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17 Cards in this Set
- time from the first deposit to the selection of settlement option, during which taxes are deferred
Annuity (Liquidation) Period
- starts at the receipt of the first periodic payment, and continues on a regular basis
- upside down life insurance policy
- insurance policy protects against premature death while annuity protects against out living retirement benefits (super annuation)
- may have beneficiaries named
- owner rights begin at time of purchase (change annuity date, beneficiary, and settlement options)
- contract owner and the annuitant are the same person and the designated
beneficiary is the annuitant’s spouse, the IRS code allows the spouse to assume
ownership of the annuity upon the death of the annuitant. If death occurs during the
accumulation period, all rights of ownership are assumed to include tax deferment
- To discourage the use of annuities as short-term tax shelters, a 10% penalty tax is
levied against any premature withdrawals prior to 59½ years of age. This discourages
- When a contract is fully surrendered, any surrender charges will lessen the contract
payout. Surrender charges diminish over a stated number of years (set by the insurer)
until they disappear.
- Annuity surrender charges are generally waived if the annuitant is hospitalized for an
extended period, placed in a nursing facility, becomes disabled, or dies.
- Corporations may use annuities to provide pension benefits for employees. The annuity
is considered a Group Deferred Annuity with each employee receiving a certificate.
Corporations may also use annuities to fund nonqualified deferred compensation
plans or qualified retirement plans, and to structure payments of liability settlements.
Corporations may not use annuities to invest profits and defer taxes as the assets grow
for the benefit of the corporation.
- Privately, annuities may be used as a basic savings vehicle, or a tax-qualified retirement
plan. When used as a basic savings vehicle, contributions are unlimited. If used as a
retirement plan (TSA, IRA), contributions are limited by the Internal Revenue Code.
Single Premium Immediate Annuity (SPIA)
- single premium (lump sum) is put into an account
- may immediately withdraw benefits (within 1 year of issue date)
- no accumulation period
- used as immediate income
- retirement plan buy out, or the
death proceeds of a life insurance policy might be used to purchase.
Single Premium Deferred Annuity (SPDA)
– a single premium (lump sum) is
put into an account from which the annuitant will draw the periodic benefits at some
specified time in the future; benefits begin more than one year from date of purchase.
If a deferred annuity contract is canceled during the early years, the insurer normally
assesses a surrender charge. This annuity is ideal for educational funding.
Flexible Premium Deferred Annuity (FPDA)
– flexible contributions may be made
as often and in whatever amount the contract owner desires; however, most insurers do
set a minimum, benefits begin more than one year from the date of purchase. Deferred
annuities are normally purchased to defer taxes on growth and accumulation, such
as a retirement fund. Only the contract owner can sign the request for surrender of a
deferred annuity and if accomplished during the early part of the accumulation period
the insurer normally assesses a surrender charge
Fixed (Guaranteed) Annuity
– annuitization of benefits is a level fixed amount, and the
declared interest during the accumulation period is a fixed guaranteed rate.
a. The insurer guarantees a minimum rate of interest credited during the
accumulation period and a minimum amount of payout per dollar during the
b. The actual rate of interest credited at any one time will be a function of the
earnings rate of the insurer’s general account.
c. A 20-year projected schedule of cash availability must be shown for each
d. The fixed amount purchasing power decreases as the cost of living increases.
e. The insurer’s general account assets guarantee the fixed annuity contract.
f. The insurer bears any investment risk.
g. The Bailout Provision (Escape Clause) favors the annuitant and states if the
interest rate drops below the current rate by a specific amount, the annuity may
be surrendered without surrender charges being applied. This provision might
state that if the contract interest drops 1% (not basis points) below the current
rate, a surrender without charges is allowed. Since it applies to a declared
interest rate, this tells us that this provision, when used, is part of a fixed
annuity. Variable annuities do not use a declared interest rate.
Equity Indexed Annuity
- interest rates linked to stock market index like S&P
a. The contract owner enjoys safety of principal and some guaranteed minimum
returns (usually 3%), as well as some of the gains in the stock market.
b. The contract owner is normally obligated to remain in the contract for some
minimum period of time, such as possibly five years.
Market Value (Adjusted) Annuity
– a type of SPDA, normally backed with the
assets of bonds. The MVA is normally purchased for periods of three to ten years, with
a longer period paying a higher yield. Thus, a three-year MVA might pay 5% and a
five or seven-year MVA might pay 6 or 7%. Generally speaking, these annuities were
popular in the 1980’s. Since the fixed rate investments are currently at lower rates, the
popularity of the MVA has reduced greatly.
– annuity payments fluctuate according to the investment experience of the
separate account(s) the contract owner has designated as his/her investment choices.
