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24 Cards in this Set
- Front
- Back
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What is a non-qualified annuity?
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The agreement between a contract owner and an insurance company where the owner invests money on an after-tax basis though the money will accumulate tax deferred
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Tax Penalty for Annuities
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If money is withdrawn before age 59.5 the annuitant may be sujbect to a penalty and be taxed on the increase of value in the investment
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Fixed versus Variable Annuitities
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Payments: Fixed proves specified, variable provides variable payments at intervals Rate of Return: Only fixed has guaranteed minimum Risk: Fixed assumed by insurance company, Variable assumed by the annuitant Hedge against Inflation: Fixed No, Variable Yes Classification: Only variable a security Prospectus Delivery: Required only for variable |
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What is a separate account in regards to variable annuities?
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Accounts segregated from insurance company's general account, registered as investment companies. Not affected by losses/gains from insurance company GA. Typically separate accounts contain different underlying portfolios into which contract owner can allocate payments. Money can be transferred within subaccounts without charge
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Difference between Immediate Annuities and Deferred Annuities?
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Immediate begin paymetns one pay period after lump-sum deposit made, can only be funded with a single premium. Deferred may delay payments for undertemined period post purchase. Most are funded with periodic payments (premiums)
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How do deferred annuities work?
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First accumulation period during which owner makes payments and accumulation units grow. Then annuity period can be started, and owner will receive money based on value of annuity units |
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How do you calculate the NAV of an accumulation unit?
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Total Net Assets/ Total Units Issued
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How is the number of annuity units determined?
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Age and Gender Life expectancy Selected Settlement option Projected Growth rate (Assumed Interest Rate) |
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Why are annuities often better than mutual funds?
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They provide a death benefit to the owner
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Payout Options for Receiving Annuity Payments
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Straight-Life: Receive payment for life but they stop at death (highest payout) Life Annuity with Period Certain: Receive payments for life guaranteed for period, if person dies receive payment til end of period Unit Refund Life: Receive payments for life, certain amount of payments guaranteed, beneficiary receives payments in case of death Joint and Last Survivor Life: Receive payments for life, payments end on last person's death |
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Assumed Interest Rate (AIR)
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Used to project return over annuity period. Annuitants can choose AIR, but high AIR's can be more difficult to acheive return. If separate account performance equal to AIR, payment remains same. If lower, payment will be lower than previous, etc.
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Annuity Charges and Expenses
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Sales Charges: No maximum % charge Expenses: Deducted from investment account Management Fee: Investment Adviser receives Expense Risk: Insurance company guarantees they will not raise costs for administering contract beyond certain level (money set aside in case expenses do go up) Administrative: Costs of issuing/servicing contract Mortality: Helps cover costs of guaranteeing payments made for rest of person's life |
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Taxation for Withdrawals of Non-Qualified Annuities
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Follows LIFO method, so withdrawals are assumed to be taking out earnings first and then initial investment. Those earnings are taxed at normal income
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Taxation during Annuity Period
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Cost basis is paid out first, and then the earnings are received and taxed as ordinary income
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Death Benefit Taxation
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If an annuitant dies during accumulation period, annuity's value is incldued in estate for purchasing of calculating taxes. It avoids the probate process (lengthy estate process)
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Variable Annuity Regulation
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Selling agreements must be signed between underwriter and B-D of annuity sale. Once an RR has collected info on a potential annuity customer, this package must be sent to RR's Office of Supervisory Jurisdiction for approval
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1035 Exchanges
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Permits exchange of annuity contracts without creating taxable event
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Equity Indexed Annuities (EIAs)
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An annuity which offers returns linked to performance of underlying stock index. Company guarantees minimum rate of return but also variable element based on performance of index (has fixed and variable annuity elements)
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Calculating Returns for Equity Indexed Annuities
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Equity Indexed Annuity never returns as much as index. Participation rate says annuity was responsible for % of index performance. If 80%, a 10% index gain is 8% annuity gain. Some companies use spread fee (subtracted from gain) or a hard cap that can't go above
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Indexing Methods for calculating EIAs
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Annual Reset: calculates return based on increase in index from beginning of year to end, ignoring decreases High Water Mark: Uses three highest values to calculate rate of return Point to Point: compares index value on two different dates Index Averaging: Calculate average value on daily/monthly basis |
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Downsides to EIA
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Do not include dividends which are a large portion of benefit to indexes. Limit how much of the index gain an owner can receive. Can take many years to receive money and has 59.5 early withdrawal penalty
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Variable Life Insurance
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Policyholders make payments to insurance company then money is deposited into separate accounts. Cash value built through higher premiums, since death benefits are guaranteed to be paid at face value of policy. Unlike many insurance policies variable life insurance lets your money grow and protect against inflation
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Variable Universal Life Insurance
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Combines flexibility of universal life policy with investment aspect of variable life. Can adjust premiums/death benefits to meet changing situation, and death benefit passes to beneficiary tax-free (true of all life insurance policies)
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Guidelines for Communication Regarding Variable Products
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Must be identified as an insurance product. Must make clear that these are not very liquid Must not overemphasize guarantees for variable policies. When illustrating sample projections, one assumed rate of return must be 0%, other cannot exceed 12% |
