Unit 9 - Annuities Flashcards
Accumulation Period
The “Pay-In” period, when an annuity is being funded, before a payout begins. The money paid into an annuity is called a premium.
What can the owner generally do during the accumulation period?
- 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
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.
When the annuitization period starts, who does the money belong to?
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
Parties involved in the Annuity Contract
- Contract Owner
- Annuitant
- Beneficiary
- Insurer
Contract Owner
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
Annuitant
“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
Beneficiary
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.
Insurer
The party who issues the annuity contract.
Immediate Annuity
“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.
Deferred Annuities
Do not start an income stream immediately,
Owner is not required to annuitize the contract.
How can deferred annuities be paid for?
- Single Premium Deferred Annuity (SPDA)
- Periodic Premium Deferred Annuity (PPDA)
- Flexible Premium Deferred Annuity (FPDA)
Surrender or Withdrawal
- 10% tax if withdrawn before 59 1/2
- Surrender period - waiting period
- Surrender fee - penalty for early withdrawal
Death Benefit
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
Life Only Payout Option
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.
Life with Refund Payout 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 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.
Life with Period Certain Payout Option
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.
Joint-Life-and-Survivor Payout Option
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.
Joint Life Payout Option
Payments stop when first of two annuitants dies
Factor’s in determining a Life Annuity Payment Amount
- Annuitant’s age
- Annuitant’s gender
- Payment guarantee
- Assumed interest rate
Fixed period and fixed amount are types of what annuities?
Temporary Annuities
Types of Annuities
- Fixed
- Variable
- Equity-Indexed
- Market Value Adjusted
Fixed Annuities
Values are guaranteed against loss
General Account
- 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.
Interest Rate Guarantees
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.
Level Benefit Payment Amount
Annuitants can count on getting a specified dollar amount of income on a regular basis. May become inadequate to live on with inflation.
Variable Annuities
Have the potential to keep with pace of inflation because they are supported by investments (stocks and bonds).
Not guaranteed against loss.
Separate Account Assets
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.
Sub-Accounts
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.
Accumulation Units
The accumulated value of a variable annuity is expressed as accumulation units, similar to shares purchased in a mutual fund.
How do you find the value of an accumulation unit?
by dividing the total value of the separate account by the number of existing accumulation units.
Annuity Units
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.
Equity Indexed Annuities
- 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
Market Value Adjusted Annuities
- 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
Taxes
Earnings on accumulated values are tax deferred until distribution begins.
The recipient must pay the ordinary income rate on any interest or investment earnings.
Uses of Annuities
- Life Income
- Tax favored savings
- Funding IRA
- Education funds
Employer-Sponsored Retirement Plans
Annuities are designed to accept employer contributions made to the retirement plans set up for their employees.
