102-2 Annuities Flashcards
(34 cards)
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
Twisting
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
Churning
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
