Unit 9 - Annuities

Question 1

Accumulation Period

Answer 1

The “Pay-In” period, when an annuity is being funded, before a payout begins. The money paid into an annuity is called a premium.

Question 2

What can the owner generally do during the accumulation period?

Answer 2

• 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

Question 3

Annuitization Period

Answer 3

The “Pay-Out” period, money in the contract is converted into a series of regular income payments that can continue for the life or for a stated period of time.

Question 4

When the annuitization period starts, who does the money belong to?

Answer 4

The insurance company

• No additional premiums can be made
• No withdrawals can be taken
• The annuity cannot be surrendered
• The owner can’t change the contract

Question 5

Parties involved in the Annuity Contract

Answer 5

1. Contract Owner
2. Annuitant
3. Beneficiary
4. Insurer

Question 6

Contract Owner

Answer 6

The person or couple who buy the annuity and has certain rights.

• name or change the annuitant
• name or change the bene
• choose the payout option
• add more money or take withdrawals
• surrender or terminate the agreement

Question 7

Annuitant

Answer 7

“Insured”, they are chosen by the owner to receive the income payments during the annuitization period

• The annuitant’s life is used to determine the amount of guaranteed payments
• The annuitant must be a person, cannot be a corporation or trust

Question 8

Beneficiary

Answer 8

The bene has no voice in the control or management of the annuity and only benefits upon death of the contract owner.
Can be a person, trust or corporation.

Question 9

Insurer

Answer 9

The party who issues the annuity contract.

Question 10

Immediate Annuity

Answer 10

“Single Premium Immediate Annuity” (SPIA)

• Begins as soon as a month after purchase or may be delayed for up to one year.
• Interest is subject to taxes, the rest is treated as a return of principal and is tax free.

Question 11

Deferred Annuities

Answer 11

Do not start an income stream immediately,

Owner is not required to annuitize the contract.

Question 12

How can deferred annuities be paid for?

Answer 12

• Single Premium Deferred Annuity (SPDA)
• Periodic Premium Deferred Annuity (PPDA)
• Flexible Premium Deferred Annuity (FPDA)

Question 13

Surrender or Withdrawal

Answer 13

• 10% tax if withdrawn before 59 1/2
• Surrender period - waiting period
• Surrender fee - penalty for early withdrawal

Question 14

Death Benefit

Answer 14

The accumulated contract value is paid to a selected beneficiary if the annuity owner dies during the accumulation period.
The amount paid as a death benefit is the greater of:
- the accumulated value of the annuity; or
- the total premiums paid to that point, minus withdrawals

Question 15

Life Only Payout Option

Answer 15

AKA: Straight Life, Pure Life, Life-no refund

Payments continue on until the annuitant dies, regardless of when that occurs.

• Highest payout
• Only the annuitant’s life expectancy is considered to determine the amount of the monthly payout.

Question 16

Life with Refund Payout Option

Answer 16

If the annuitant dies and the total payments received are less than the amount paid for the annuity, the difference is paid to the bene.
The money will be paid as either:
- Lump sum, called a cash refund; or
- Continuation of payments in the same amount was being paid to the annuitant, called an installment refund.

Question 17

Life with Period Certain Payout Option

Answer 17

Pays an income for as long as the annuitant is alive. 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, the payments continue to the bene. No payments are made to the bene if the annuitant lives past the period certain.

Question 18

Joint-Life-and-Survivor Payout Option

Answer 18

Payments continue until the last survivor of the two annuitants dies. Usually husband and wife.
The owner can choose for continued payments in the same amount for the survivor or in a lesser amount such as 2/3 or 1/2 of their monthly pay out.

Question 19

Joint Life Payout Option

Answer 19

Payments stop when first of two annuitants dies

Question 20

Factor’s in determining a Life Annuity Payment Amount

Answer 20

• Annuitant’s age
• Annuitant’s gender
• Payment guarantee
• Assumed interest rate

Question 21

Fixed period and fixed amount are types of what annuities?

Answer 21

Temporary Annuities

Question 22

Types of Annuities

Answer 22

1. Fixed
2. Variable
3. Equity-Indexed
4. Market Value Adjusted

Question 23

Fixed Annuities

Answer 23

Values are guaranteed against loss

Question 24

General Account

Answer 24

• Fixed annuities
• the investment risk is on the insurer
• Assets in the general account are conservatively invested typically in debt securities and other fixed-rate investments that provide a steady return for years.

Question 25

Interest Rate Guarantees

Answer 25

Fixed annuity, The current rate is generally declared at the beginning of the year and guaranteed for the year. This will never be less than the guaranteed minimum rate that is stated in the contract.

Question 26

Level Benefit Payment Amount

Answer 26

Annuitants can count on getting a specified dollar amount of income on a regular basis. May become inadequate to live on with inflation.

Question 27

Variable Annuities

Answer 27

Have the potential to keep with pace of inflation because they are supported by investments (stocks and bonds). Not guaranteed against loss.

Question 28

Separate Account Assets

Answer 28

Insurers are not allowed to bear the risk of variable annuities. The assets that support variable annuities are kept in a separate account where the investment risk is born by the annuity owner.

Question 29

Sub-Accounts

Answer 29

The assets that support variable annuities are kept in separate account, the owner makes the various investment choices called sub-accounts, which resemble mutual funds.

Question 30

Accumulation Units

Answer 30

The accumulated value of a variable annuity is expressed as accumulation units, similar to shares purchased in a mutual fund.

Question 31

How do you find the value of an accumulation unit?

Answer 31

by dividing the total value of the separate account by the number of existing accumulation units.

Question 32

Annuity Units

Answer 32

When the annuity period begins, the accumulation units are converted to annuity units. At that point the annuity units stays the same throughout the annuity period. The value of the annuity unit can change.

Question 33

Equity Indexed Annuities

Answer 33

- Are fixed annuities, guaranteed payout - Value is guaranteed by company - Interest earned can go up or down like the stock market - Interest tied to stock market index (S&P 500) - No securities license is required

Question 34

Market Value Adjusted Annuities

Answer 34

- Very flexible annuity - Guaranteed rates if investment held until maturity - Single premium deferred annuities - Interest rate for a fixed number of years - Early surrender - -- Withdrawal penalty - -- Interest penalty - may be higher or lower - Not a variable product - no securities license required

Question 35

Taxes

Answer 35

Earnings on accumulated values are tax deferred until distribution begins. The recipient must pay the ordinary income rate on any interest or investment earnings.

Question 36

Uses of Annuities

Answer 36

1. Life Income 2. Tax favored savings 3. Funding IRA 4. Education funds

Question 37

Employer-Sponsored Retirement Plans

Answer 37

Annuities are designed to accept employer contributions made to the retirement plans set up for their employees.