Flashcards in Chapter 10 Deck (55):
Define in general terms, the term annuity.
this is a series of periodic payments.
in the us annuities are considered to be life insurance products and only life insurance companies are permitted to issue annuities.
who are the parties ot an annuity contract?
1. the insurer that inssued the contract
2. the person or other entity known as the contract owner,
do insurers issue both individual and group annuities?
yes, thus the owner of a contract can be an individual or a organization that purchased the annuity on behalf of a group of individuals.
as part of the contractual agreement, the contract owner pays a single/series premium to the insurer. what is the term used for premiums that insurers receive for annuities?
they invest those pooled funds, and investment earnings on those funds make the period annuity income payments as they come due according to the term of the contract.
what is the maturity date?
also known as annuity date, which is the date on which the insurer begins to make the periodic income payments. the period of time (of the payemnts) is the payout period (liquidation period)
what is the annuity period?
the time span between each of the payments in the series of the periodic annuity payments.
how long is an annuity period? (typically?)
either one month or one year, other options are quarterly or semiannually.
- annual annuity
annuity contracts can be catergarized based on 3 characteristic. Name them.
1. when period income payments begin
2. how often premiums are paid
3. how annuity premiums are invested
how is an immediate annuity paid out?
provides period income payemnts that generally are scheduled at begin one annuity period after the date of the contract is issued.
- the owner selects the date
when would someone used an immediate annuity?
to cover lump-sum payments into an income stream
what is a deferred annuity?
an annuity under whichy periodic income payments are scheduled to begin more than one annuity period after the date on which the annuity was purchased.
what is the term given to the period of time between the contracts owner's purchase of a deferred annuity and the beginning of the payout period?
during this time the insurer invests the premiums paid by the contact owner and the annuity builds an accumulated value.
what is the deferred annuity's accumulated value equal too?
the amount paid for the annuity plus the investment earnings, minus the amount of any withdrawals and fees
A single-premium annuity can be either an immediate or a deferred annuity. How is a single-premium immediate annuity (SPIA) contract structured?
purchased with lump-sum premium payment
provides periodic income payments that begin one annuity period after the annuity is purchased.
A single-premium annuity can be either an immediate or a deferred annuity. How is a single-premium deferred annuity (SPDA) contract structured?
lump-sum premium payment
provides periodic income payments that begin more than one annuity period after the annuity is purchased.
can a deffered annuity be purchased with a series of periodic premiums as well as single premiums?
what is a flexible-premium annuity?
an annuity that is purchased by the payment of a periodic premiums that can very between a set minimum amount and a set maximum amount.
- issues as flexible-premium deferred annuity (FPDA) contracts.
Insurance companies will usually offer two general options to annuity purchasers, depending on the method of investing the premiums. What are they?
1. insurer will pay at least a stated interest rate on the annuity funds it holds or,
2. insurer will not guarantee any rate of return annuity funds; instead the rate will vary according to the earnings of certain investments held by insurer.
how does someone earn money on a fixed annuity if its an immediate annuity or a deferred?
1. immediate- insurer alculates the amount of the periodic income payments based on the single premium paid for the contract and guarentees interest rates.
2. deferred, the accumulated value earns interest throughout the accumulation period. Insurer guarentees that accumulated value will be credited with a stated interest rate for a stated period of time.
name two examples of hybrid annuity products
equity-indexed annuities (EIAs)
- offers certain principale and earining guarantees with the possibility of additional earnings by linking contract to a published index
market value adjusted annuities (MVA)
- offers multiple guarentee period and multiple fixed interest rates.
What is a variable annuity?
an annuity under which the amount of the accumulated value and the amount of the periodic income payments fluctuate in accordance with preformance of one or more specified investment funds.
- no guarantees on the principal or the interest rates.
under which juristictions so variable annuities fall, in terms of securities that must comply.
federal, and federal securities laws.
The owner of a variable annuity may allocate premiums among a number of subaccounts and has the right to 3 additional laws. What are they?
1. transfer money amount subaccounts.
2. change the percentage of money allocated to specific subaccounts.
3. change the subaccounts in which future premiums are invested.
Owners of variable annuity contracts can also place a portion of premiums into a fixed subaccount. Define this.
its a subaccount that guarantees payment of a fixed rate of interest for a specific period of time.
-this money is usually held in the insurers' general account.
At the beginning of the payout period of a variable annuity contract, the owner typically has the option of receiving income payments in 3 different ways. name them .
1. fixed in amount from a fixed subaccount.
2. fluctuate as the result of the investment performance
3. are based on the results of a combination of fixed and variable subaccounts, so that a portion of the period income payments will be stable, other portion will fluctuate.
Name 5 provisions that are generally included in all types of individual annuity contracts
1. entire contract provision
2. free-look provision-
3. incontestability provision "once the contract becomes effective, the insurer may not contest the validity of the contract"
4. misstatment of age or sex provision
5. dividends provision.
name some examples of deferred annuity contract provisions, and define them
1. withdrawal provision- give owner the right to withdraw all or part of the contracts accumulated value during the accumulation period.