Payments are made in terms of units rather than dollars.
a. The contract owner bears the investment risk and receives the return actually
earned on invested assets, less any charges by the insurer.
b. The money paid during the accumulation period is invested in separate account(s); separate from insurer’s general account.
c. The investment varies according to the funding medium, which fluctuates.
d. Both an insurance license and a securities license (National Association
of Securities Dealers — NASD) are required. A prospective buyer of a variable annuity must be provided with a prospectus. The separate account(s) are managed
by a person referred to as a fund manager. It is this person’s responsibility
to get the most return possible with the least amount of risk within the family (category) of a particular account. Fund managers normally charge a
management fee for these services. The amount of the fee is not only stated in
the prospectus but also in the variable contract.
e. Transfers between accounts are authorized and completed at the direction of the
f. The periodic payments made during the accumulation period may be flexible in
size and frequency.
g. Premiums purchase accumulation units in the fund. Upon annuitization,
accumulation units are converted to annuity units. The income is paid based on
the value of the annuity units.
h. The number of annuity units received remains level, but the unit value fluctuates.
i. When computing the payments during the annuitization period the insurer uses
an assumed interest rate for the calculation. The higher the assumed interest
rate (AIR) the greater the amount of each monthly benefit. The AIR is used for
any systematic annuitization.
Nonforfeiture of Fixed and Equity-Indexed Annuities
1. Fixed and Equity-Indexed Annuities place requirements upon the insurer to absorb
100% of the management and investment risk associated with the obligations
guaranteed in the contract. The insurer is accountable to invest properly and reserve
adequately to fulfill the guarantees of the contract.
2. The contract owner assumes no market risk with respect to account values; there is no
potential for losing any principal. The insurer must price its annuity taking into account
its cost of doing business and still fulfill the promise of the contract to its holder.
3. The insurer must pay any excess interest above the guaranteed minimum interest rates
specified in the contract.
Annuity (Benefit) Payment Options
1. Temporary Annuity – annuity benefit payments are received for a specified period of
time, or until death of the annuitant; whichever occurs first.
2. Life Income (Pure or Straight Life) – annuity is payable for as long as the annuitant lives,
and upon death all payments cease (pays more monthly income than any other options).
3. Life Income Period Certain (Fixed Period) – annuity is payable for life, or for a
specified period, whichever occurs last. If annuitant lives beyond the period, benefits
continue for life.
4. Life Income with Refund (Fixed Amount or Cash Refund) – annuity is payable
for the lifetime of annuitant. Upon his/her death, if an annuitant has not received an
amount equal to the total of all payments made into the annuity, the balance is refunded
to the beneficiary either lump sum or in installments, sometimes referred to as the
5. Fixed Amount (Level Benefit) – pays an amount as stated by the annuitant for as
long as the principal and interest will pay the set or level benefit.
6. Life Income Joint & Survivor – annuity is payable to two or more annuitants
while both are living. Upon the death of the first annuitant, survivor benefits continue,
normally reduced to two-thirds or one-half, for the survivor’s income until the survivor
dies. Joint and two-thirds life annuity is considered a full annuity for a married couple.
This income benefit requires the greatest amount of capital available to sustain a specific
(certain) payment level. The higher the percentage of payment for the survivor (1/2,
2/3), the greater amount of capital is needed.
7. Joint Life – annuity is payable to two or more annuitants while both are living. Upon
the death of the first annuitant, the benefits stop.
Securities Act of 1933
- disclosure act
- states that a buyer gets a prospectus
- shows financial information about the insurer and contract owner rights
- fees must be disclosed
Securities Exchange Act of 1934
– regulates as does the Act of 1933, but for the secondary
securities market, such as the exchange of securities. Under this Act the insurance company
must register as a broker-dealer and the company’s associated people must pass a securities
examination on securities business and regulations. Associated people would include agents,
agency managers and some home office employees. This Act also regulates financial reporting
requirements, such as annual reports to shareholders and advertising. The Maloney Act of 1938
amended the Securities Act of 1934 to form one or more regulating bodies to regulate itself and
assure compliance with the act’s standards. Thus the National Association of Securities Dealers
(NASD) was established in 1939 for this purpose. This sets the requirement for all broker-dealers
and agents selling Variable Life Insurance and Variable Annuities to be registered with the NASD after passing the appropriate securities examination.
Investment Company Act of 1940
insurance companies marketing variable contracts must
adhere to the Investment Company Act of 1940. Those producers (agents) who market Variable
Life, Variable Universal Life or Variable Annuities are under the jurisdiction of this legislation.
