Maryland Life Chapter 5

Deferred

withheld or postponed until a specified time or event in the future

IRS 

Internal Revenue Service: a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

Life contingency

dependent upon whether or not the insured is alive

Liquidation of an estate

converting a person's net worth into a cash flow

Natural person

a human being

Qualified plan

a retirement plan that meets the IRS guidelines for receiving favorable tax treatment

Suitability 

a requirement to determine if an insurance product or an investment is appropriate for a particular customer

annuity

a contract that provides income for a specified period of years, or for life

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The ____ of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The _____ of an annuity may be a corporation, trust, or other legal entity

Annuitant

The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written

must be a natural person

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out

accumulation period, also known as the pay-in period

period of time over which the owner makes payments (premiums) into an annuity

annuity period also known as the annuitization period, liquidation period, or pay-out period

which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant

Classification of annuities:

• Premium payment method: single premium vs. periodic

• When income payments begin: immediate vs. deferred

• How premiums are invested: fixed vs. variable

• Disposing of proceeds: pure life, annuity certain, or life refund annuity

immediate annuity

purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase

deferred annuity

annuity in which the income payments begin sometime after one year from the date of purchase

nonforfeiture law

stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization

surrender charge

to help compensate the company for loss of the investment value due to an early surrender of a deferred annuity.

waiver

Annuity contracts provide for a ______ of surrender charges if the annuitant is confined to a Long-term Care facility for at least 30 days

bail-out provision

allows the contract holder to surrender the contract without charge in the event that interest rates drop a specified amount within a specified time frame

pure life

this payment ceases at the annuitant's death (no matter how soon in the annuitization period that occurs). This option provides the highest monthly benefits for an individual annuitant. Under this option, while the annuity payments are guaranteed for the lifetime of the annuitant, there is no guarantee that all the proceeds will be fully paid out

life with guaranteed minimum settlement option

if the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. This option is also called refund life. It guarantees that the entire principal amount will be paid out.

Cash refund

when the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant. The cash refund option does not guarantee to pay any interest.

Installment refund

when the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out

Life with period (term) certain

another life contingency payout option. Under this option, the annuity payments are guaranteed for the lifetime of the annuitant, and for a specified period of time for the beneficiary

Single life annuities cover one life

and annuity payments are made with reference to one life only. Contributions can be made with a single premium or on a periodic premium basis with subsequent values accumulating until the contract is annuitized

Multiple life annuities

cover 2 or more lives. The most common multiple life annuities are joint life, and joint and survivor.

Joint life

payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop

joint and survivor arrangement

is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive. Although it is possible for the surviving recipient(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipients will receive a reduced payment after the first recipient dies. Most commonly, this option is written as “joint and ½ survivor” or "joint and ²/₃ survivor,” in which the surviving beneficiary receives ½ or ²/₃ of what was received when both beneficiaries were alive

short-term annuities

annuities certain are _________ that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated

fixed-period installments

annuitant selects the time period for the benefits, and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified amount of time only, whether or not the annuitant is living.

fixed annuity provides the following features

• Guaranteed minimum rate of interest to be credited to the purchase payment(s);

• Income (annuity) payments that do not vary from one payment to the next; and

• The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.

level benefit payment amount

With fixed annuities, the annuitant knows the exact amount of each payment received from the annuity during the annuity period

disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

general account

Fixed annuity premiums are deposited into the life insurance company's

account is comprised mostly of conservative investments like bonds. These investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide.

Know This

In fixed annuities, the premiums are deposited in the company’s general account.

In fixed annuities, the

insurer bears the investment risk

current interest rate

During the accumulation phase, the insurer will invest the principal, or accumulation, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the ___________, whichever is higher. The minimum rate is the lowest rate that the principal can contractually earn.

