Retirement Plans Flashcards
fixed annuity
the guaranteed rate of return to the investor
Who assumes the investment risk in a fixed annuity
the insurance company
Variable annuity
- no guaranteed rate of return
- if the investments funding an annuity perform better than expected
-the annuity performs better than expected and vice versa
Who assumed the investment risk in a variable annuity
the investor, it is considered to be a security
AIR
-Illustration of a conservative interest rate that shows the annuity that would be received if the separate account grew at this rate
If the actual returns are greater than 5% AIR, then
annuity amount increases
if the actual return is lower than 5% AIR, then
annuity amount decreases
Separate account
- an account this is separate from the insurance company, used specifically to fund the annuity
- portfolio run as a management company
During annuity, if a separate account grows at the same rate as AIR, then
annuity payment is unchanged
During annuity, if the separate account grows faster than the AIR, then
annuity payment increases
During annuity, if the separate account grows slower than AIR, then
annuity payment decreases
Accumulation unit
Monies paid into a variable annuity contract are used to buy accumulation units
- NAV is computed daily
Interest, dividend payments, and capital gains realized from a separate account ______
- automatically reinvested to buy more accumulation units
- cannot be distributed until contract is complete
Big benefit to annuity contract holders
reinvested dividends and capital gains grow tax deffered
Variable annuities and inflation
- in periods of inflation, variable annuities have a greater return potential to investors since equity prices tend to rise with inflation rate over long term
Life Annuity
Pays only for that person’s life
- largest monthly payments
Life Annuity - Period Certain
Pays for that person’s life, but if that person dies before a stated time period (say 10 years), the annuity will be paid to a beneficiary for the balance of the 10 year certain period.
Joint and Last Survivor Annuity
Pays a married couple until the second party dies.
Unit Refund Annuity
If the contract holder dies earlier than expected, the balance left in the separate account is refunded to a beneficiary.
People who are not gamblers, more on safer side should invest in __
lump sum payments/ fixed annuities
- installment for designated period
- installment for
License required to sell variable annuities
- Series 7/ Series 6
- state insurance license may also be required
Suitability to recommend a variable annuity
- customer has been informed of the material features of the product
- customer would benefit from one or more of the features
GMIB
- optional rider
- Guarantees when the separate account is annuitized, if the account has not grown at the Guaranteed minimum rate, then the account will be annuitized as if it did.
- Only applies at the annuity phase
Variable Annuity Mortality Guarantee
- insurance company guarantees to pay the annuity for one’s life
- if person dies later than projected mortality, payments continue
Variable annuity Expense Guarantee
- if expense exceed a given percentage, the insurance company absorbs the excess.
tax qualified
before tax
non-tax qualified
after tax
Variable annuities are “___ qualified”
non- tax, the contribution is NOT deductible from the tax return
Cost basis in a variable annuity
the amount contributed, dollars after tax
Distributions from a variable annuity
build tax-deferred; these monies were never taxed
- payments are taxed at the amount above cost basis.
If a lump sum distriution is made from a plan, the IRS requires they use __ accounting
LIFO
LIFO accounting
the “build-up” amount comes out first since it went in last (and is 100% taxable), while the contribution amount comes out last since it went in first (and is 0% taxable).