Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
55 Cards in this Set
- Front
- Back
|
Purposes of Annuities pt. 1
|
Life insurance protects against the risk of
premature death (dying too soon) • An annuity is designed to protect the annuitant against the risk of living too long (possibly outliving their financial resources during retirement) • Annuities are designed to transfer a risk from consumers to an insurance company – Risk being transferred is the risk of outliving your savings |
|
|
Purposes of Annuities pt. 2
|
• Serve as a means of providing money to the
annuitant • Annuities technically are not life insurance, but are sold by life insurance companies, so a basic understanding of annuities is necessary to qualify for a producer license |
|
|
Distribution of a Lifetime Income
|
• Annuities convert a sum of money into a series
of periodic payments that can be guaranteed to last a lifetime (sometimes longer) – Eliminates some of the uncertainty of handling sums of money in retirement years • Am I spending too little each month and not maximizing the use of my money? • Will I run out of money before I die because I am spending too much each month? |
|
|
Lump Sum Settlements
|
• Based upon payout option chosen, it is possible
to have a lump-sum cash payment made to the annuitant’s beneficiary if annuitant dies before the annuity fund (the principal) is depleted – Typically consists of an amount equal to the beginning annuity fund less the amount of income already paid to the deceased annuitant |
|
|
Accumulation of a Retirement Fund
|
• An annuity can be structured to allow for the
accumulation of funds over time so that when retirement finally arrives, income payments begin • Payments will continue as long as annuitant lives and may continue even longer, based upon the payout option chosen (i.e. to a surviving spouse) |
|
|
Accumulation of Education Funds
|
• Even though designed basically to create and
accumulate income for retirement, annuities can be used for other purposes as well – Can be used to create and accumulate funds for a college education |
|
|
Tax-Deferred Growth and Taxation pt 1
|
• Interest and earnings in an annuity grow taxdeferred
|
|
|
Tax-Deferred Growth and Taxation pt. 2
|
• Upon distribution (annuitization), the benefit
payments consist of a combination of principal and interest and are taxed in a manner consistent with other types of income – Portion of benefit payments that represents a return of principal (contributions into the annuity/cost basis) are not taxed • Since taxes already taken out of monies contributed (after-tax), those monies not taxed again – Portion representing the interest/earnings is taxed • Growth is tax-deferred, so taxed upon distribution |
|
|
Tax-Deferred Growth and Taxation pt. 3
|
The calculation used to determine the amount of
the benefit that is not taxable versus the amount that is taxable is referred to as the exclusion ratio – Represents the percentage amount of the benefit payment that is not taxable to the annuitant – The actual formula is • Investment in the contract (cost basis) divided by the expected return (one year’s payments x annuitant’s life expectancy) = exclusion ratio (percentage of the benefit payment that is not taxable) |
|
|
Tax-Deferred Growth and Taxation pt. 4
|
The calculation used to determine (continued)
– Once the cost basis of the annuity is considered to have been fully distributed, the entire benefit payment becomes taxable to the annuitant |
|
|
Tax-Deferred Growth and Taxation pt. 5
|
• Since annuities are designed for retirement, not
short-term investment, the IRS imposes an early withdrawal penalty tax of 10% for any withdrawals taken before age 59 ½ – This is in addition to ordinary income tax that is applied to the earnings portion – Certain exceptions to the 10% penalty may apply (i.e. death, total disability), but withdrawal still taxable as ordinary income |
|
|
Tax-Deferred Growth and Taxation pt. 6
|
Partial withdrawals are considered earnings first
and are taxable as ordinary income (LIFO—last in, first out) – Only after all the earnings have been taxed are withdrawals considered a return of principal – If withdrawal is before age 59 ½, 10% penalty tax could also apply |
|
|
Annuity Principles
|
• Annuities and life insurance are based on the
same fundamental principles – Both employ a pooling technique, with either premiums (for life insurance) or payouts (for annuities) being computed on the basis of probabilities of death and survival as reflected by a mortality table • An annuity may be defined as a series of periodic payments made over a fixed period of time or for the duration of the annuitant’s life – May also be described as the systematic liquidation of an estate |
|
|
Accumulation Period
|
• The time during which money is paid into the
annuity • Earnings grow tax deferred |
|
|
Annuitization or Annuity Period
