MY FIXED ANNUITIES PRODUCTS Flashcards
WHAT ARE FIXED ANNUITIES?
Fixed Annuities
Fixed annuities are products that have a guaranteed rate for fixed periods of time. They include a minimum guaranteed rate, and in many cases they allow for withdrawals without any penalty prior to the payout period. Upon annuitization they offer a variety of payout options. The term “annuitization” is another word meaning payout.
WHAT ARE DEFERRED ANNUITIES?
Deferred Fixed Annuities
Deferred annuities have an accumulation period where the contributions made to the annuity accumulate earnings paid by the insurer. During the accumulation phase, the earnings are not taxed as they accumulate within the product. The earnings are taxed only when they are withdrawn. This sets them apart from savings products such as bank CDs or mutual funds, which are not tax-deferred products and whose earnings are generally taxed in the year they are earned.
What are Single Premium Annuities?
[(Single Premium Deferred Annuity (SPDA)]
A single premium deferred annuity (SPDA) allows only one contribution to be made to the contract. For example, an insurer may offer an SPDA with a five year rate guarantee of 2%, with a minimum required initial contribution of $5000. The policyowner earns 2% on the $5000 for five years. He or she may then renew the contract for another five years at the current rate, may take a lump sum withdrawal or may annuitize the contract.
What are Flexible Premium Annuities [Flexible premium Deferred Annuity (FPDA)]?
Flexible Premium Annuities
A flexible premium deferred annuity (FPDA) allows the policyowner to make contributions throughout the accumulation period. In some FPDA’s, the insurer will pay the same rate on all contributions made during the guarantee rate term. For example, if the product pays 2% for five years, each time a contribution is made during the five year period, it will be credited the 2% rate. In other FPDA’s, each contribution earns the rate in effect at the time the contribution is made, along with the accumulated value in the annuity.
For example, the policyowner opens the annuity with $5000 on April 5, 2023. This contribution earns 2% for the first year. After the first year, the insurer declares the rate at 1.95%. The $5000 plus earnings is credited the 1.95% rate. The policyholder makes another $3000 contribution during this second year. This amount is also credited the 1.95% rate, until the end of the year. The following year, the $8000 in contributions and their earnings is credited the new rate declared by the insurer, of 2.25%.
Typically, FPDA’s have shorter rate guarantee periods than do SPDA products.
What is a major difference between the FPDA’s (Flexible Premium Deferred Annuities) and the SPDA’s (Single Premium Deferred Annuities)?
Typically, FPDA’s have shorter rate guarantee periods than do SPDA products.
What is generally practiced SPDA’s (Single Premium Deferred Annuities) the have guaranteed rate terms?
Under SPDA’s that have guaranteed rate terms, the policyholder generally must choose to annuitize at the end of the guaranteed term. For example, if Polly the policyholder opens an SPDA with a 6-year term, she will be given several options. At the end of the 6-year term, Polly can:
-renew her contract term for another 6 years;
-she may choose to take the annuity values as a lump sum; or
-she may choose an annuitization option.
Do some SPDA’s (Single Premium Deferred Annuities) allow annuitization within the guaranteed rate term without surrender charges?
Yes.
Some SPDA’s allow annuitization within the guaranteed rate term without surrender charges. For example, if a policyholder selects a product with a ten-year guaranteed term, the product may allow the policyholder to annuitize the contract after only seven years, as long as the policyholder chooses a period certain payout period of at least five years.
Let’s break it down:
SPDA (Single Premium Deferred Annuity):
Think of SPDA as a special savings account where you put in a lump sum of money (like a big birthday gift from Grandma).
But instead of spending it right away, you decide to save it for later. You’re patient like that!
Annuitization:
Imagine you have this SPDA, and you’ve been saving up for a while. Now you want to turn it into a regular income stream (like getting a monthly allowance).
Annuitization is like converting your savings account into a magical money machine that pays you regularly. It’s like saying, “Hey, SPDA, start giving me money every month!”
Guaranteed Rate Term:
When you opened your SPDA, the insurance company promised you a certain interest rate for a specific period (let’s say 10 years).
During this time, your money grows at that guaranteed rate. It’s like planting a money tree that grows steadily.
No Surrender Charges:
Usually, if you take money out of your SPDA early (before the promised time), there’s a penalty (surrender charge). It’s like breaking a promise to keep your money there.
But some SPDAs are super cool! They let you annuitize without any penalties during the guaranteed rate term. So, you can start getting your regular allowance even before the full 10 years are up.
Policyholder’s Choice:
Here’s the twist: If you’ve had your SPDA for 7 years and you’re itching to get that allowance, you can!
As long as you choose a payout period of at least 5 years (like saying, “Give me money for the next 5 years, please”), the SPDA lets you start the magical money flow early.
What are Immediate Income Annuities?
Immediate Income Annuities:
Another type of annuity is the immediate income annuity. These are referred to as “immediate” annuities because payout of income begins after making the annuity contribution. These products are always single premium products and are known as single premium immediate annuities (SPIA).
