Unit 2 Flashcards by Kenya Cabell

Withheld or postponed until a specified time or event in the future

Deferred

How well did you know this?

Not at all

Perfectly

Internal Revenue Service; a US Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

IRS

How well did you know this?

Not at all

Perfectly

dependent upon whether or not the insured is alive

Life contingency

How well did you know this?

Not at all

Perfectly

converting a person’s net worth into a cash flow

Liquidation of an estate

How well did you know this?

Not at all

Perfectly

a human being

Natural person

How well did you know this?

Not at all

Perfectly

A retirement plan that meets the IRS guidelines for receiving favorable tax treatment

Qualified plan

How well did you know this?

Not at all

Perfectly

a requirement to determine if an insurance product or an investment is appropriate for a particular customer

Suitability

How well did you know this?

Not at all

Perfectly

a contract that provides income for a specified period of years, or for life.

annuity

How well did you know this?

Not at all

Perfectly

The purchaser of the annuity contract, but not necessarily the one who receives the benefits.

Owner

How well did you know this?

Not at all

Perfectly

The owner of the annuity has all 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.

How well did you know this?

Not at all

Perfectly

The person who receives benefits or payments from the annuity, whose life expectancy is take into consideration, and for whom the annuity is written.

Annuitant

How well did you know this?

Not at all

Perfectly

Because annuities are based on the life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy.

How well did you know this?

Not at all

Perfectly

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Beneficiary

How well did you know this?

Not at all

Perfectly

The period of time over which the owner makes payments (premiums) into an annuity.

Accumulation period or Pay-in period

How well did you know this?

Not at all

Perfectly

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.

Annuity period or annuitization period, liquidation or pay-out period

How well did you know this?

Not at all

Perfectly

During the accumulation period, funds are paid INTO the annuity.
During the annuity period, funds are paid OUT to the annuitant.

How well did you know this?

Not at all

Perfectly

The annuity income amount is based upon the following:

The amount of premium paid or cash value accumulated.
The frequency of the payment.
The interest rate; and
The annuitant’s age and gender.

How well did you know this?

Not at all

Perfectly

Shorter life expectancy = higher benefit

Longer life expectancy = lower benefit.

Shorter life expectancy = higher benefit

Longer life expectancy = lower benefit.

How well did you know this?

Not at all

Perfectly

If an annuitant dies during the accumulation period, the insurer is obligated to return to the beneficiary either the cash value or the total premiums paid, whichever is greater. If a beneficiary is not named, the death benefit will be paid to the annuitant’s estate.

How well did you know this?

Not at all

Perfectly

Classification of annuitites:

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

How well did you know this?

Not at all

Perfectly

One-time lump-sum payment

Single Premium

How well did you know this?

Not at all

Perfectly

Premiums are paid in installments over a period of time.

Periodic Payments

How well did you know this?

Not at all

Perfectly

Periodic payment annuities can be level premium

The annuitant/owner pays a fixed installment

How well did you know this?

Not at all

Perfectly

The amount and frequency of each installment varies.

Flexible Premium

How well did you know this?

Not at all

Perfectly

One that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase.

Immediate Annuity

an annuity in which the income payments begin sometimes after one year from the date of purchase.

Deferred Annuity

An immediate annuity is purchased with a single premium

Income payments from a deferred annuity begin sometime after 1 year from the date of purchase

Law stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges). However, a 10% penalty will be applied to early withdrawals (prior to age 59 1/2).

Nonforfeiture

The purpose of the Surrender charge is to help compensate for loss of the investment value due to an early surrender of a deferred annuity.

A surrender charge is levied against the cash value and is generally a percentage that reduces over time.

Fixed Annuity provides the following features:

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.

Level benefits payment amount.

Fixed annuity premiums are deposited into the life insurance company's

General account. The general account is comprised mostly of conservative investments like bonds. These investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide

In fixed annuities, the insurer bears the investment risk. Future interest rates actually paid by an insurer are based upon the performance of the insurance company's general account.

Fixed annuities the rate may not drop below a policy's guaranteed minimum (typically 3%). Should interest rates drop below this guaranteed rate, the insurer is obligated to pay the guaranteed rate amount.

Guaranteed minimum

During the accumulation phase, the insurer will invest the principal, or accumulation, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher. The minimum rate is the lowest rate that the principal can contractually earn.

