Annuities
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| show | deferred payments that are calculated actuarially to extend for a certain number of years or for a lifetime
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| what 3 parties are associated with an annuity | show 🗑
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| owner | show 🗑
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| show | yes but typically it is limited to spouses. If changes r to be made on contract both must consent.
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| show | person names who will receive death benefit
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| show | pay the death benefit when owner dies.
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| annuitant driven | show 🗑
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| show | stranger originated annuity transactions - controversial practice where a 3rd party investor persuades an indiv-usually sick-to buy an annuity with a guaranteed min dealth benefit and to diesignate 3rd prty as bene. Annuity buyer is give lump sum.
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| What 2 time frames do annuites fall into | show 🗑
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| show | serves as income distributuin vehicle. will pay out systmeatically usually within 30 days.
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| SPIAs | show 🗑
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| show | accumulated funds for a long term. Ususally held for 8-10 years.
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| show | period during which funds are deposirted inot the contract and are credited with a certain rate of interest earnings or grow in relation to the performnce of the investments in which they are deposited.
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| whis mor popular today, immediated or deferred annuities? | show 🗑
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| what three ways are funds invested in an annuity? What are the 3 types | show 🗑
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| show | most indexed annuities are tied to a stock mrket index, like the S&P 500, for this reason, they are also called equity indexed annuities.
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| two tiered annuity | show 🗑
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| who is the fixed annuited geared for? | show 🗑
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| show | 2-15 yrs
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| guaranteed living befefit riders | show 🗑
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| annuity features | show 🗑
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| show | higher income earners because of the tax deferral benefits.
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| what are the drawbacks to annuities? | show 🗑
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| show | provide for a tax deferred accumulation of funds for use during an indiv life and second to provide death benefits.
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| show | yes, qual are used for funding vehicle for IRA, SEP or 403b polans
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| show | nanqual plan cannot dedut the prem deposits, but an IRa may allow you to deduct the premium pmts
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| show | deferred annuity
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| Using capital to purchas income defines what? | show 🗑
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| t or f a fixed annuity can be used to fund a qualified plan; a variable annuity cannot. | show 🗑
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| t or f the primary reason a consumer should purchase an annuity is to provide a death benefit to his heirs | show 🗑
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| show | indexed
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| show | the ways in which their funds are invested for growth.
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| who issues annuities? | show 🗑
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| when does an immediate annuity pay out | show 🗑
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| what do the terms immediate and deferred refer to with an annuity? | show 🗑
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| where do the funds go with a fixed annuity? | show 🗑
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| show | the difference between wha the insurer earns on the invested asets and the interest rate it then credits to its fixed annuities.
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| show | typically a fixed annuity is isssued with a rate of interest to be paid for a set # of years, at the end of that period, the insurer declares a new rate that will be paid for a specified period (usually 1 yr).
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| show | underlying a fixed annuity contract for its life
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| show | portfolio based and new money based crediting
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| show | allocates all annuity premiums to one larege invest portfolio. Based on performance of protfolio, insurer declares interest rate for all owners.
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| New money based interest rate | show 🗑
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| show | mortality and expense results, reserve requirements, and competitive market influences.
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| t or f fixxed annuity owners do not bear any invest risk? | show 🗑
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| show | SAFETY
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| show | the index increased 10% so (1100-1000)/1000 credit to the annuity is 10%
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| do indexed annuities have guaranteed min rates? | show 🗑
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| show | the amount or level of the index increase that will be creditied to the contract. example: if part rate is 80% and index increased by 11% the credit would be 8.8% (.80*.11=8.8%)
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| margins (indexed annuity) | show 🗑
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| show | indexed annuityues impose a cap which is the max amount of interest that will be credity during any one interest crediting period.
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| show | the min amount of indexed linkend interest that is to be credited to a contract during any crediting period. With most index annuities it is 0.
