Annuities Flashcards
What are Annuities and how are they different from life insurance?
Annuities are popular financial products used to distribute a sum of money over an extended period of time.
- annuities are not life insurance.
- purpose of annuities is to liquidate a principal sum over a certain period.
Annuities achieve this goal by converting a sum of money into a series of income payments.
Annuity Accumulation Period vs. Annuity Payout Period
List 5 characteristics of annuities
Annuities serve which 2 purposes?
- Premium payments go to interest bearing, tax deferred account.
- those accumulated funds can be annuitized or turned into a series of ongoing, periodic income payments to the annuitant.
- Prior to annuitization the contract owner is permitted to withdraw money from the annuity
- once annuitized those funds are no longer available for withdrawal
- because annuity payments are made for a guaranteed period of time, up to the annuitant’s lifetime or even longer, annuities are popular retirement-planning products.
So, an annuity serves two purposes:
- It can accumulate cash.
- It can distribute income of a guaranteed amount for a guaranteed period.
What is Tax-Deferred Accumulation?
- interest earnings and growth are not taxable to the owner while they accumulate in the contract.
- this tax-deferral feature is one of the main advantages to annuity ownership.
Annuity Riders
List 3 common annuity riders?
What is the difference between a death benefit rider and a return of premium rider?
As is the case with life insurance policies, riders are additional benefits that people can add to an annuity for an additional cost. Riders can take several forms and can address different needs:
- A guaranteed income rider ensures that the annuitant will receive a regular payment every month, quarter, or year from the deferred annuity, without having to annuitize the contract. The annuitant funds it with a single lump-sum premium from which payments are made. This type of rider can help provide retirement income for the annuitant without irreversibly committing funds through annuitization. An annual fee is usually charged to the deferred annuity for this feature before payments begin.
- A death benefit rider guarantees that if an annuitant dies before annuity payments begin, or soon after the distributions begin, a beneficiary will receive at least the balance of the premiums paid. This can be paid to the beneficiary in a lump-sum payment or over the balance of the period for which the payments were scheduled.
- A return of premium rider ensures that the annuitant will get back at least the amount paid for the premium. This rider guarantees that he or she will receive no less than the amount invested in the contract.
These riders are most relevant with variable annuities. Like variable life insurance, variable annuities invest funds in securities-based subaccounts that are not guaranteed. As such, it is possible that the accumulation value of a variable annuity could be less than the sum of premiums paid. The value of these riders in that scenario is obvious.
What are the Insurance Aspects of Annuities
Annuities are also called …
Annuities are often promoted as “insurance against living too long”.
Both an investment product and an insurance product.
As an investment product,
- annuities can be used to accumulate, tax defered, a sum of money for future distribution
As an insurance product, they
- provide protection in the form of guaranteed death benefits (Unlike the death benefits paid by an ordinary life insurance policy, the death benefit from an annuity does not pass to your beneficiaries on a tax-free basis. Your heirs will have to pay tax on the income received from the annuity after your death)
What is a term certain factor?
A term certain annuity is an insurance product that guarantees a periodic payment of a predetermined amount for a fixed term.
Once the term has elapsed, these products are spent and offer no possibility of any future payments, even if the annuitant is still alive.
