Fixed Annuities

Question 1

Define Fixed Annuities

Answer 1

• insurer guarantees both the annuity principal and a specified rate of interest to be credited to the contract.
• Fixed annuities provide the peace of mind that comes with knowing all future values are guaranteed.
• Also like whole life insurance, fixed annuities guarantees the interest rate because premiums are invested in the insurer’s general account.
• Fixed annuities may either be immediate or deferred contracts.
• Fixed deferred annuities can be funded with either fixed premiums (so-called retirement annuities) or flexible premiums.

Question 2

Define Guaranteed Minimum and Current (Declared) Interest Rates

Answer 2

Insurance companies that offer a declared-rate fixed annuity manage two interest rates with their fixed deferred annuities:

• a guaranteed minimum rate (which is stated in the annuity contract)
• a current declared rate (which is subject to change periodically)

1. The current declared rate, based on the insurer’s investment results and economic conditions, is subject to change.
2. The annuity contract usually stipulates a minimum period of time the current rate will remain in effect (e.g., one or two years) before the insurer declares a new current rate (called a renewal rate).

Question 3

Describe a Two-Tiered Fixed Annuities

Answer 3

The two tiers comes from the redemption options the annuity offers.

A two-tier annuity has two different interest rates, depending on how long you hold the annuity.

1. If you hold onto your annuity until its maturity date, you will be entitled to a higher interest rate than the rate on a comparable single-tier annuity.
2. However, if you decide to cash out the annuity before this date, your earnings will be retroactively adjusted down to a much lower rate.

Question 4

Fixed Annuity Annuitization

A contract provides a 60-year-old male with a fixed annuity monthly payout of $4.50 per $1,000 of accumulated value under a straight life payout option. This means that a $100,000 annuity fund would generate ______ a month guaranteed for as long as this annuitant lives.

Answer 4

Annuity payments are calculated by dividing the accumulation funds by the insurer’s annuity purchase rate.

Annuity purchase rates are defined in terms of income dollars per $1,000 of accumulation.

For example, a contract might provide a 60-year-old male with a fixed annuity monthly payout of $4.50 per $1,000 of accumulated value under a straight life payout option. This means that a $100,000 annuity fund would generate $450 a month guaranteed for as long as this annuitant lives. Regardless of the annuity settlement option selected, fixed annuity income amounts do not change over the term of the income period.

Question 5

Fixed annuity contracts provide for a death benefit if the contract owner or annuitant ______ during the accumulation period.

• The death benefit equals the ___________ value when the death occurs.
• Unlike life insurance death benefits, annuity death benefits are NOT _________.

Answer 5

Fixed annuity contracts provide for a death benefit if the contract owner or annuitant dies during the accumulation period.

• The death benefit equals accumulated value when the death occurs.
• Unlike life insurance death benefits, annuity death benefits are NOT tax free.

The formula for calculating the death benefit is as follows:

total premiums paid into policy

+ credited interest earnings

– withdrawals and contract charges

Question 6

How is the Insurer’s General Account used?

Answer 6

Fixed annuities guarantee

• principal protection,
• minimum interest rates,
• fixed level of lifelong annuitized payments, and
• death benefit.

The insurance company’s general account makes these guarantees possible.

The premiums, in turn, are invested in safe, secure investments, such as long-term bonds and mortgages.