|
• The time during which money is paid out of an
annuity • Taxation based upon the cost basis versus the earnings |
|
|
Nonforfeiture Provisions pt. 1
|
• If an annuity contract owner stops making
premium payments during the accumulation period, the owner does not lose the value accumulated in the annuity to that point • Contract holder may have several nonforfeiture options—the rights to the cash value accumulation up to the point the premiums stopped |
|
|
Nonforfeiture Provisions pt. 2
|
• Nonforteiture options include
– Can annuitize the contract; annuitant receives annuity payments based on that amount – Can surrender the contract and take a lump-sum payment • Surrender is not permitted once annuity payments begin • Most companies will level some kind of surrender charge – Typically a back end load which reduces the longer the annuity has been in force |
|
|
Nonforfeiture Provisions pt. 3
|
• According to the circumstances involved, owner
should be aware of possible tax ramifications – Upon surrender, all of the earnings become taxable at the policyowner’s current income tax bracket – If surrender is before age 59 ½, 10% penalty tax will apply • With the possible exception of certain situations |
|
|
Owner versus Annuitant
versus Beneficiary pt. 1 |
• The owner is the person who purchases the
annuity contract and has the right to – Name an annuitant or annuitants – Name a beneficiary – Determine the premium payments • Amount of premium paid • Frequency of premium payments – Decide when the annuity period will begin – Decide which settlement option will be used – Surrender the annuity or make a cash withdrawal |
|
|
Owner versus Annuitant
versus Beneficiary pt. 2 |
• The annuitant is the person who receives the
income distributed from an annuity – Payout amounts will be based on information pertinent to the annuitant (i.e. age and gender) • The beneficiary is the person who receives money from the annuity when either – The owner dies (if death occurs prior to annuitization) – The annuitant dies (if after annuitization and an applicable settlement option had been chosen) |
|
|
Owner versus Annuitant
versus Beneficiary pt. 3 |
• In many instances the owner and annuitant are
the same person, but just as with a life insurance policy’s owner and insured, this does not have to be nor is it always the case |
|
|
Immediate and Deferred Annuities
|
• Based on when annuity payments are to begin,
annuities are referred to as either a(n) – Immediate annuity • Payments are to begin in one payout interval after purchase of the annuity – Annuity benefit payments can be made on either an annual, semiannual, quarterly, or monthly basis – Monthly payment most common – Deferred annuity • Payments are to begin at some further point in the future |
|
|
Deferred Annuity Death Benefits pt 1
|
• Proceeds do not represent death protection like
benefits from a life insurance policy, but the death benefit of an annuity is the amount returned when the annuitant dies before receiving payments under the annuity • Applies during the accumulation period |
|
|
Deferred Annuity Death Benefits pt. 2
|
• For fixed annuities, upon death of the
policyowner many companies return at least the amount the policyowner has paid into the contract at the time of the policyowner’s death – Company policy for this does vary by insurer (i.e. some insurers may include interest) • For variable annuities, it is typically the greater of – The amount paid into the policy – The actual value of the separate account |
|
|
Deferred Annuity Death Benefits pt. 3
|
• Proceeds are distributed to the beneficiary
named in the contract – Any proceeds to the beneficiary in excess of cost basis are taxable as income to the beneficiary at the beneficiary’s current tax bracket • If no beneficiary, proceeds go to the deceased’s estate |
|
|
Single Premium or Payment
|
• Single premium immediate annuity (SPIA)
– Annuity purchased with a single lump-sum premium – Immediately set up to begin payment distributions • Single premium deferred annuity (SPDA) – Annuity purchased with a single lump-sum premium – Payment distributions deferred to a later date in the future |
|
|
Periodic Payment Deferred (PPDA) pt. 1
|
• Flexible premium deferred annuity (FPDA)
– Multiple premiums paid into the annuity • Premiums are paid over a period of time; may vary in amounts and payment times • Advantageous to persons whose incomes may be subject to considerable fluctuation – Payment distributions deferred to a later date in the future |
|
|
Periodic Payment Deferred (PPDA) pt. 2
|
• Level premium
– Premiums of equal amounts are paid in at regular periodic installments over a period of time – Can be annually, monthly, semiannually, or quarterly – Level premium annuities have a forced savings aspect to them |
|
|
Fixed Annuities pt. 1
|
• General account assets
