Annuities and Taxation Practice Flashcards

Vocabulary terms and definitions related to types of annuities, their classifications, taxation rules, and suitability standards as presented in the Ohio Life Pre-licensing lecture notes.

Annuity

A unique insurance contract designed to provide income security and protect against the risk of outliving one's assets in retirement.

Estate Liquidation

The systematic process of spending down assets, which is the primary goal of an annuity, as opposed to life insurance which creates an estate.

Annuitant

The party whose life determines the payment schedule within an annuity contract.

Exclusion Ratio

A formula used to determine the annual annuity income exempt from federal income taxes, calculated as the total investment divided by the expected return.

Exclusion Ratio Formula

$\frac{\text{Total investment in the contract}}{\text{Expected return}}$.

Suitability

The requirement that a producer has reasonable grounds to believe a recommendation meets the consumer's insurance needs, financial objectives, and risk tolerance.

Senior Consumer

Defined as any person who is age $65$ or older for the purposes of annuity suitability standards.

Straight Life Annuity

A pure life annuity that provides the highest monthly benefit by paying for life with no survivorship or refund for a beneficiary.

Joint Life Annuity

A multiple-life contract that pays benefits to two or more annuitants simultaneously until the first annuitant dies, at which point all benefits end.

Joint and Survivor Annuity

A multiple-life contract that guarantees income payments for the duration of two lives, continuing until the last annuitant dies.

Annuity (Period) Certain

An income option where installments are paid for a fixed period only; if the annuitant dies during this period, payments continue to a beneficiary for the remainder of the term.

Life Annuity with Period-Certain

An option that pays guaranteed income for the annuitant's life or a specified period, whichever is longer.

Life with Refund Option

An annuity that assures the return of the original principal paid into the contract; remaining funds are paid to a beneficiary if the annuitant dies early.

Variable Annuity

A contract where premiums are invested in a separate account containing securities like stocks or bonds, offering no guaranteed return but protection against inflation.

Fixed Annuity

A conservative product that pays a guaranteed, predetermined, or level benefit amount derived from the insurer's general account.

Separate Account

A unique account for variable annuities where assets are faciality segregated from the insurer's general account and investment risk is assumed by the contract holder.

Accumulation Units

The units purchased with contributions (minus expenses) used during a variable annuity's pay-in phase.

Annuity Units

The accounting measurement used to determine the fixed number of units in each dollar payment during the variable annuity's payout phase.

Equity-Indexed Annuity (EIA)

A fixed annuity offering an interest rate linked to a stock-market index, providing safety of principal and a guaranteed minimum return with upside potential.

Market Value-Adjusted Annuity (MVA)

A modified guaranteed annuity where the account value fluctuates with market interest rates, shifting some investment risk to the contract owner.

Participation Rate

In an equity-indexed annuity, the specific percentage of the equity index's appreciation that the contract owner will receive as a return.

Surrender Charges

Also known as back-end loads, these are penalties assessed when a contract owner cancels an annuity or makes excessive withdrawals in early policy years.

Non-forfeiture Value

The representational value of an annuity fund less any surrender charges before the funds are annuitized.

Section 1035 Exchange

A provision in the Internal Revenue Code allowing for the tax-free exchange of an annuity for another annuity, or a life insurance policy for an annuity.

Tax-Sheltered Annuity (TSA)

A special annuity plan, also known as a $403(b)$ or $501(c)(3)$ plan, reserved for non-profit organizations and their employees.

Qualified Annuity

An annuity purchased as part of a tax-qualified retirement plan, often funded with pre-tax dollars which lowers yearly taxable income.

LIFO (Last-In, First-Out)

The tax method used for premature withdrawals from annuities purchased after August $14, 1982$, where interest earnings are considered withdrawn first and taxed as ordinary income.

10% Penalty Tax

The federal tax penalty imposed on withdrawals from a deferred annuity taken before the age of $59 \frac{1}{2}$.

Measurable Life

A term used for the natural person designated as the annuitant when an annuity is owned by a non-natural entity like a corporation.

Guaranteed Minimum Withdrawal Benefit (GMWB)

A rider that allows an annuitant to withdraw a fixed percentage (generally between $5\%$ and $10\%$) of their investment regardless of market volatility.