The act defines investment companies and mutual funds assets in the variable contract. The
Investment Company Act regulates investment company management and operations, plus sets
the rules concerning sales charges and investment manager’s fees. The format and content of
the periodic financial reports are also developed under the guidance of this act. The Investment
Company Act of 1940 sets the limitations of sales loads and requires an insurer to offer refunds
under certain circumstances.
California Annuity Laws
In California, it must be disclosed on the cover page of a Variable Annuity Contract, Variable Life
Insurance Contract, or Modified Guaranteed Contract, issued to a senior citizen, that during the
30-day cancellation period (free-look period) that the premium will be placed in a fixed account
or money-market fund, unless the customer otherwise directs that the premium be invested in a
stock or bond portfolio underlying the contract. If the customer does not direct the premium be
invested in a stock or bond portfolio, and if they return the contract within the 30-day period, they
will be entitled to a refund of the premium and policy fees. If the customer does direct that the
premium be invested in a stock or bond portfolio, and if they return the contract within the 30-day
period, they will be entitled to a refund of the contract’s account value, which could be less than
the premium paid for the contract.
Senior Insurance in California
1. Elder = any person residing in this state who is 65 +
2. If a life agent offers to sell to an elder any life insurance or annuity product, the agent
shall advise the elder or elder’s agent, in writing, that:
a. The sale or liquidation of any stock, bond, IRA, certificate of deposit, mutual
fund, annuity, or other asset to fund the purchase of the product may have tax
consequences, early withdrawal penalties, or other costs or penalties as a result
of their sale or liquidation.
b. The elder or elder’s agent may wish to consult independent legal or financial
advice before selling or liquidating any assets prior to the purchase of any life
or annuity products being solicited, offered for sale, or sold.
3. A life agent who offers for sale, or sells a financial product to an elder on the basis of
the product’s treatment under the Medi-Cal program, may not negligently misrepresent
the treatment of any asset under the statutes, rules, and regulations of the Medi-Cal
program, as it pertains to the determination of the elder’s eligibility for any program or
4. A life agent who offers for sale, or sells any financial product based on its treatment
under the Medi-Cal program shall provide, in writing, a disclosure entitled “Notice
Regarding Standards For Medi-Cal Eligibility”. This notice is a brief description of
the Medi-Cal eligibility rules, and is to be clearly separate from any other document or
writing, and it to be signed by the prospective purchaser and that person’s spouse, and
legal representative, if any.
5. In addition to any other reasons that a sale of an individual annuity to a senior may
violate any provision of law, an annuity shall not be sold to a senior in any of the
a. The senior’s purpose in purchasing the annuity is to affect Medi-Cal eligibility
and either of the following are true:
1) The purchaser’s assets are equal to or less than the community spouse resource
allowance established annually by the State Department of Health Services
pursuant to the Medi-Cal Act.
2) The senior would otherwise qualify for Medi-Cal.
b. The senior’s purpose in purchasing the annuity is to affect Medi-Cal eligibility
and, after the purchase of the annuity, the senior or the senior’s spouse would
not qualify for Medi-Cal.
6. In the event a fixed annuity is issued to a senior, as relates to item 5. above, the issuer
shall rescind the contract and refund to the purchaser all premiums, fees, and any
interest earned under the terms of the contract. This remedy shall be in addition to any
other remedy that may be available.
7. As respects the sale, offering for sale, or generation of leads for the sale of life
insurance, including annuities, to senior insureds or prospective insureds by any person,
the following rules shall apply:
a. Any person who meets with a senior in the senior’s home is required to deliver
a notice, in writing, to the senior not less than 24 hours prior to the meeting that
1) During the visit a sales presentation will be given on a stipulated product.
2) The senior has the right to have other persons present at the meeting, including
family members, financial advisors, or attorneys.
3) The senior has the right to end the meeting at any time.
4) The senior has the right to contact the Insurance Department for information, or
to file a complaint. The notice shall include the consumer assistance telephone
number at the Insurance Department.
5) Who the individuals arriving at the home will be, complete with any applicable
insurance license information.
b. Upon arriving at the senior’s home, the person shall, before making any other
statement, other than a greeting, or asking the senior any other questions,
state that the purpose of the contact is to talk about insurance, or to gather
information for a follow-up visit to talk about insurance, and state all of the
1) The names and titles of all persons arriving at the home.
2) The name of the insurer being represented by the person making the call.
c. Each person attending the meeting shall provide the senior with a business card or
other written identification stating the person’s name, business address, telephone
number, and any insurance license number.
d. The persons attending the meeting shall end all discussions and leave the home
immediately after being asked to leave by the senior.
e. A person may not solicit a sale, or order for the sale of an annuity or life insurance
policy at the residence of a senior, in person or by telephone, by using a plan,
scheme, or approach that misrepresents the true status or mission of the contact.