– Premiums paid go into the insurer’s general account – Insurer invests in conservative investments that match its contractual guarantees and liabilities to the policyowner • Investing in highly rated long-term bonds quite common |
|
|
Fixed Annuities pt. 2
|
• Interest rate guarantees
– Fixed annuities consist of two interest rates and provide a guaranteed rate of return • Guaranteed interest rate is the rate that is guaranteed in the contract – Minimum rate paid to annuity owner regardless of market or economic conditions |
|
|
Fixed Annuities pt. 3
|
– Fixed annuities consist of two interest rates
(continued) • Current interest rate is the rate that is being credited at the current time – Rate declared in advance, and typically applies for one year – Insurer adjusts rate as deemed necessary but cannot change any more frequently than time period specified in the contract (again, usually an annual adjustment) – Current rate will never be below the guaranteed rate – Insurer assumes the investment risk |
|
|
Fixed Annuities:
Level Benefit Payment |
• When converted to payout mode (annuitized),
fixed annuities provide a guaranteed fixed benefit amount to the annuitant – Possible because the interest rate payable on the annuity funds is fixed and guaranteed at the point of annuitization • Amount and duration of benefit payments are guaranteed – Fixed benefit can be comforting to annuitant, but annuitant will most likely see the purchasing power of his income payments decline over the years due to inflation |
|
|
Variable Annuities pt. 1
|
• Characterized by a variable rate of growth and a
variable benefit payable to the annuitant • Rate of growth (or decline) and benefit payments vary according to the performance of the separate account • This separate account is used by the company to invest in the securities they offer as options |
|
|
Variable Annuities pt. 2
|
• Contract owner chooses from the investment
options available (for example: subaccounts consisting of several mutual fund choices), and their premiums are invested accordingly • May provide possible protection in regards to inflation • Annuity owner assumes the investment risk |
|
|
Variable Annuities pt. 3
|
• Regulation as securities
– Variable annuities are defined as securities • Must be registered as a security with the Securities and Exchange Commission (SEC) – Under the Securities Act of 1933 • Subject to both federal securities regulations and state insurance regulations |
|
|
Variable Annuities pt. 4
|
• Regulation as securities (continued)
– Persons selling variable securities must be dually licensed • Life insurance license in the state(s) they will be selling • Registered/licensed as registered representatives of a member firm of the Financial Industry Regulatory Authority (FINRA) – Series 6 or 7, and in most states a Series 63 • Also subject to both federal securities regulations and state insurance regulations |
|
|
Accumulation Units pt. 1
|
• Premiums paid into a variable annuity (less
items such as expense and sales charges) go into the separate account and purchase accumulation units—amount referred to as the net purchase payment – Buying accumulation units, not individual shares of stock or other securities – Use of accumulation units is an accounting measure used to determine an annuity owner’s proportionate interest in the separate account during the accumulation period |
|
|
Accumulation Units pt. 2
|
• Premiums paid into a variable annuity
(continued) – Number of units a net payment will buy depends on the value of an accumulation unit at that time – Annuity owner will never end up with fewer accumulation units than purchased, but the value of each unit will most likely vary based upon the performance of the separate account |
|
|
Annuity Units pt. 1
|
• Upon annuitization of the annuity contract,
accumulation units are converted into a fixed number of annuity units – Annuity units are used as an accounting measure to determine the amount of each payment during an annuity’s distribution phase or payout period – Calculation takes into account the value of each accumulation unit and other factors such as interest rate and mortality risk |
|
|
Annuity Units pt. 2
|
• After conversion, the number of annuity units
remains fixed throughout the remainder of the contract, but the value of each unit will vary based upon the performance of the separate account • In computing the annuity payouts, an assumed interest rate (AIR) is used as a benchmark for comparison |
|
|
Benefit Payment-Annuitized Contract pt. 1
|
• A number of factors are used to calculate the
initial and subsequent payout with a variable annuity that has been annuitized – Account value • At the time of annuitization – Age • At annuitization • To determine mortality statistics – Sex • To determine mortality statistics |
|
|
Benefit Payment-Annuitized Contract pt.2
|
• A number of factors (continued)
