CH 6 Annuities

Annuity

A contract that provides income for a specified period of years or for life. It protects individuals against outliving their money.

the primary purpose of an annuity

To provide retirement income and help accumulate money or liquidate an estate.

How are annuities different from life insurance?

Life insurance pays a death benefit upon death, while annuities are designed to provide income while the annuitant is alive.

Do annuities pay a face amount upon the death of the annuitant?

No. In most cases, annuity payments stop upon the annuitant’s death.

What do annuities protect against?

Outliving one’s money.

What rights does the owner of an annuity have?

The owner can:

• Name the beneficiary

• Change ownership

• Surrender the annuity

• Exercise contract rights

Can a corporation or trust own an annuity?

Yes

Who is the annuitant?

The person whose life expectancy is used to determine benefits and who receives payments.

What must the annuitant be?

A human being (natural person)
This is because annuities are based on life expectancy

Who receives annuity benefits if the annuitant dies during the accumulation period?

The beneficiary receives the amount paid into the annuity or the cash value, whichever is greater.

What is the accumulation period?

The period when the owner pays premiums into the annuity and funds grow tax deferred.

Another name for accumulation period?

Pay-in period.

During the accumulation period, are funds paid into or out of the annuity?

Into

What is the annuitization period? (Distribution period/liquidation period/pay-out period)

The period when accumulated funds are converted into income payments.

During the annuitization period, are funds paid into or out of the annuity?

Out to

What is the annuitization date?

The date when annuity benefit payments begin.

What determines the amount of annuity income payments?

• Premium paid/cash value

• Frequency of payments

• Interest rate

• Annuitant’s age

• Annuitant’s gender

How does life expectancy affect annuity payments?

Shorter life expectancy = higher payments.
Longer life expectancy = lower payments.

Who receives higher annuity payments: a 65-year-old male or a 65-year-old female?

The male because females statistically have longer life expectancies.

What is a single premium annuity?

An annuity funded with one lump-sum payment.
Can be immediate or deferred

What is a periodic premium annuity?

An annuity funded through multiple payments over time.

What are the two types of periodic premiums?

• Level premium

• Flexible premium

Which type of annuity uses periodic payments?

Deferred annuities.

What are the two types of deferred annuities?

• SPDA = Single Premium Deferred Annuity

• FPDA = Flexible Premium Deferred Annuity

What is a fixed annuity?

An annuity with guaranteed interest and guaranteed payment amounts.

Where are fixed annuity premiums invested?

The insurer’s general account.

What type of investments are found in the general account?

Conservative investments, mainly bonds.

Who bears the investment risk in a fixed annuity?

The insurance company.

What is guaranteed in a fixed annuity?

• Minimum interest rate

• Payment amount

What is a disadvantage of fixed annuities?

Inflation can reduce purchasing power.

What is a variable annuity?

An annuity where payments vary based on investment performance.

Why are variable annuities considered securities?

Because funds are invested in securities such as stocks and bonds.

What licenses are required to sell variable annuities?

• Life insurance license

• Securities license

What organization regulates variable annuities?

SEC and state insurance regulators.

What happens to accumulation units when annuitization begins?

They are converted into annuity units.

What is an equity indexed annuity?

A fixed annuity with interest tied to a market index.

What index is commonly used for indexed annuities?

S&P 500.

How do indexed annuities compare to fixed and variable annuities?

• More return potential than fixed

• Less risky than variable

What is an MVA/MGA annuity?

A single premium deferred annuity with a guaranteed interest period.

How long is the guaranteed period for an MVA?

Usually 3–10 years.

What happens if interest rates rise when an MVA is surrendered?

A penalty may apply.

What happens if interest rates decrease when an MVA is surrendered?

The insurer may provide a bonus.

What is a pure life annuity?

Lifetime payments that stop when the annuitant dies.

What is the advantage of pure life?

Highest monthly payment.

What is the disadvantage of pure life?

Remaining funds are kept by the insurer at death.

What is a refund life annuity?

A lifetime annuity that guarantees the remaining principal is refunded to the beneficiary.

What are the two types of refund life?

• Cash refund

• Installment refund

What is life with period certain?

Lifetime payments with a guaranteed payment period for beneficiaries.

What is a joint life annuity?

Payments continue until the first death among two or more annuitants.

What is a joint and survivor annuity?

Provides income to two people that neither can outlive.

After one person dies, what percentage does the survivor usually receive?

Usually ½ or ⅔ of the original payment.

What are annuities certain?

Payments guaranteed for a fixed period or fixed amount.

Are annuities certain based on life expectancy?

No

What is a fixed-period annuity?

Pays for a specific period regardless of whether the annuitant is alive.

What is a fixed-amount annuity?

Pays a specified amount until funds are exhausted.

What is a qualified retirement plan?

A retirement plan meeting IRS requirements for favorable tax treatment.

What happens to growth in qualified plans during accumulation?

It grows tax deferred.

What is a nonqualified plan?

A plan where contributions are not tax exempt, but growth is tax deferred until withdrawn.

What is the excess contribution penalty for traditional IRAs?

6%.

Who can use a 403(b) plan? (Tax-sheltered annuity (TSA))

• Nonprofit employees

• Public school employees

Who is considered a senior consumer under these rules?

65+

What must agents disclose when a senior sells assets to buy an annuity?

• Tax consequences

• Early withdrawal penalties

• Other costs

What is the minimum free-look period for senior annuity purchases?

30 days

What is the penalty for an individual’s first violation of senior rules?

1,000

What is the penalty for subsequent individual violations?

5-50,000

What is the insurer penalty for the first violation?

10,000

What is the insurer penalty for subsequent violations?

30,000-300,000