The rate credited on SPIA contributions is not published because it is part of the calculation made to determine the payout amount by the insurer. Some payout options are based on the life expectancy of the insured, and upon the death of the insured the payments cease. In this case, the mortality expense is also part of the payout calculation. The insurer also applies an amount for administrative expenses when calculating payouts. Some administrative expenses may include fees for items such as issuing checks or for making direct deposits each month. Other administrative fees may be for servicing the account through address changes and don’t forget the processing of beneficiary payouts if the payout option includes a payment to a beneficiary at death. For this reason, when selecting a SPIA, the insured should compare payout amounts among insurers. Another important factor in determining which SPIA to choose must include the insured investigating the financial health of the company prior to investing his or her money when determining which product to buy.
What are the 6 Payout Options of SPIA’s (Single Premium Immediate Annuities)?
- Life Income
- Life Income with Period Certain
- Life Income with Refund
- Temporary Life Income
- Join and Survivor Life Payouts
- Period Certain
Explain the LIFE INCOME payout option of a SPIA (Single Premium Immediate Annuity):
Life Income
The life income payout option provides payments for the entire life of the insured. In a SPIA or in a deferred annuity when referring to the annuitization period, the insured is known as the “annuitant.” In a fixed product, a life income annuity will pay the same amount each payment period, such as monthly or quarterly, until the annuitant passes away. At death, the payments for the life income payout option cease.
Explain the LIFE INCOME WITH PERIOD CERTAIN payout option of a SPIA (Single Premium Immediate Annuity):
Life Income with Period Certain
Under a life income with period certain, the payments are guaranteed for a certain period, or for life, whichever is greater. For example, a life income with 20-year period certain will make payments for at least 20 years. If the annuitant dies during the 20-year period, the payments continue to a beneficiary. If the annuitant lives beyond the 20-year period, the payments continue until the annuitant’s death.
Explain the LIFE INCOME WITH REFUND payout option of a SPIA (Single Premium Immediate Annuity):
A life income with refund annuity pays out income for the life of the annuitant. If the annuitant passes away before an amount equal to the principal payment made to open the annuity is paid out, the beneficiary will continue to receive payments until this amount is paid, or the beneficiary will receive a lump sum. When the annuity allows for the beneficiary to be paid out in installment payments, the product is known as a Life Income with Installment Refund annuity. If the annuity allows for the beneficiary to be paid a lump sum, it is called a Life Income with Cash Refund annuity.
For example, the policyholder who is also the annuitant contributes $75,000 to a SPIA. He chooses the life income with cash refund payout option. He receives payments of $293 a month from this product. He passes away after seventeen years. He has received $59,772 in payments. His beneficiary will receive $15,228 as a cash refund upon his death.
Explain the TEMPORARY LIFE INCOME payout option of a SPIA (Single Premium Immediate Annuity):
Temporary Life Income
Under a temporary life income annuity, the payments are made for the annuitant’s life or for a period certain, whichever is the shorter of the two. For example, the annuitant has a life expectancy under the insurance company’s tables of 22.7 years, and the annuitant chooses to take a temporary life income annuity with a period certain of 20 years. The annuity will make payments for at least 20 years. The reason the annuitant selected this option is that the payout amount was slightly higher than the life income only option, since the term certain is shorter than his life expectancy. Depending on the age of the annuitant, his life expectancy and expense factors and the term period selected, temporary life annuities may pay out more than a life income contract, or it may pay out less.
Explain the JOINT AND SURVIVOR LIFE payout option of the SPIA (/single Premium Immediate Annuity):
Joint and Survivor Life Payouts
There are several annuity income payout options that are based on the lives of two beneficiaries. These payout options are known as joint and survivor life payouts.
Under a joint and survivor life option, payments are calculated on the basis of two life expectancies. The payments continue until the death of the last annuitant to die, or until the “survivor’s” death.
Under a joint and survivor specified percentage option, the payments are made at a certain level while both annuitants are alive. At the death of the first annuitant, payments continue at a specified percentage of the payment amount made while they were living. For example, the payment after the first death may be 75% or 50% of the original payment amount.
Under a joint and survivor period certain income, the payments are made for a specified period or the death of the second annuitant whichever is later. If a period certain of 20 years is selected with the joint and survivor life option, and both annuitants die during this period, a beneficiary will receive the payments until the end of the 20-year period.
Joint and survivor life payouts may also be made with the installment or cash refund options. Upon the death of both annuitants, if the amount paid out does not equal the principal paid for the annuity, a beneficiary will receive the remainder in installments, or as a lump sum.
Explain the PERIOD CERTAIN payout option of the SPIA (Single Premium Immediate Annuity):
Period Certain
Under period certain payouts, a specified period is selected. Generally, the minimum period is five years, but some annuity companies allow for a period as short as three years. The maximum term may be limited. For example, an insurer may not allow a forty-year period certain. Generally, however, the insurer will allow just about any annuity term, whether 5 years, 17 years, or 22.8 years.