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity the indexed annuity has a guaranteed minim interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500

Indexed (or Equity Indexed) annuities

Equity indexed annuities are less risky than a variable annuity or mutual fund but are expected to earn a higher interest rate than a fixed annuity.

The payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account.

Underlying Investment

A 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.

Issuing insurance company does not guarantee a minimum interest rate.

Interest Rate

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 securitiies license in addition to a life insurance license.

License Requirements

Represent ownership interest in the separate account.

Accumulation Units

Upon Annuitization, the accumulation units are converted to

Annuity units.

Interest Rate

Fixed Annuity - Guaranteed by insurer | Variable Annuity - No guarantee

Underlying Investment

Fixed Annuity - General account (safe, conservative) | Variable Annuity - Separate account (equities, No guarantee)

License Needed

Fixed Annuity - Life insurance | Variable Annuity - Life Insurance PLUS securities

Expenses

Fixed Annuity - Guaranteed | Variable Annuity - Guaranteed

Income Payment

Fixed Annuity - Guaranteed | Variable Annuity - NO Guaranteed

The life annuity will pay a specific amount for the remainder of the annuitant's life.

Payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs).

Pure Life also known as life-only

Provides the highest monthly benefit, but there is no guarantee that the entire principal will be paid out.

Pure life

Under the life with guaranteed minimum settlement option, If the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary.

Refund Life | guarantees that the entire principal amount will be paid out.

When the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant. this option is not guaranteed to pay any interest.

Cash Refund

When the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.

Installment refund

another life contingency payout option. Under this option, the annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary.

Life with period (term) certain

annuities cover one life, and annuity payments are made with reference to one life only. Contributions can be made with a single premium or on a periodic premium basis with subsequent values accumulating until the contract is annuitized.

Single Life

annuities cover 2 or more lives. The most common multiple life annuities are joint life, and joint and survivor.

Multiple life

a payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop.

Joint Life

arrangement is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive.

Joint and Survivor

payment options specify how annuity funds are to be paid out. They are very similar to the settlement options used in life insurance that determine how the policy proceeds are distributed to the beneficiaries.

Annuity

In contrast with life contingency benefit payments options, annuities certain

Short-Term Annuities

The annuitant selects the time period for the benefits, and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified amount of time only, whether or not the annuitant is living.

Fixed-period installments

The annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. This option pays a specific amount until funds are exhausted, whether or not the annuitant is living.

Fixed-amount installments

The principal use of an annuity is to provide income for

Retirement

Annuities may serve as an ideal financial vehicle for someone who comes into a large lump sum of money, such as inheritance, lottery, award of damages from a lawsuit, etc.

Lump-Sum Settlement

These plans can be individual (such as individual retirement accounts - IRAs), and group (such as tax-sheltered annuity - TSA, or profit- sharing pension plans).

Qualified retirement plans

The annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered.

Guaranteed Minimum Withdrawal Benefit (GMWB)

Specific monthly payment for life and a specific period of time. If annuitant dies before payment period is up, payment goes to beneficiary.

Life with Period Certain

Who receives benefits or payments from an annuity?

The annuitant receives benefits or payments from and annuity during the annuitization period.

If the annuitant dies during the accumulation period, what happens to the account?

His/Her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater

An annuity can have 2 distinct periods. What are they called, and what happens during each?

Accumulation period or pay in period is the period of time over which the annuitant makes payments into the annuity. Annuity period or pay out period. which is the time when money is distributed to the annuitant.

How does inflation affect the purchasing power of a fixed annuity?

Inflation can erode the purchasing power of income payments.

What are accumulation units?

Accumulation Units represent ownership interest in the separate account. Instead of buying "shares" the annuity holder purchases units.

What type of annuity credits its interest based upon an index like the S&P 500?

Equity Indexed Annuities, which they invest on a relatively aggressive basis to aim for higher returns.

How long will a life annuity with 15-year certain pay with a Joint and Survivor option?

The annuity will pay out for a guaranteed 15 years. After that, it will pay out for as long as the annuitants are living.

How long will a life annuity with 15-year certain pay?

A life annuity with 15-year certain will pay for the life of the annuitant; however, if the annuitant dies shortly after the annuity payment begin, the payment to the beneficiary will only last 15 years.

The owner is the person who purchases the contract and has all of the rights such as naming the beneficiary and surrendering the annuity. The owner, however, does not have to be the one who receives the benefits; it could be the annuitant (if different from the owner) or the beneficiary.