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| show | point to point; high water mark; annual ratchet or annual reset & monthly average
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| point to point | show 🗑
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| show | thes method looks at the index value at varios pts during the interst credit period, such as contract anniversary dates. the highest of the index on these dates is compared to the index level at the start of the period and the diff is cred
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| show | credits amt of interest based on the performance of the associated index over a year. also known as annual point to point
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| monthly average | show 🗑
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| index call options | show 🗑
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| show | true
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| show | to empasize the fact that thes products are not securities and are not registered.
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| separate accounts | show 🗑
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| what is the attraction to a variable annuity? | show 🗑
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| show | each separate account of a variable annuity has subaccts - it is not uncommon to find 30, 40 or more separate subaccts availble for a single V.A.
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| t or f as an investment option most variable annuities also offer a fixed acct fund | show 🗑
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| show | each subacct in a VA is document by a prospectus. this provides detailed info about the fund, the mgmnt, invest object, risks, fees and other disclosures.
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| what happens to the premiyums when deposited to a VA? | show 🗑
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| show | often, typically daily
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| how is the subacct units valued? What formula do they use? | show 🗑
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| show | no - that number remains constant unless and until additional premium dollars are invested.
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| What are some common VA investment strategies? | show 🗑
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| show | the insurer designs allocation models that align with specific invest profiles such as conservative, moderate, or mod aggressive, and aggressive. Owner select model and prem allocated accordingly
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| cost free fund transfers | show 🗑
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| automatic portfolio rebalancing | show 🗑
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| interest sweeps | show 🗑
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| show | technique for VA contracts so an inverstor buys securites in a series of regular purchases instead of a single purchase. this allow for and average the pruchase price of of securites over time.
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| What are fixed annuity premium deposits invested into? | show 🗑
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| show | indexed deferred annuity.
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| what are premium deposits in a variable annuiti's subaccts applied to purchase? | show 🗑
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| show | 500/10=50
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| t or f variable annuity principal and earnins are guaranteed by the insurer? | show 🗑
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| show | when the contrac t is the funding vehicle for a qualified plan.
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| tax deferral | show 🗑
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| DEATH BENEFIT | show 🗑
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| show | this is one aspect of the VA that is almost always guaranteed. The amt will be the contract's value at death or the sum of the premiums paid whichever is more.
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| what happens if the spouse is the beneficiary and the owner dies? | show 🗑
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| show | the contract's accuulated bvalues are converted into a stream of periodic income pmts. These pmts are guaranteed to be made for whatever length of time the owner wishes.
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| show | fixed unchanging income paymebnts for the duration of the annuity payout period.
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| as a general rule how do variable annuities pay out? | show 🗑
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| what are the options of the frequency of payments that annuity woners can choose from? | show 🗑
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| show | true
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| what funds does the insurer use to pay commissions, opp costs, reserve requirements, & profits to the producer? | show 🗑
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| surrender charges | show 🗑
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| what purpose do surrender fees serve for the insurer? | show 🗑
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| what are the 2 most common approaches to determine surrender charges used by insurers? | show 🗑
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| show | used by insurers to determine surrender charges it assesses a surrender charge equal to some percentage of the contracts accumulated value.
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| premium deposit method | show 🗑
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| show | provision which applies if the contract is surrendered during the surrender charge period. The adjustmnt works to the detriment of the contract owner if interest rates increased since the contract was issued.
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| What are the most common V.A. fees? | show 🗑
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| show | tje fimd es[emse cjarge b/c tjey vary according to which subaccts investments the owner selects, these charges are specified in the fund's prospectus.
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| show | the cost of a V.A. death benefit and annuity charge plus related insurer costs. This charge is assessed against the values of the sep subaccts and is deducted b4 accum units values are calculated.
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| show | true
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| show | the risk of death dureing the accumulation stage and the guarantee of the min annuity purchase rate when the contract is annuitized.
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| show | cost imposed on the subaccts for investment mgmt and fund expenses, the charge for the inestment co managing the protfolio of securities w/in the subacct, incl the cost of buy ans ell securities
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| VA's admin svc charge | show 🗑
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| Contract maintenance fee | show 🗑
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| show | the equivalent of a surrender charge a fee for early contract surrenders. tend to apply for a limited time period. the firs t 5, 8, or 10 yrs.
