Part 2 Unit 15 Flashcards
Annuity
-Contract bw life insurance comp. and indiv. for retirement income
-Investors: pay premium or lump sum
-Future date, surrender and get a lump sum or receive regular income dist. that will continue for life.
-Tax-deferred
-No limit from the Gov. side but insurance comp may have limits
2 major types:
Fixed
Variable
Fixed Annuaties
-Fixed rate of return guaranteed
-Payout determined by account value, and life expectancy
-Not a security;
1. guaranteed return 2. no risk
The only risk might be purchasing power risk
-Insurance regulation
Variable annuities
-Frequently invested in stock port.
-Better gains involves potential risk
-Monthly pay out varies
-resistant to inflation
-insurance and securities regulation
Contributions go to a separate account:
-Sub accounts range from most aggressive to most conservative
-The performance of these sub accounts determine the investment returns.
VA Vs. Mutual Fund
Mutual fund
-Invest. company, shares, objectives varied, no guarantees, redeemed by issuer, priced based on formula, voting rights
V A:
-Product of insurance comp., units, objectives varied, some guarantee, redeemed by issuer, price based on formula, voting rights
-VA
1. Tax deferred growth
2. guaranteed death benefits; assured of getting back at least the principle
3. Lifetime income: a check every month when yu are alive. income is variable though but protects against longevity risk.
4. IRS 1035 exchanges: Exchange without tax consequences might incur surrender charge
5. No contribution limits
6. Tax free transfer bw sub accounts
7. No probate: there is direct designation of beneficiary, so no probate efforts.
-VA disadvantages:
1. Ordinary income rate for taxes
2. Admin fees are higher compared to mutual fund
3. withdrawals before 59/.5 will incur 10% penalty plus income tax
4. surrender in early years will have additional charge
Index Annuity:
Market participation with a guarantee against loss
-Usually there is a participation rate like 80% and there is a cap return rate like 8%. If the account grows at 20, you are getting 80% of the 20% which is 16% however, because you have a cap of 8% you only get 8%. Also, there is a min guaranteed return of 2%.
important to note how account is credited;
-Annual reset; interest to be credited is based on index value at beg. of the year
-High-water mark: Highest value reached by the index bw anniversary dates is compared to value at the beg. of the year.
-poin to point: value of index at the end of contract compared to beginning.
-Averaging: Monthly averaging when markets are volatile.
Types of purchases offered:
- Deferred annuity: lump sum; payout deferred
- Periodic payment:
- Immediate annuity: single lump sum; payout usually within 60 days
Accumulation stage: no penalty on missed payment of premium and contract can be cancelled (surrender charges in first 5-10 years)
Accumulation is determined like mutual fund shares and unit changes with the value of securities change
Annuity payout options
- Life Annuity/Straight life/Pure life: until death; highest payment
- Life with period certain; pmt to beneficiary after death before period certain expires; if client lives, payments continue.
- Jonit life with last survivor annuity: Payment cease when both die
- Refund annyity: continues until principle amount is paid after death
- Mortality guarantee: increased mortality cost if lives longer than anticipated.
Last in first out LIFO
Accounting method for earnings of annuities; if you withdraw, it is considered earnings until you withdraw the full amount in which case the cost basis will be considered too.
Term insurance
-Protection for specific period
-Benefits only if the insured dies within that period
-No cash value accumulated
Uses:
-Good for younger people married with Children
-Can get a lot of coverage for low premiums
-
Whole life insurance
-Protection for whole life
-Insured can choose how to spread out the premium benefits payments (known as the modes)
-Accumulates some value called Cash Value
-Once you have cash value, it can’t be forfeited. You can exchange for surrender and getting the cash value.
-Can also borrow a portion called policy loan.
Uses:
-Cash value can be used during retirement if you are short
-Premium will last longer than income having years so, not much protection per dollar of the premium paid like term insurance.
Universal life
Higher interest rate and let you adjust premium and death benefits based on needs
Cash value grows according to current interest rates
-Premium first go to insurance protection and then the remaining balance to build cash value
-increase or decrease death benefits
Premium can be changed too as long as enough is paid to maintain death benefit s
Interest will vary but subject to a guaranteed minimum
UL interest rate:
Current annual rate; changes based on market conditions
contract rate; min guaranteed interest rate and the policy will never pay less than that amount
UL Death benefits:
-Option 1: level death’s benefits equal to face amount. as cash value increases, ned death protection decreases over the life of the policy. Premiums are lower for the same face amount of death coverage. Tradeoff is the level death benefits doesn’t protect with inflation
Option2:
increasing death benefits equal to the policy’s face amount plus the cash account. cash value grows more quickly over time. higher initial premiums makes the cash higher and lower death benefits.
In VL, what are the charges deducted from gross premium?
-Admin fees
-Sales load
-State premium taxes
Max allowable sales load is average equivalent of 9% of premium. Front end loaded to 50% of the first year’s premium.
In VL, what are deductions from separate account?
-Mortality risk (insured might live for a longer period)
-Expense risk fee (cost of admin might be greater than assumed)
-Invst. mgnt fee
These will reduce the investment return payable.
