Objective 5 : Individual Annuities

Question 1

mortality risk of life annuities.

Answer 1

When the annuitant dies, the premium is entirely liquidated and nothing or very little remains for the heirs.

Question 2

Annuity Types Based on the Date Benefits Begin

Answer 2

(1) Deferred annuity :
- benefits are not payable until a specified time in the future
- more effective instrument for retirement planning
- if annuitant dies before any payment is made, the beneficiairies pay ordinary income tax on the earning

(2) immediate annuity
- benefit payments begin soon after the annuity owner purchases the annuity. Because the accumulation period is shorter it typically does not earn as much interest as the earnings from deferred annuities.
- if withdrawal before age of 59 1/2 10% penalties apply

Question 3

Annuity Types Based on the Party Bearing the Investment Risk

Answer 3

(1) Fixed-Dollar Annuity/(Fixed Indexed Annuity)
- Insurer invests its customers’ annuity premiums in exchange for a fixed rate of return.
- Value of annuity does not fluctuate with market performance, but interest rate annuitant earnings may.
- Considered a more conservative investment than other types of annuities and, therefore, has a lower rate of return.

(2) Equity Indexed Annuity
- Fixed-dollar annuity linked to a stock market index.
- Insurer guarantees payment of minimum principal amount and a minimum interest rate.
- Value of the return can increase with the market, based on the index values, but if the market fares poorly, the premium and interest rate will never drop below the guaranteed rates.
- can exceed their guaranteed value at maturity.

(3) Variable Annuity
Owner invests annuity premiums in diversified subaccounts
The annuity guarantees that a specified number of units will be paid periodically, but the value of each unit will vary as determined by the performance of the subaccounts.

(4) Combination Plan
Combines features of fixed-dollar and variable annuities.
Insurer might make the investment decisions in the interests of the annuity owner, but the annuity owner bears the investment risk.

Question 4

Annuity Types Based on Premium Payment Method

Answer 4

(1) Flexible-premium annuities
- enable the annuity owner to decide when to pay
periodic premiums.
- Most flexible-premium annuities require a
minimum payment amount

(2) Single-premium annuities
- purchases the annuity using one lump-sum payment.