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| No Load VA's | show 🗑
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| show | are those with surrender charge periods, that are much shorter than traditional VAs such as 2 - 3 yrs. L shares typically charge higher M&E fees
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| show | allows the owner to take w/ds from his or her contract without a surrender charge.
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| what are the limits on a surrender free w/d | show 🗑
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| what is the most common definition of a contrac'ts free w/d allowance? | show 🗑
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| annuities often waive the surrender charge in the event of certain crises. What are the crisis? | show 🗑
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| is surrender charge free the same as income tax free? Explain. | show 🗑
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| show | offered by insurer. those who buy bonus credits, will be credited with an additional amount based on some specified % of the premium deposit. can be given as % of intial prem or when contract is annuitized.
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| persistency bonus | show 🗑
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| show | higher surrender charges, and longer surrender charger periods, increased M&E and other charges, lower commission rates for the agens who sell the bonus contract
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| show | these riders guarantee that the owner's principal will be protected, and a min level of principal will be available for income, accumulation and w/d.
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| show | guarantees that a min level of income payments will be paid if the owner decides to annuitize his or her contract, regardless of the value of the contract upon annuitization.
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| show | guarantees that a contract's principal will be safeguarded and will not be drawn down by poor investment performance
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| graranteed min w/d benefit (GMWB) | show 🗑
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| how are guaranteed life benefits added to annuities | show 🗑
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| Income rider | show 🗑
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| show | THE INCOME ACCT IS CREDITED WITH A SPECIFIED RATE OF RETURN. (growth rate) at the end of the term, the owner is able to make annual w/d's of certain % such at 5, 7%. Can make w/d for life even if value is depleted.
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| show | riders are designed to provide cash benefit pmts in the event the owner needs long term care. the cost of the rider is deducted from the annuits cash value.
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| show | benefits paid under the cotnract for long-term care are not subject to taxation; thus using the contract's values for Ltc benefits avoids income taxation on the annuity's gain.
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| show | they are more common with fixed annuity designs rather than with V.A.s
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| Term Insuarnace Riders | show 🗑
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| show | allows the contract holder to return the contract withing a specified period of time. this is determined by state law, usually 10 days some states have extended periods of 30 days if purchases is 60 yrs or older
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| show | he would keep any gains and that the contract experienced during this time and would absorb any losses. Some states say they get all prem refunded.
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| Tax sheltered annuities (TSA's) | show 🗑
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| Can you take a loan out on an annuity? | show 🗑
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| What are the requirements to take a loan out on a TSA? | show 🗑
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| show | false. they are payable to a named beneficiary and pass directly to them.
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| show | $115k
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| show | false
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| show | when a withdrawal is made during the surrender period
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| show | 32000*.10=$3200
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| show | financial hardship
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| What is an annuity desgned specifically for? | show 🗑
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| show | converting an annuity contract's accumlated funds into income stream
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| what does annuitized incoe consist of? | show 🗑
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| Annuity purhase rate | show 🗑
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| show | term (certain # of yrs), straight life (for life), or joint life (life for more than 1 person)
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| show | the guarantee that the income stream will contine and income will be paid for as long as the owner wishes. gives 2 things: 1) reg cash flow, 2) peace of mind
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| show | when annuitized
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| show | pays out over a certain # of yrs, could be 10, 15, 20 yrs, if owner dies before end, bene gets remaining pmts
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| life income payout option | show 🗑
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| joint and survivor income payout option | show 🗑
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| show | produce an income stream for the annuitan's life but would guarantee pmt for certain number of yrs. If annuitant had life with 20 yr certain and dies at yr 10, the policy would continue to pay for 10 yrs to bene.
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| show | fixed steady income pmts for an agreed apon amount of time.
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| variable annuitization | show 🗑
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| assumed interest rate (AIR) | show 🗑
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| show | *if actual net returns are > than AIR, pmts will increase. *If net returns are < AIR, pmts decrease, If same as AIR, then no change.
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| show | the contract owner can have the choice to to choose AIR between 3-7%. Selecting a high AIr will produce larger pmts but will also set a a higher benchmark for future. typically it is set in contract very conservative 4-5%.
