Chapter 8 3Qs insurance based products Flashcards
Annuity types and Fixed annuity
Contract between an individual and a life insurance company
Tax deferred investment vehicle
Fixed annuity- Guarantees a fixed rate of return
Payout based on current account amount and life expectancy based on mortality tables
Need a life insurance license but not securities
Variable annuities
Money put towards a separate account
Annuity unit worth fluctuates with security value
Payout varies, considered a security
Must be registered with FINRA and have an insurance license
Combination annuity
Fixed account of the insurance company and a separate account
Guaranteed fixed portion
Index Annuity
Credits interest to owners account based on performance of a stock or index (usually 80 to 90% of growth)
Comes with guaranteed performance if index does poorly in exchange for the loss in overall growth (only receive 3% rate if you lagged over entire period)
Usually a cap rate as well where investor loses out on participation
Longer surrender charge period
Crediting methods of index annuities
Annual reset- Index value at beginning vs end to find interest amount
High-water mark- Highest point during year vs beginning of year
Point to point- Beginning of contract to end of contract
Purchasing options for annuities
Deferred- Single premium deferred annuity
Periodic Payment deferred- Monthly, quarterly or annual payment
Immediate Annuity- Payout begins 60 days after a lump sum is made
Accumulation units
Pay in period of an annuity missing payments is not costly
Measure of ownership in separate accounts
No max sales charge on annuities
Annuity Payout options (order of largest to smallest)
Life annuity- Periodic payment till end of life
Life annuity with period certain- Payout continues if annuitant dies early
Joint life with Last survivor- Two or more people receive payment till death
Refund annuity- Payment continues till principal is repaid
Annuity units
Annuitization causes accumulation units to change to annuity units
Fixed at time of annuitizing
Assumed interest rate
Helps to determine the distributions to be received by the annuitant
Higher the better
Taxation of Annuities
IRS uses LIFO for random withdrawals and taxes as ordinary income (earnings before contributions)
Lump sum withdrawals- 10% penalty on early withdrawals before 59 1/2 (only on taxable portion)
If 100k value and 60k is gains, person taking out 20k would be taxes on full 20k
If annuitized, the payout is taxed based on percentage of the account being gain
Never a 10% penalty on anuitization
Advantages and disadvantages of annuities
May switch annuities tax free under IRS section 1035
No minimum distributions at 70.5
Dis
Taxed at ordinary income
10% early withdrawal at 59 1/2
Life Insurance Policies
Financial comp in case of an individual dying
- Term Insurance- Least expensive, ends at a specific time or age
Premium for death remains constant
Geared more toward younger individuals
- Whole Life- Continues until death, provided the premiums are paid, will only payout face
Carries a cash surrender value unlike term insurance
May take out a policy loan but must return loan for policy to pay out (subtracted from death benefit if person dies)
In effect until 100
- Universal Life- Allows for adjustable death benefits and/or premiums based on current need and higher interest rates
Death protection resembles one-year renewable term insurance and cash value grows at current interest rates
Premium payment can be skipped if cash value is available
There is a contract rate (minimum interest rate) and current annual rate. Client receives the higher of the two
2 options on the death benefit
- Level death benefit but lower premium
- Face amount plus cash value but higher premium
Most allow a partial cash withdrawal
Poor returns could cause premiums to increase
Variable Life Insurance
Premiums are put into a separate account instead of a company general account (like whole life)
Cash value of the account is not guaranteed
Provided with a minimum guaranteed death benefit though
Flexible Premium Variable Life- Nothing guaranteed, must maintain a minimum cash balance
Variable Life Has a max sales load of 9% on the premiums imputed over 20 years
Also pay a fee on the separate account for: Mortality risk (living a shorter period of time), Expense Risk fee and investment management fee
SAS: Sales load, admin fee and state premium taxes may be deducted on way in
Total benefit is made up of: guaranteed minimum and separate account return
Guaranteed minimum is held in company general account
Cash value would reflect only what is held in separate account
AIR only effects death benefit, not how separate account is performing
Death benefit is calculated annually, cash value is monthly, separate account value is daily
- May exchange contract for a universal life contract for at least 24 months
- No evidence of insurability required
- everything is stated as if it were done on initial purchase date
- Get one vote per $100 unlike variable annuities and mutual funds
- Not sold as an investment
Variable Life Policy Loans
May only borrow a certain percentage (usually 75%) and will have to pay interest
SEC Requires that 75% be available, but only after 3 years of holding the produce
