only life insurance companies can do what
guarantee income for the life of the annuitant
what does an annuity do
its principal function is to liquidate an estate by the periodic payment of money out of the contract. are ways of providing a stream of income for a guaranteed period of time. It is started with a large sum of money that will be paid out in installments
what does life insurance do
its principal function is to create an estate being a sum of money by the periodic payment of money into the contract.
the monthly amount of benefit an annuitant receives is based on what factors
1. principle amount
2. rate of interest the annuity earns
3. length of payout period
what are surrender charges
they are used to discourage withdrawals and exchanges in an annuity
contract owner
the individual who purchases the annuity pays the premiums and has rights of ownership.
what can a spouse beneficiary do if the annuity contract owner dies
she can continue the contract with deferred taxation as contingent owner
when filling out an annuity contract application the owner does what
names his own beneficiary and also the annuitants beneficiary. An owner may be the annuitant, the beneficiary or neither
annuitant
the income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to this person
what are the 2 distinct time periods involved in an annuity
1. accumulation period
2. annuity period
accumulation period
the pay-in period, where the contract owner makes the purchase payments. The accumulation period of any annuity normally may continue after the purchase payments cease
annuity period
this is also called the liquidation period, annuitization, or pay-out period. This is the time when the annuity ceases to accumulate and begins to generate benifit payments at regular intervals. Typically paid out monthly, quarterly, semiannual, or annual
the policy owner is the only one that can what
can surrender an annuity during the accumulation period.
what are the annuity options
1. the funding method
2. date annuity benefit payment begins
3. investment configuration
4. payout period
funding method
is a single lump sum payment or periodic payments over time
date annuity benefit payment begins
immediately or deferred until a future date
investment configuration
a fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return
payout period
a specified number of years, or for life, or a combination of both
a single lump sum premium
the principal sum is created immediately. for example individuals nearing retirement whose financial priority is retirement income could surrender their whole life policies and use the cash value as a lump sum premium to fund an annuity
periodic payments
this will eventually create the annuity principal fund.
immediate annuities
purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. also called single-premium immediate annuities and is intended for liquidation of a principal su
deferred annuities
will start providing income payments after the first year. are usually purchased with either a single lump sum payment known as a single premium deferred annuity or from monthly payments known as flexible premium deferred annuity. They accumulate interest
surrender charges
when a deferred annuity is cancelled during the early contract years, the insurer normally will assess a back end load. this covers the costs associated with selling and issuing contracts as well as costs associated with the insurer's needs to liquidate u
the "bailout" feature
is sometimes found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below a stated level within a specified time period
before a deferred annuity contract can be terminated for its surrender value what must happen?
the insurer must first obtain authorization from the owner
the accumulation value of a deferred annuity is ?
equal to the sum of premium paid plus interest earned minus expenses and withdrawls
benefit payments are initiated when
after the contract becomes annuitized
straight life income payout option
pays the annuitant a guaranteed income for the annuitants lifetime. when the annuitant dies, no further payments are made to anyone. If the annuitant dies before the annuity fund is depleted the balance is forfeited to the insurer.This annuity offers prot
cash refund payout option
pays a guaranteed income to the annuitant for life. If the annuitant dies before the annuity fund (principal) is depleted, a lump sum cash payment of the remaining balance is made to the annuitants beneficiary. The beneficiary receives an amount equal to
installment refund payout option
pays a guaranteed income to the annuitant for life. if the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments. if the annuitant lives to receive payments equal to the principal amount no
life with period certain payout option (life income with term certain)
is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. it provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies. f
joint and full survivor payout option
pays out the annuity to 2 or more people until the last annuitant dies. if one of them dies, the other will continue to receive the the same income payments. when the surviving annuitant dies, no further payments are made to anyone.
joint and two-thirds survivor
survivor will have payments reduced to 2/3 of the original payment
joint and one-half survivor
survivor will have payments reduced to one half of the original payment
period certain option
pays guaranteed income payments for a minimum number of years such as 10, 15, or 20 years regardless of when the annuitant dies, at the end of the specified term payments cease
annuities can be defined by what
their investment configuration, which affects the income benefits they pay.
what are the 2 type of annuity classifications
fixed annuities, and variable annuities
fixed annuity
provide a guaranteed rate of return. Has a credit interest at a rate no lower than the guaranteed rate. during the period in which the annuitant is making payments to fund the annuity(the accumulation period) the insurer invests these payments in conserva
insurers that deal with variable annuities are subject to what
dual regulation by the SEC and the states office of insurance regulation. or be registered with the financial industry regulatory authority and have a state license
accumulation untis
in a variable annuity the value of the accumulation unit varies depending on the value of the stock investment that is part of a variable annuity
annuity units
at the time the variable annuity is to be paid out to the annuitant, the accumulations are converted into (annuity fill in) these payouts can vary from month to month depending on the investment results. the number of units doesnt change, but the value do
variable annuity
does not provide guaranteed rate of return because of the investment risk. a statement must be provided to the owner of the annuity at a minimum of once per year. they can be classified as immediate or deferred. Shift the investment risk from the insurer
equity indexed annuities
a type of fixed annuity that offers the potential for a higher return than a standard fixed annuity. they are sometimes tied to the standard and poor's 500 or the composite stock price index which results in long-term inflation protection. underlying the
single-life annuities
characterized by having only one annuitant
tax-sheltered annuities
limited exclusively for employees of religious, charity, or educational groups. also called 403 b plans, accumulation payments often come from voluntary salary reductions, the annuitant may have an individual account contract
income tax treatment of annuity benefits
annuity benefit payments consist of principal and interest. the portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owners "cost basis" interest i
the exclusion ratio definition
is a simple way to determine what portion of each annuity benefit payment is taxable
the exclusion ratio formula
investment in the contract/expected return
the portion of the annuity benefit that is interest earned on the declining principal is
taxable as ordinary income
cost basis
the owners investment in the contract is the amount of money paid into the annuity (the premium). the expected return is the annual guaranteed benefit the annuitant receives multiplied by the number of years of the annuitant life expectancy. the resulting
partial with-drawl
is taken from an annuity before age 591/2 the withdrawal is considered 100% interest, and is there fore taxable as ordinary income.
a 10% tax penalty is applied if a distribution is recieved before the annuitant reaches age 591/2. after this age, withdraw
the nonforfeiture value of an annuity prior to annuitization is
all premiums paid, plus interest, minus any withdrawals and surrender charges
if the annuitant dies before the annuity start date
the beneficiary receives the premiums paid plus interest earned
1035 contract exchanges
applies to annuities. if an annuity is exchanged for another annuity. a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However an annuity cannot be exchanged for a
what is a qualified annuity plan
is a tax-deferred arrangement established by an employer to provide retirement benefits for employees. the plan is qualified because of having met government requirements. this is an annuity purchased as part of a tax-qualified individual or employer-spon
structured settlements
used to distribute funds of lawsuit winnings or lottery winnings usually paid in 10 through 20 years
who is a senior consumer
a person 65 or older
when making recommendations to a senior consumer regarding the purchase or exchange of an annuity an agent must do what
must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. this recommendation should be based on the facts disclosed by the senior consumer. it should include an evaluation of his investments and other insura