9 - Annuities

Question 1

Accumulation Period

What is this and what can the owner generally do during this period?

Answer 1

• The accumulation period is when the annuity is being funded, before the payout period begins
• Interest is credited on the accumulation value and grows tax-deferred
• Owner can generally do the following during the accumulation period
  
  • make additional premium payments or deposits
  • Take withdrawals from the accumulated values
  • Surrender the annuity for its cash value
  • Make other changes to the contract
    *

Question 2

Annuitization Period

What is it and what actions are the owner restricted from doing?

Answer 2

• This is the payout phase of the contract where the money in the contract is converted to a series of regular income payments
• The annuity owner no longer owns the value of the contract and cannot
  
  • make any more premium payments
  • make withdrawals
  • cannot surrender the annuity
  • cannot change the contract

Question 3

Parties of Annuity Contract

Who are the 4 parties? Describe them.

Answer 3

1. Contract Owner
   
   • Typically the same as the annuitant
   • Names annuitant
   • Names the beneficiary
   • Can withdraw money
   • Can end the contract
2. Annuitant
   
   • Must be an individual (cannot be a corporation or a trust)
   • Typically the same as the contract owner
   • Receives income
   • Can be more than one person
3. Beneficiary
   
   • Can be a person, trust or corporation
   • Only benefits upon the death of the contract owner
   • Receives the accumulation value if owner dies
   • May receive income payments if the annuitant dies sooner then expected
4. Insurer

Question 4

Immediate Annuity (SPIA)

What is it and how does it function?

Answer 4

• 1 premium payment provides an immediate annuity
• No short accumulation period
• Income payments begin between 1 - 12 months after payment

Question 5

Deferred Annuity

What are they and how do they function?

Answer 5

• Annuities with either a single or recurring premium payment accumulation period
• Owner decides annuitization at a later date

Question 6

Annuity Withdrawal Penalties & Surrender Charges

What are the rules and tax implications of each?

Answer 6

• Withdrawal
  
  • earnings taxed as ordinary income
  • All earning are withdrawn first and then original investment out last
  • If taken out before 59 1/2 additional 10% penalty charged on the taxable earnings
• Surrender Charges
  
  • The surrender period is dictated by the insurer (typically 2 - 12 years)
  • Fees will be assessed by the insurance company in addition to the taxes/penalties you pay on withdrawals

Question 7

Annuitization Payout Options

What are the different options? Describe them.

Answer 7

• Life Only
  
  • payments stop when annuitant die
  • Pays highest monthly income
  • No refund for beneficiaries
• Life w/refund
  
  • If annuitant dies and the amount paid is less then amount paid for the annuity then a lump sum may be paid or an installment refund
• Life w/ Period Certain
  
  • Income continues for the life of the annuitant
  • There is also a period where payments are guaranteed (5-20 years)
  • If annuitant dies after the guaranteed period nothing is passed on the beneficiaries
  • If the annuitant dies before the end of that period then the beneficiary gets the income for the remainder of the guaranteed period.
• Joint Life and Survivor
  
  • Annuity is paid out for the life of two people
  • When the first dies the annuity can be for the full amount or it can be for a reduced amount
• Joint Life
  
  • Annuity is paid until one of the owners dies

Question 8

Fixed Annuities

What are they? What are the basic principles?

Answer 8

• Fixed Annuities are guaranteed against loss. Besides surender charges, the value will never be less then what was paid into the contract
• Basic Principles
  
  • General Account Assets
    
    • Insurance Company takes on all insurance risk by investing the assets in debt securities and other fixed-rate investments
  • Interest Rate Guarantee
    
    • Guaranteed minimum interest rate
  • Level Benefit Payment
    
    • Fixed benefit amount
    • May lose out and fail to keep pace with inflation

Question 9

Variable Annuities

What are they? What are the basic principles?

Answer 9

• Supported by investments and have the ability to keep pace with inflation. There is a guaranteed interest rate, but if investments do better then payments are higher.
• Principles
  
  • Separate Account
  • No guarantee by the company
  • Premium buys accumulation units
  • When annuitized accumulated money buys annuity units
  • Value can go up or down
  • Must be licensed by the state and securities

Question 10

Equity Indexed Annuity

What is it? What are the principles?

Answer 10

• Tax-deferred annuity linked to an index like the S&P 500. Form of fixed annuity so assets are in the insurance companies general account.
• Guaranteed minimum interest rate
• Protects against loss of principle
• Returns not as high as variable annuities
• Form of fixed annuity
• No security license needed

Question 11

What are the different uses for annuities?

Answer 11

1. Life Income - ex: retirement
2. Tax favored savings - only pay income on earnings when annuitization period begins
3. Funding IRAs
4. Accumulating Education Funds -