types of Annuities Flashcards
An annuity
a contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving his or her money. Annuities are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate. Annuities are marketed by life insurance companies. Licensed life insurance agents are authorized to sell some types of annuities.
two parties to an annuity
Owner – The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust, or other legal entity.
Annuitant – The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person.
accumulation period
known as the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.
The annuity period
the annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter. The annuitization date is the time when the annuity benefit payouts begin (trigger for benefits).
The annuity income amount is based upon
The amount of premium paid or cash value accumulated;
The frequency of the payment;
The interest rate; and
The annuitant’s age and gender.
Classification of annuities:
Premium payment method: single premium vs. periodic
When income payments begin: immediate vs. deferred
How premiums are invested: fixed vs. variable
Disposing of proceeds: pure life, annuity certain, or life refund annuity
A fixed annuity
Guaranteed minimum rate of interest to be credited to the purchase payment(s);
Income (annuity) payments that do not vary from one payment to the next; and
The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.
With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period. This is called level benefit payment amount. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.
Variable Annuities
variable annuity serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity. Listed below are the 3 main characteristics of variable annuities:
1) Underlying Investment: the payments that the annuitant makes into the variable annuity are invested in the insurer’s separate account, not their general account. The separate account is not part of the insurance company’s own investment portfolio, and is not subject to the restrictions that are applicable to the insurer’s own general account.
2) Interest Rate: issuing insurance company does not guarantee a minimum interest rate.
3) License Requirements: a variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA.
Indexed (or equity indexed) annuities
fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor’s 500.
immediate annuity
one that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase. Typically, an immediate annuity will make the first payment as early as 1 month from the purchase date. Most commonly, this type of annuity is known as a Single Premium Immediate Annuity (SPIA).
deferred annuity
an annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (Single Premium Deferred Annuities — SPDAs) or through periodic payments (Flexible Premium Deferred Annuities — FPDAs). Periodic payments can vary from year to year. The longer the annuity is deferred, the more flexibility for payment of premiums it allows.
