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Flashcards in Ch. 7 - Annuities Deck (25)
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one to whom an annuity is payable, or a person upon the continuance of whose life further payment depends.


Accumulation Period

when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased but payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units.


Accumulation Units

make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is credit to the individual's account and varies depending on the value of the underlying stock investment.


Annuity Units

the converted accumulation units once variable annuity benefits are to be paid out to the annuitant. At the time of the initial payout the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant.



the original sum of money paid in to an annuity through premium(s)


Single Premium Annuity

an annuity for which the entire premium is paid in one sum at the beginning of the contract period. This can be deferred or immediate


Periodic payments (flexible premium)

describes an annuity owner making multiple premium payments to accumulate principle. Typically, after the initial premium, these payments are flexible with frequency and amount.


Immediate annuities

provide for payment of annuity benefit at one payment interval from date of purchase. Can only be purchased with a single payment. Immediate annuities typically begin paying income within one month of purchase.


Deferred annuities

provides for postponement of the commencement of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased either on single-premium or flexible premium basis. Deferred annuities typically do not begin making income payments for at least one year after the date of purchase.


Straight Life annuity

an annuity income option that pays a guaranteed income for the annuitant's lifetime, after which time payments stop.


Cash refund option

provides that, upon the death of an annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries


Life with period certain or life income

with term-certain option is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. The life with period certain option provides income to the annuitant for life but guarantees a minimum period of payments. This, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period.


Joint and full survivor option provides

for the payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit.


Period Certain

an annuity income option that guarantees a definite minimum period of payments. i.e. 10 years.


Fixed annuities

provide a guaranteed rate of return. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. With fixed annuities, the investment risk is on the insurer.


Variable Annuities

shift the investment risk from the insurer to the contract owner. are similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks. Variable annuities invest deferred annuity payments in an insurer's separate accounts as opposed to an insurer's general accounts (which allow the insurer to guarantee interest in a fixed annuity). Because variable annuities are based on non-guaranteed equity investments (such as common stock), a sales representative who wants to sell such contracts must be registered with the financial industry regulatory authority (FINRA) as well as hold a state insurance license.


Equity indexed annuities

are a fixed deferred annuity that offers the traditional guaranteed minimum interest rate and an excess interest feature that is based on the performance of an external equities market index.


Market Value Adjustment

can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to market conditions. Instead of having the annuity's interest rate linked to an index as with the equity-indexed annuity an MVA annuity's interest rate is guaranteed fixed if the contract is held for the period specified in the policy. The market-value adjustment feature applies only if the contract is surrendered before the contract period expires. Otherwise, the annuity functions the same way a fixed annuity does.


Exclusion ratio

is a fraction used to determine the amount of annual annuity income exempt from federal income tax. The exclusion ratio is the total contribution or investment in the annuity divided by the expected ratio.


1035 Contract Exchange

applies to annuities. if an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes.


403(b) plan

a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.


The amount of an annuity payment is dependent upon three factors:

Starting principle, interest, and income period


Annuities v. life insurance

annuities and life insurance look alike, but are actually exact opposites. Whereas the principal function of a life insurance contract is to create an estate (an "estate" being a sum of money) by the periodic payment of money into the contract, an annuity's principal function is to liquidate an estate through the periodic payment of money from a contract. Life insurance is concerned with how soon one will die, while life annuities are concerned with how long one will live.


With an annuity, there are two distinct time periods involved:

the accumulation period and the payout or annuity period. The accumulation period is that time during which funds are being paid into the annuity. The payout or annuity period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments on a regular basis.


Annuities are flexible in that there are options available to purchasers to which enable them to structure and design the product to best suit their needs. These options include:

-Funding method - single lump-sum payment or period payments over time.
-Date annuity benefit payment begins - immediately or deferred until a future date.
-Investment configuration - a fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return.
-Payout period - a specified number of years, or for life, or a combination of both.