– Payout option selected – Actual performance of the separate account as compared to the AIR • The amount of payment with a variable annuity will vary, both up and down – Based upon the actual performance of the separate account as compared to the AIR |
|
|
Life Annuities
|
• Also referred to as pure life, straight life, life only
• Payout is guaranteed to the annuitant for life – Pays a benefit for as long as annuitant lives – All payments cease upon the death of the annuitant • Regardless of when death occurs (later or earlier in the annuitization phase) • This option pays the highest amount of monthly income – Due to being based on life expectancy only, with no further payment after death of annuitant |
|
|
Refund Life Annuity
|
• Payout is guaranteed to the annuitant for life
• If death occurs before an amount equal to the purchase price has been paid to the annuitant, the annuitant’s beneficiary receives the rest of the money in cash (lump-sum) or installment payments |
|
|
Life Annuity with Period Certain
|
• Guarantees a payout for a guaranteed minimum
number of years • Payout is guaranteed to the annuitant for life • If annuitant dies prior to the specified number of years having elapsed, annuitant’s beneficiary receives income payments until remainder of guaranteed (certain) period has elapsed • Life with period certain options vary by insurer, but common ones include – Life with 10 year period certain (perhaps most common), 15 year, and 20 year |
|
|
Joint Life and Survivor
(or Last Survivor) pt. 1 |
• Involves more than one annuitant (usually two,
but can include more, i.e. “last survivor”) • Insurer guarantees to pay an income for the life of more than one person • First annuitant receives payments as long as he is alive • Upon death of first annuitant, payments now made to the survivor for her lifetime |
|
|
Joint Life and Survivor
(or Last Survivor) pt. 2 |
• Based upon the contract, payments to the
survivor may remain the same or be of a lesser amount – Common options include • Joint and 100% survivor • Joint and two-thirds survivor • Joint and 50% survivor |
|
|
Joint Life
|
• Covers two or more annuitants
• Provides monthly income to each annuitant until one of them dies • Upon first death that occurs among the annuitants, all income benefits cease |
|
|
Equity-Indexed Annuities pt. 1
|
• Currently considered a type of fixed annuity
– Contract offers a guaranteed minimum interest rate – A guarantee against loss of principle if held to term • This guarantee not effective immediately; only after a minimum time period • Interest crediting tied to growth of an equity index (i.e. S & P 500) |
|
|
Equity-Indexed Annuities pt. 2
|
Actual interest credited to the contract is the
greater of – The guaranteed minimum interest rate – The percentage of growth of the index and the contract owners participation rate |
|
|
Market Value-Adjusted Annuities (MVA) pt. 1
|
• Based upon the type of contract itself, a MVA
can be – A fixed annuity – carrying MVA options and a traditional minimal guaranteed interest rate – A registered security product – with only MVA options but no minimum guaranteed interest rate – A variable annuity (security) – offering MVA options along with variable subaccounts invested in portfolios of stocks and bonds |
|
|
Market Value-Adjusted Annuities (MVA) pt. 2
|
• Market value adjustment feature applies only if
contract is surrendered before the contract period expires • Contracts must disclose on first page that nonforfeiture values may increase or decrease on basis of the market value formula specified in the contract |
|
|
Market Value-Adjusted Annuities (MVA) pt. 3
|
• If an MVA annuity owner decides to surrender
his contract early, a surrender charge and a market value adjustment applies – If interest rates decreased during the contract period, the market value adjustment will be positive and may add to the surrender value of the contract – If interest rates increased over that period, the market value adjustment will be negative, which would increase the contract’s surrender charge |
|
|
Group versus Individual Annuities pt. 1
|
• Annuities can benefit groups as well as
individuals – Retired employees receiving a stream of income from their former employer are getting an annuity benefit – Small employers often purchase group annuities for employees during their working years – Larger employers often operate their own annuity pool, using a trust fund to hold investment assets and dispense benefits |
|
|
Group versus Individual Annuities pt. 2
|
• Increased longevity and early retirement may
contribute to the rapid increase in the purchase of individual annuities • People retiring before age 65 should begin to fund their retirements earlier because mortality probability indicates they will have longer retirement periods than people retiring after age 65 – A longer retirement period requires greater initial funding |