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| annuity units | show 🗑
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| t or f the number of annuity units credited to a contract upon annuitization does not change no matter what? | show 🗑
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| show | (1+actual investment performanc)-(1+AIR)/1+AIR (Chap 4, pg 67)
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| is annuitization irrevocable? | show 🗑
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| commutation | show 🗑
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| show | a portion of the annuity funds can be used to purchase an immediate annuity to produce income while the balance remains invested in the deferred annity to grow back the orig amount over the same period
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| show | normally irrevocable,
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| alternatives to annuitization | show 🗑
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| systematic w/d's instead of annuitzation | show 🗑
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| how are systmatic w/d start and stopped? | show 🗑
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| How are systematic w/d's taxed? | show 🗑
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| show | taxation & no guarantee of lifelong funds.
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| show | this is a rider that can be added to fixed or VA. when added they then guarantee that the w/d or income will be available for as long as the annuitant lives. As w/d are taken interest is still gained and the value remains avaialble to owner at all times.
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| Why is annuitization not very popular? | show 🗑
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| show | the amount ofmonthly income that each $1000 of the contract's values will generate
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| may, 65,annuitized her $150k VA strt life, AIR is 5% and gives initial pmt of $950. If the values in her contract net 5% nxt mo what will the pmt be? | show 🗑
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| show | false
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| t or f one of the djisadvantages to annuity contracts is that they require the full value of the contract to be annuitized if the owner elects annuitization | show 🗑
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| show | systematic w/d
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| show | they accumulate savings tax deferred and can sometimes anticipate being in a lower tax bracket at the time of retiremement.
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| show | first in first out treatment. used before 1982. amounts first put into the contract (premiums) were considered first to be withdrawn. Because principal is not subject to tax any w/d were not taxed unless principal was exceeded.
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| LIFO | show 🗑
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| how are annuities purchased prior to 1982 TEFRA treated and taxed today? | show 🗑
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| show | Tax equity and fiscal Responsibility Act. changed law from FIFO to LIFO taxation of annuities and also changed the penalty from 5% to 10% if w/d funds before age of 59 1/2
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| show | true
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| show | death, disablility, and annuitization
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| show | annuitized income is taxed in such a way as to exclude principal and tax the balance
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| Fixed exclusion ration | show 🗑
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| show | investment in contract (prem)/number of anticipated pmts
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| How much of the annuity is taxable to the beneficiary? | show 🗑
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| what are the 3 ways an annuities death benefit can be taken? | show 🗑
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| show | an annity's value is included in the oners gross estate. If owner des b4 annuitizat, the full value of annuity is in estate, if after, remaining values are left to be paid to the beneficiary.
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| 1035 exchange | show 🗑
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| show | life ins for life ins, life ins for ann, endow for ann, ann for ann, life ins for qual long-term care, ann for qual long-term care, long term care for LTC
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| what are the rules to 1035 exchanges? | show 🗑
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| show | what part do you exchange, principal or interest? Ruling 2003-51. states that partial annuity exchanges would be considered tax free exchanges.
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| what happens to funds when partial exchange is done? How are the new funds and old funds established at princ and interest | show 🗑
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| show | IRS imposes a 12 mo moratorium on any further w/ds or surrenders from contracts involved in a partial annuity exchange, both orig and new contract. (pg 86)
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| exceptions to moratorium rule | show 🗑
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| rollover | show 🗑
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| show | true-the funds have been contributed under a qualified plan and were deducted when they were contributed on a pre-tax basis they are fully subject to tax when annuitized.
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| show | false-some do, however others do not.
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| show | LIFO-interest taxed first
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| at what point are an annuity's earnings subject to income tax? | show 🗑
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| show | the exclusion ration
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| 70 y/o Patrice elects to annuitize her VA under Strt life. She invest $25k and it's now worth 80k. she will life for 16 yrs, her first yr is $6800 how much is taxable | show 🗑
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| t or f nonqualified annuities can be exchanged for qualified long-term contracts under the tax-free exchange rules of section 1035 | show 🗑
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