Chapter 7. Annuities

annuity

contract that provides income for life or a set period; protects against outliving money; used for estate liquidation

annuitant

person receiving payments; must be a natural person; life expectancy affects payouts

owner (of annuity)

holds all rights (name beneficiary, surrender policy); can be a person or legal entity

beneficiary (annuity)

receives annuity payout or balance if annuitant dies; gets greater of cash value or total premiums paid

accumulation period

pay-in phase when owner funds annuity; gains grow tax-deferred

annuity period

pay-out phase when annuitant receives income; can last lifetime or set period

factors affecting annuity payments

premium/cash value, payment frequency, interest rate, age, gender

life expectancy and annuity

shorter life expectancy = higher benefit; longer expectancy = lower benefit

premium payment options (annuities)

single premium (lump sum) or periodic premium (level or flexible installments)

immediate vs. deferred annuity

immediate = income starts within 1 year; deferred = income starts after 1 year.

nonforfeiture (annuities)

guarantees deferred annuities have a surrender value if canceled before annuitization.

surrender charge

fee for early withdrawal; decreases over time; applied to cash value minus charge.

fixed annuity

pays fixed income; guaranteed interest; backed by insurer’s general account.

interest rate guarantees

insurer must pay minimum rate (e.g., 3%) even if current rates drop.

equity indexed annuity

fixed annuity with growth tied to market index; guarantees minimum + pays excess interest.

variable annuity

invested in separate account; no guaranteed rate; requires insurance + securities license.

accumulation vs. annuity units

accumulation units grow during pay-in phase; convert to annuity units for payout.

market value adjusted annuity (mva)

interest rate fixed for term; surrender value affected by current interest rates.

refund life annuity

guarantees full payout via cash refund (lump sum) or installment refund (continued payments).

life with period certain

pays income for life + guarantees payments to a beneficiary for a set time if death occurs early.

single life vs. multiple life annuity

single = 1 person; multiple = 2+ lives (joint or joint and survivor).

joint life

pays until first annuitant dies; then stops.

joint and survivor

pays for life of both; survivor gets reduced income (½ or ⅔) after first death.

annuities certain

short-term annuities; pay fixed period or fixed amount regardless of life.

fixed-period installments (annuity certain)

pay for a set time only, whether or not annuitant is alive.

fixed-amount installments (annuity certain)

pay fixed amount until funds are gone, even after annuitant’s death.

lump-sum settlement

use a single premium immediate annuity (SPIA) to convert a lump sum into periodic income.

retirement income

annuities are often used to fund qualified retirement plans with favorable IRS tax treatment

qualified retirement plan

meets IRS rules; contributions are tax-deductible; taxed only when benefits are received; must not favor top employees.

nonqualified retirement plan

contributions are not tax-deductible; gains are taxed only at withdrawal.

earned income

money from wages, salary, or commissions; does not include investment or unemployment income.

individual retirement annuity (ira)

anyone with earned income can contribute; couples can contribute double; 6% penalty for over-contribution.

traditional ira tax benefit

contributions are tax-deductible based on income and plan participation; assets grow tax-deferred.

guaranteed minimum withdrawal benefit (gmwb)

allows fixed % withdrawal each year until initial investment is recovered; protects against losses.

tax-sheltered annuity - 403(b)

for employees of nonprofits and public schools; funded by employer/employee; salary reductions not taxed now.

education funds

annuities can grow funds tax-deferred to help pay for college.

long-term care needs

annuity money can be used tax-free for long-term care premiums under the Pension Protection Act of 2006.

business use of annuities

used to fund employee retirement plans; helps retain employees; supplements Social Security.

main use of annuities

to provide retirement income.

suitability factors

age, income, financial goals, risk tolerance, liquidity, time horizon, assets, gov. benefit eligibility, etc.

consumer disclosure requirements

must inform about surrender charges, tax penalties, fees, riders, and market risks.

when suitability rules do not apply

direct solicitations, ERISA/government/church plans, 401(k)/403(b)/408 plans, lawsuit settlements, prepaid funeral plans.

duty owed to seniors by insurers and agents

must act with honesty, good faith, and fair dealing when soliciting insurance to those age 65 or older.

advertising to seniors rule

ads targeting age 65+ must clearly state that an agent may contact the applicant.

prohibited advertisement practices

cannot use deceptive or fake names, mislead about agent/insurer status, or use misleading terminology.

disclosure before selling annuities to seniors

must advise in writing of possible tax consequences, penalties, or costs; recommend legal/financial advice before sale.

penalties for violating senior annuity rules

• $1,000 for 1st offense

• $5,000–$50,000 for 2nd or more

• If harm is significant: $10,000 first, $30,000–$300,000 each subsequent; license may be suspended.

required disclosure period for annuity cancellation

policy must allow at least 30 days for seniors to cancel and return for a full refund.

investment restriction during 30-day cancellation period

premium can only be put in fixed-income or money-market funds, unless owner requests otherwise.

variable annuity cancellation rule

if funds are invested early and owner cancels, insurer must refund account value within 30 days of cancellation notice.