UNIT 9 Flashcards
ACCUMULATION PERIOD
when an annuity is being funded, before payout begins. Life insurance companies issue these contracts and the money paid into the annuity is called a premium.
interest grows tax deferred
During the accumulation period , the owner can generally;
- make additional premium payments or deposits
- take withdrawals from the accumulated value
- surrender the annuity for its cash value
- make other changes to the contract
ANNUITIZATION PERIOD
is the pay-out phase of the contract. Money in the contract is converted into a series of regular income payments that can continue for life or for a stated period of time.
When the annuitization period starts, the accumulated value no longer belongs to the annuity owner;
- no additional premium payments can be made
- no withdrawals can be taken
- the annuity cannot be surrendered
- the owner cannot change the contract
ANNUITANT
is similar to the insured in a life insurance policy. They are chosen by the owner to receive the income payments during the annuitization period. The annuitants life expectancy is used to determine the amount of the guaranteed payments. The annuitant must be an individual– a natural person-and cannot be a corporation or a trust.
The annuitant does NOT have the power to make withdrawals, deposits, change the names of the parties to the agreement, or terminate the contract. They must also sign the annuity contract.
The contract owner and the annuitant are frequently the same person.
IMMEDIATE ANNUITY
single premium immediate annuity (SPIA) provides an individual with an income that may begin as soon as a month after purchase or may be delayed up to one year. The funds in the contract accumulate on a tax deferred basis. When the payments begin , the portion of each payment that is attributed to interest is subject to taxes; the rest is treated as a return of principal and, therefore, is tax free.
Pays a monthly income immediately. The first payment would be made after a delay of one payment interval or period. The earliest and income payment could be paid is one month, the latest is one year.
DEFERRED ANNUITIES
Do NOT start an income stream immediately. The annuity owner chooses the premium amount and frequency of premium payments. Accumulated funds may be withdrawn at anytime, subject to a possible surrender charge.
Lastly, the owner is not required to annuitize the contract.
- can be purchased with a single premium or ongoing premium payments
- premium payment options are similar to that of life insurance, monthly, Q, Semi, Annually.
- Benefit payments postponed until retirement age
WITHDRAWALS, PENALTIES, SURRENDER CHARGES
- when a withdrawal is taken from an annuity, the earnings or the growth portion, is taxed as ordinary income.
- IF a withdrawal is made prior to the age 59 1/2 there is an additional 10% penalty on taxable earnings.
- In order for the annuitant to avoid additional fees from the insurance company for early withdrawal, there is a waiting period called the surrender period. Surrender periods may be as short as 2 years up to 12 or more years.
DEATH BENEFIT
The deferred annuity death benefit does not provide a surviving family a life insurance policy. Rather, the accumulated contract value is paid to a selected beneficiary if the annuity owner dies during the accumulation period.
LIFE ONLY OPTION
Pure life income option- Payments stop when the annuitant dies, regardless of when that occurs; one month or 20 years. -
This pays the HIGHEST monthly income amount because there are no other contingencies and only the annuitants life expectancy was considered to determine the amount of the monthly payout.
also known as,
Straight life
Pure life
life- no refund
LIFE WITH REFUND OPTION
If the annuitant dies and the total payments received are less than the amount paid for the annuity, the difference is paid to the beneficiary. The money can be paid as;
- lump sum
- continuation of payments in the same amount as was being paid to the annuitant, called installment refund.
LIFE WITH PERIOD CERTAIN OPTION
Pays and income for as long as the annuitant is alive. In addition, the annuitant selects a payment period, typically 5, 10 or 20 years, and payments are guaranteed to be made for at least that number of years. If the annuitant dies before the end of the selected period, payments continue to the beneficiary for the rest of the period certain. No payments are made to the beneficiary if the annuitants lives past the period certain.
JOINT LIFE AND SURVIVOR
the insurer promises to make payments until the last survivor of 2 annuitants dies. For example, if the 2 annuitants were a married couple and the husband died first, payments would continue to the spouse for the rest of her life.
JOINT LIFE ANNUITY OPTION
Pays income until the death of the first of 2 or more annuitants. While the monthly payment is greater than other joint annuities, it is not considered suitable as a joint annuity because the survivor is left without an income.
4 FACTORS IN DETERMINING A LIFE ANNUITY PAYMENT AMOUNT
ANNUITANTS AGE- age is used to determine life expectancy, which indicates how long payments will have to be made. The younger the annuitant the lower the payment amount.
ANNUITANTS GENDER-Life expenctancy statistics show that as a group women live longer that men, women generally receive lower payments than men of the same age.
PAYMENT GUARANTEE-A refund option will lower the payment. With a period certain option, the longer the period, the lower the payment
ASSUMED INTEREST RATE- The insurer assumes that it will ear some rate of interest on the funds used to buy the annuity. The lower the assumed interest rate, the lower the payment.
4 BASIC TYPES OF ANNUITIES
- FIXED
- VARIABLE
- EQUITY-INDEXED
- MARKET VALUE ADJUSTED
FIXED ANNUITY
values are guaranteed against loss. Aside from surrender charges that may apply, the value of a fixed annuity will never be less than the amount paid into the contract.
- supported by the insurer’s general account
- long term low risk investments
- if annuitized- fixed income payments
- Money guaranteed by the company