Indexed (or equity indexed) annuities

are fixed annuities that invest on a relatively aggressive basis to aim for higher returns

variable annuity

serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity

Underlying Investment

the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account

Interest Rate

the issuing insurance company does not guarantee a minimum interest rate

License Requirements

a variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA

accumulation units

Variable premiums purchase __________ in the fund, which is similar to buying shares in a Mutual Fund. ________ represent ownership interest in the separate account

annuity units

Upon annuitization, the accumulation units are converted to _________. The income is then paid to the annuitant based on the value of the annuity units. The number of ________ received remains level, but the unit values will fluctuate until actually paid out to the annuitant

market value or market value adjusted annuity

modified guaranteed annuity (MGA), is a single-premium deferred annuity that allows the owner to lock in a guaranteed interest rate over a specified maturity period, anywhere between 3 to 10 years

retirement

The principal use of an annuity is to provide income for

single premium immediate annuity

which will convert the lump sum into a series of periodic payments, providing a stream of income for the annuitant.

qualified retirement plans

Since annuities are a popular means to provide retirement income, they are often used to fund _______

Individual Retirement Account (IRA)

An annuity may be used to accumulate retirement funds on a tax-deferred basis in an __________

tax deferred

Both qualified and nonqualified annuities grow ______. Values that accumulate within an annuity contract are not subject to current income taxation

charitable gift annuity

type of planned giving, where a donor (individual annuitant or couple) makes an arrangement with a nonprofit organization (charity) that upon the donor's death, the balance of the assets in the annuity account will be retained by the organization as a gift

Trust Fund Plan

the employer usually retains a consulting actuary to determine the contributions necessary to fund the benefits. The employer pays the trustee the contributions that are held and invested. Upon retirement, the trustee pays the benefits to the employee according to the terms of the trust and pension plan provisions.

Insured Plans

the funding agency is an insurance company

Individual policies

Individual cash-value life insurance and annuity contracts (often used by smaller employers as the funding device);

Group permanent plans

Consisting of cash-value life insurance written on a group basis (when group permanent life insurance funds a pension plan, the amount of life insurance is usually set at $1,000 per $10 of annuity benefits)

Group deferred annuities

The annual contributions are used to purchase a deferred annuity for each employee each year

Suitability in Annuity Transactions

• Age;

• Annual income;

• Tax status;

• Financial needs and timeline;

• Investment objectives;

• Liquidity needs and liquid net worth;

• Existing assets;

• Intended use of annuity;

• Financial experience; and

  • Risk tolerance.

Phases

• Accumulation period - payments in, to insurer

  • Annuitization period - payments out, to insured

Parties

• Annuitant - insured; policy issued on annuitant's life; must be a person

• Beneficiary - will receive any amount contributed to annuity (plus any gain) if annuitant dies during accumulation period

• Owner - has all rights to policy (usually annuitant); can be corporation or trust 

Types of Annuities

• Fixed Annuities - guaranteed, fixed payment amount; premiums in general account

• Variable Annuities - payment not guaranteed; premiums are in separate account, and invested in stocks and bonds

• Indexed Annuities - interest rate tied to an index; earn higher rate than fixed annuities, not as risky as variable annuities or mutual funds

Premium Payments

• Single - ONE lump-sum payment. The principal is created immediately (used for both immediate and deferred annuities).

• Periodic (level or flexible) - multiple payments; annuity principal fund is created over time (used for deferred annuity only)

Income Payments

• Immediate - purchased with a single premium. Income payments start within one year of the date of purchase.

• Deferred - purchased with either lump sum or periodic-payments premium. Benefits start sometime after one year from the date of purchase (often used to accumulate funds for retirement). 

Settlement Options

• Lump-sum - at annuitization; all interest accumulated is taxable; additional 10% penalty can be imposed prior to annuitant's reaching 59 1/2.

• Life Only - insured cannot outlive income. Any monies not paid out are retained by company at insured's death. Pays highest monthly amount.

• Refund Life Annuity - guaranteed lifetime income. If the annuitant dies, the balance is "refunded" to the beneficiary. The installment refund option pays the beneficiary until the purchase amount is paid out. The cash refund option refunds the balance of the original annuity purchase amount minus payments made to the annuitant.

• Joint Life - 2 or more annuitants receive payments until first death, then payments cease.

• Joint and Survivor - income for 2 or more that cannot be outlived. Often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount.

• Life with Period Certain - specific monthly payment for life and a specific period of time (e.g., Life plus 10-year certain). If the annuitant dies before the payment period is up, the payment goes to beneficiary.

• Annuities Certain - payments guaranteed for a fixed period or until a certain fixed amount is paid out. NO LIFE option. 

• Any unpaid annuity benefits following the death of an annuitant are taxable when paid to the beneficiary

Interest Rate

• Guaranteed - company must pay this minimum percentage (usually, 3%).

• Current - exceeds guaranteed rate. Paid to the annuitant when the company's own investment is better than expected.