Types of Annuities

Question 1

Fixed (Guaranteed) Annuity

Answer 1

During the accumulation period, the insurer guarantees a minimum interest rate that is fixed. At annuitization, benefits are paid at a minimum level fixed amount.

Question 2

Indexed (or Equity Indexed) Annuity

Answer 2

An annuity product with interest rates that are linked to the positive performance of a stock market related (equity) index, such as the Standard & Poor’s 500 Index.

The contract owner enjoys the safety of the principal and some guaranteed minimum returns. The safety of the principal and previously locked-in interest is backed by the insurer’s general account. The minimum guarantee can be as low as 0%, reflecting that the policy will not be adversely affected by negative stock market index performance.

. They also tend to have higher surrender charges and longer surrender charge periods.

Question 3

Market-Value Adjustment (Adjusted) Annuity

Answer 3

This is an annuity product that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the surrender value to fluctuate in response to market conditions.

Question 4

Variable Annuity

Answer 4

Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on “units” rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation.

Question 5

AIR fluctuations

Answer 5

Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on “units” rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation.

Question 6

qualified annuity

Answer 6

A qualified annuity is funded with pretax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes.

Question 7

nonqualified annuity

Answer 7

A nonqualified annuity is funded with after-tax dollars, meaning taxes on the money were paid before it goes into the annuity. Upon distribution, only the earnings are taxable as ordinary income.