Chapter 3 - Annuity Contracts Flashcards
Annuity Contracts
Life insurance is defined as the creation of an estate
The annuity is defined as just the opposite, the liquidation for an estate
The original purpose of the annuity is to:
- create an income stream that one cannot outlive
- Protect the annuitant from living too long
Two sides of the annuity
Accumulation side:
- like a savings account with an insurance company
- owner controls the money
- tax deferred growth
- guaranteed minimum rates
- penalties may apply
Annuity side:
- owner chooses when and how to annuitize
- the insurer guarantees an income stream, either a life annuity or temporary annuity
Parties to the Annuity
Owner - controls the policy, has all the rights, makes all the choices:
- who is the annuitant
- who is the beneficiary
- when and if to annuitize
- the income options
Annuitant - who the policy is based on
- annuitant and owner could be the same person
- when the annuitant dies, the policy ends
Beneficiary - recipient of a death benefit
Premium payment methods
Single premium - the annuity is purchased with one single payment, The annuity (income) may begin:
- immediately or
- annuitization may be deferred until a later time
Flexible premium - periodic payments will be made over time of unequal amounts at sporadic times. Annuitization will be deferred
Cash Value Growth
Current interest rates are paid
A minimum return will be guaranteed
Nonqualified (standard) annuities:
- principal is not tax deductible
- growth only is tax deferred
Qualified (retirement) annuities:
- principal is tax deferred
- growth is tax deferred
Tax Consequences during Accumulation Period
Withdrawals are on a LIFO (last in first out) basis
Tax deferred money will be taxed as it is withdrawn
Funds withdrawn prior to 59.5 will experience a 10% penalty. Exceptions:
- death
- disability
Surrender charges - addition disappearing penalty by the insurer
Section 1035 Exchanges
Allows cash value to be moved from one company to another without tax consequences
Allowable transactions include:
- annuity to annuity
- life policy to life policy
- life policy to annuity
Life Annuity
Income streams that cannot be outlived
Straight life annuity - pays for life with no minimum guarantees
Life with period certain - pays for life with a guarantee based upon a minimum period of time
Refund life annuity - provides an income for life with a guarantee based upon the amount annuitized
- cash refund annuity
- installment refund annuity
Joint and survivor life annuity - guarantees payments throughout multiple lives
Temporary Annuity/Annuity Certain
Fixed period annuity - pays a regular income of interest and principal for a set amount of years
Fixed amount annuity - pays a regular income (fixed amount) of interest and principal until money runs out
Annuity premium determining factors
Include:
- income amount chosen
- minimum guarantee
- age
- sex
- fixed interest rate
- company expenses
Exclusion Ratio
Method used to establish the taxable amount of each payment during the income stream
- a portion of each payment will be taxed as growth
- a portion of each payment will be generated from previously taxed principal
Types of annuities
Fixed annuities
Variable annuities
Equity indexed annuities
