102-2 Annuities Flashcards Preview

CFP 2 - Risk, Insurance, Emp. Benefits > 102-2 Annuities > Flashcards

Flashcards in 102-2 Annuities Deck (34)
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Single premium immediate annuity (SPIA)

One in which the first annuity payment is made one scheduled interval from its purchase date

Purchased with a single lump sum payment


Deferred annuity

Provides income at some future date and is purchased either with a single premium or periodic level premiums


Flexible premium annuity

Allows the insured the option to vary the premium deposits over a designated period of time


Single premium annuity

Purchased with a single lump sum


Fixed annuity

Pays a specified (or fixed) interest rate over a given period and provides more security of principal than a variable annuity, but it does not take advantage of market conditions

The funds are held in the insurance company’s general account and the insurance company bears all of the investment risk


Variable annuity

Offers a variable or uncertain amount of payment over a given period based on the performance of subaccounts, which are professional managed portfolios of debt and equity securities


Variable annuity prospectus

Contains, but is not limited to, all of the variable annuity’s investment choices and the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice


Equity-indexed annuity (EIA)

A specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor’s 500 Index

The insurance company typically guarantees a minimum return (or floor)

Combines the features of traditional insurance products with those of a security

Suitable for a client who wants to participate in the equities market without bearing the investment risk of a variable annuity


EIA Features

Participation Rate
-determines how’s much of the increase in the value of the underlying index will be used to compute the interest rate that is credited to the owner

Interest rate caps
-some EIA’s establish a maximum interest rate that the annuity can earn

Spread or administrative fee
-the index-linked interest for some EIA’s is determined by subtracting a % from any gain in the index

High water mark
-this indexing method credits the index-linked interest rate on the basis of any increase in the index value from the index level at the beginning of the annuity’s term to the highest index value at various points during the annuity’s term


Initial bonus percentage or initial bonus amount

The actual bonus paid by the insurer, generally, at inception of the annuity contract, and may be expressed as a percentage of the initial premium or a specific dollar amount and must be stated in the annuity contract


Deferred income annuities

Aka longevity annuities

Guarantee income for life or a certain period of time

Purchase rates (annuitization rates) are established at the time of the initial premium payment of subsequent premium payments


Qualified longevity annuity contracts (QLACs)

An insurance option that ensures retirees have a stream of regular income throughout their advanced years
QLACs are a type of deferred income annuity (DIA)

Key provisions (for QLACs purchased on/after July 2, 2014)
-maximum age at commencement of income
Start date must be no later than the first day of the month following the employees attainment at age 85
-max allowed investment
-allowing return of premium (ROP) death benefit
-protecting persons against unintentional payment of excess longevity annuity premiums
-allowing more flexibility in issuing QLACs


Section 1035 exchange

Provides for an exchange of an existing insurance based contract for a new insurance-based contract without having to pay taxes on any gain in the original contract

Provides postponement of taxes for:
-2 life insurance contracts
-life insurance contract for an endowment or an annuity contract
-2 annuity contracts
-endowment insurance contract for an annuity contract
-2 endowment insurance contracts

Does not apply to an annuity to life insurance

Annuities and life insurance must have same owner and insured


Straight (single) life annuity

Provides a lifetime income to the owner/annuitant regardless of how long he lives

Provides the highest monthly payment amount because the annuity provides not guarantees beyond the annuitant’s life


Life annuity w/ period certain

Guarantees that a minimum # of payments will be paid or the annuitant will have income for life, whichever is greater


Installment refund annuity

Similar to a life annuity with a period certain, except that the insurance company promises to continue periodic payments after the annuitant has died until the sum of all payments equals the purchase price of the annuity


Joint and survivor annuity

Based on the lives of 2 or more annuitants, usually the annuitant and spouse
Annuity payments are made until the last of the 2 annuitants dies


Qualified joint and survivor annuity (QJSA)

The requirement of the QJSA form leads to a planning technique in which a couple elects the higher monthly benefit amount under a single life annuity and uses part of that benefit to purchase life insurance on the plan participant’s life, with the participant’s spouse as beneficiary


Free withdrawals

Most annuities that impose surrender charges also provide for free withdrawals

Usually 10% of the contract’s accumulated value- every year without incurring surrender charges

Annuity withdrawals are subject to income taxation and a 10% penalty if taken before the owner reaches age 59.5


Surrender charge

Imposed when the full value of the annuity contract is surrendered (lump-sum withdrawal) or when funds exceeding the free withdrawal amount (partial withdrawal) are withdrawn


Crisis waiver

Some insurance companies include surrender charge waivers in the event of a specified occurrence

Examples: nursing home, terminal illness, unemployment, disability waivers



The practice of inducing policyowner w/ 1 company to lapse, forfeit, or surrender a life insurance or annuity policy for the purpose of taking out a policy through another company



The practice by which policy values in an existing life insurance policy or annuity contract are used to purchase another policy or contract with that same insurer for the purpose of earning additional premiums or commissions without an objectively reasonable basis for believing that the new policy will result in an actual and demonstrable benefit


Guaranteed lifetime withdrawal benefit (GWLB) rider

An optional rider guaranteeing that the owner of a variable annuity can make certain systematic withdrawals for life and be assured of receiving a guaranteed amount of income, regardless of the annuity contract’s investment performance

Guaranteed for the life of the contract owner


Guaranteed minimum withdrawal benefit (GMWB)

Not guaranteed for the life of the contract owner


Guaranteed minimum income benefit (GMIB) rider

The insurance company guarantees that the owner can eventually annuitize a certain minimum guaranteed income base, regardless of how poorly the contract’s subaccounts perform


Guaranteed minimum accumulation benefit (GMAB) rider

A living benefit guaranteeing that the owner of a variable annuity will receive at least a return of principal, in a lump sum, after a specified waiting period


Taxation with annuity withdrawals during accumulation stage for annuities issued after August 13, 1982

After Aug 13, 1982: withdrawals are taxable to the extent there are earnings in the contract
LIFO rule applies

Before Aug 13, 1982: withdrawals may be treated as FIFO


Qualified vs Nonqualified annuities

Qualified: some or all of the annuity distribution (both principal and earnings) is taxable as ordinary income when received

Nonqualified: owner has a basis consisting of after tax premium payments
-if the distribution from a Non-Q annuity is not annuitized over the owner/annuitant’s lifetime, the LIFO tax rule applies


Fixed annuity exclusion ratio

Determines the nontaxable portion of each annuity payment indicated by the following formula:

Investment in the contract / expected return

Payments behind projected life expectancy are fully taxable unless the annuity payments began on or before 12-31-1986
In this instance, the exclusion ratio applies for the entire payment period