokerage account, etc. (nonretirement accounts)
Explain the Deferred Fixed Annuity.
Guaranteed return, low risk, subject to inflation risk (eg CD rates)
Explain the Deferred Variable Annuity.
Returns vary because more market participation (mutual funds, ETFs, etc)
Riskier for owner
Explain the Deferred Equity-Indexed Annuity.
Hybrid of fixed and variable
4 Primary Parties in a Deferred Annuity
- Life Insurance Company
- Owner
- Annuitant
- Beneficiary
8 basic building blocks to an Annuity Product
- Free look provision
- Premiums
- Withdrawal options & limitations
- Investment Options
- Optional Supplemental benefits
- Death Benefits
- Annuity date
- Post accumulation period options
3 main types of charges that apply to deferred annuities
- Annual Contract Charges (admin fee; usually waived if balance in the annuity exceeds a certain amount)
- Surrender Charges
- Commissions
5 investment features of deferred fixed annuities
- Guaranteed capital (value of contribution)
- Fixed Guaranteed Rate (life of contract)
- Current Rate (guaranteed 1-10 years; is then annually renewable at a rate that reflects current market rates)
- Renewable Rate (never goes below fixed guaranteed rate)
- Bonus Interest Rate (higher rate at beginning of contract; costs more)
True or False
There is a small, guaranteed rate of return for Deferred Variable Annuities
False; ZERO guaranteed rate of return unless you add it as an option for a higher premium
True or False
Only the investment return from a non-qualified deferred annuity can be taxed
True; funds used to pay premiums have already been taxed
True or False
If a person withdraws from a deferred annuity in the accumulation period (pre-annuity date), the distributions are taxed because the IRS considers earnings as what’s being withdrawn
True
True or False
When annuity owner dies during the accumulation period, the account value of the annuity is not included in the owner’s estate
False
The cash surrender value of a deferred annuity must be paid out within 5 years of owner’s death to successor owner/named beneficiary UNLESS
(2 exceptions)
- Successor owner can have cash surrender value paid under annuity payment option over the life expectancy of successor AS LONG AS payments begin w/in 1 year of owner’s death
- successor owner is spouse of deceased and elects to be new owner of the annuity
True or False
Just like life insurance policies, the benefits paid at the deferred annuity owner’s death are income taxable to the beneficiaries to the degree the proceeds exceed the owner’s net cost basis.
False; life insurance policy benefits are tax free to beneficiary
True or False
After 10/21/88, all annuity contracts issued by the same insurance company to the same annuitant are treated as one contract for the purpose of calculating taxable income on distributions
True
4 supplemental benefit options that enhance the predictability of the annuitization of deferred annuities (especially deferred variable annuities)
- Guaranteed Immediate Annuity Rates
- Guaranteed Minimum Accumulation Benefit
- Guaranteed Minimum Income Benefit
- Guaranteed Minimum Withdrawal Benefit
What is the name of the Rule instituted by FINRA & approved by SEC which outlines certain registered representative and broker dealer procedural requirements regarding deferred variable annuities?
Conduct Rule 2821
What does “superannuation” mean?
It’s the “risk of living too long”
True or False
Fixed annuities are considered investments by the SEC, but variable annuities are not
False;
Variable annuities = investments
Fixed annuities = not investments
3 main classifications of immediate annuities
- Fixed
- Variable
- Equity-Indexed
What is the Assumed Investment Rate?
In the case of an immediate variable annuity, AIR is a factor in pricing.
Think of AIR as the “hurdle rate” that the investment performance of the sub-accounts must exceed in order for the annuity payments to increase.
5 key decisions to be made at application for Immediate Annuity
- Type: Fixed, variable, or equity-indexed
- Select income option from menu
- Select mode of income payments
- Death benefits/Select beneficiaries
- Select optional benefits
3 provisions that offer flexibility for immediate annuities
- Free look provisions
- Cancellation Options
- Withdrawal Options
How does a “Pure” Immediate Annuity work?
(5 things)
-Annuity provides income for life PERIOD
-No refund if annuitant lives less than expectancy
-Not flexible
-No benefits to heirs
-Maximum income per dollar of capital
What are some of the other names of Pure Immediate Annuity?
AKA: Pure Life Annuity, Life Annuity, Straight Life Fixed, & Life Only-No Refund
What is a Refund Immediate Annuity?
In exchange for a lower income than a pure or straight-life annuity, a “Refund” Immediate Annuity promises to return a portion, or all, of the purchase price of an annuity.
2 types of “Refund” Immediate Annuities
- Cash or installment refund life annuity (enhancement to “pure” straight life annuity)
- Life annuity or straight life annuity with guaranteed payments, or period certain
(enhancement to “pure” straight life annuity)
How does “Cash or Installment Refund Life Annuity” work?
If annuitant dies prior to receiving total payments equal to the initial purchase price, the balance (or portion) will be paid to beneficiary in cash or installments
How does “Life Annuity” or “Straight Life Annuity with Guaranteed Payments” or “Period Certain” work?
All same thing just named different
There are guaranteed payments to annuitant (5-25 years) and if annuitant dies before period is over, beneficiary gets the balance
How does a “Fixed Period” Immediate Annuity work?
There’s a fixed period (eg 10 years) where annuitant receives payment and if they die before fixed period is up, beneficiary gets the balance.
How does a “Graded or Inflation Adjusted Annuity” work?
Think enhancement to Fixed annuity
Income automatically increases each year by a stated percentage
(Available as option for straight life, period certain, cash refund, etc.)
How do “Joint and Survivor Life Annuities” work?
Sort of like life insurance honestly..
-Deposit huge premium like 401k
-Select percentage of initial pay out to go to surviving annuitant when primary dies
-If 100% is selected, both are primary
How do “Medically Underwritten Annuities” work?
Annuities can be underwritten to account for a health impairment that reduces life expectancy
(e.g. a 75 year old can be “rated” as 85, then get paid much more)
How do “Variable Income Options” work?
Select “Assumed Investment Rate”
If net investment returns are higher than AIR, then higher income, and vice versa
Risky and low initial income benefits, so long life expectancy & investment experience needed
True or False
If the immediate beneficiary of an Annuity “Refund” is the spouse, the residual value of an immediate annuity will typically qualify for marital deduction and NOT be included in the estate
True
True or False
If surviving spouse is part of Joint Survivor annuity, their income benefits are taxable and wouldn’t qualify for marital deduction
False; however, it must be spouse (not business partner for example)