2. surrender right- can surrender annuity at any time for its surrender value (accumulated value less any surrender charges included in the policy)
what is a withdrawal cahrge?
when the contract owner withdraws more than the stated percentage in one year on a deferred annuity contact. usually they can not be less than a stated minimum amount.
What is a surrender charge?
a fee imposed if the annuity contract is surrendered within a stated number of years after it was purchased. This amount declines over time, as the policy ages.
what happens if the annuitant of a deferred annuity dies before the annuity payment (the contract)?
the contract provides a death benefit- known as survivor benefit. 0 amount of money payable to a beneficiary designated by the contract owner.
what makes the guaranteed minimum death benefit variable annuity special?
it guarantees that if the annuitant dies before periodic income payments begin, the beneficary will receive at least a stated amount, regardless of the contract's accumulated value at that time.
what makes the guaranteed minimum withdrawal benefit variable annuity contract appealing? (GMWB)
it guarentees, that up to a certain percentage of the amount paid into the contract will be available for withdrawals annually during the accumulation period, even if subaccount investments perform poorly.
define the guaranteed minimum income benefit (GMIB) variable annuity contract
guarantees a minimum periodic income payment regardless of the annuity's investment performance if the contract remains in force for a specific period of time.
What is the feature of the guaranteed minimum accumlation benefit variable annuity contract
guarantees that the accumulated value will be at least a minimum amount if the contract remains in force for a specific period of time.
Name the fees and charges that can be applied to annuity contracts.
1. front-end sales charge- compensates for sales commissions and other acquiring the business
2. Back-end sales charge (surrender charge)- applied on withdraws, and % decreased in the aging of the contract.
3. periodic free (maintenance fee)- compensates administration expenses.
4. service fees- one time charge, applied to additional withdrawals.
Name two additional fees that may be applied to variable annuities.
1. Mortality and expense risk charge- covers various risks and expenses assumed by insurer.
2. investment management fee - covers cost of managing and operating the investment funds underlying the variable subaccounts.
Define the perm payout options provision. What does it state?
describes each of the payout options from which the contract owner may select.
- the annuity in the payout period is called payout annuity.
Give examples of payout options offered with deferred annuities.
1. lump-sum distribution.
2. fixed period options- payments over time.
3. life annuity
what is the term used, to represent the stated period over which the insurer will make periodic income payments?
How is a fixed amount option set up (in terms of payout options offered with deferred annuities)
the insurer provides periodic income payments of a speficific minimum amount until the annuity's accumulated period runs out.
What is the most basic form of life annuity? define it.
straight life annuity
provides periodic income payments for ONLY AS LONG AS the annuitant lives. (not the most favourite)
what is a joint and survivor life annuity?
this provides periodic income payments to two or more annuitants, and those payments continue until both or all annuitants die.
what does a life annuity with period certain guarantee?
that the insurer will make periodic income payments thorughout the annuitants life and guarantees that the payments will be made for a certain period of time (even if the annuitant dies)
what does the life with refund annuity provide?
periodic income payemnts thoughout the lifetime of the annuitant and guarantees that at least the purchase price of the annuity will be paid out.
Every calculation for determining the dollar amount of periodic income payments for a fixed annuity at the maturity date, is based on what mathematical principal?
A sum of money (principal) that is invested at a stated rate of interest for a certain period of time can be paid out in a series of periodic income payments over a stated period of time.
The mathematical principal for calculating perioduc income payments of fixed annuities have 4 variables. What are they.
1. the amount of principal invested.
2. time over which the principal grows at interest
3. interest rate that represent investment earnings
4. the number and timing of periodic income payments.
name the two tax outcomes that one may face with taxation of annuities.
1. some countries allow tax and deferral for investment earnings of all annuities. - ie. no tax until the investment income is acutually paid out
2. many countries provide other income tax advantages to individuals who deposit funds into specified types of retirement savings plans.
What is an IRA? (individual retirement arrangement)
a tax-deferred savings arrangement that an individual establishes and that mets certain us federal tax laws. This can/may take the form of an annuity.
what is an individual retirement annuity?
an individual deferred annuity that qualifies for favourable tax treatment because it means requirements for federal tax laws.
The tax treatment of an IRA varies depending on whether it is a traditional IRA or a Roth IA. define these two types.
1. traditional- where contributions may be tax-deductable and investment earnings are tax-deferred until the funds are withdrawn. The investment earnings are tax deferred. When withdrawn during retirement, federal income tax will apply.
2. Roth- contributions are not tax-deductible but qualified withdrawals are tax-free. Investment earnings accumulate and are distributed on a tax-free basis.
Name two tax law restrictions on IRAS imposed by the federal government.
1. limited to amount of contributions that can be made in a year
2. tax penalties on anyone who is younger than 59.5 making a withdrawal.
In Canada, employees can establishy a qualified retirement account known as RRSP. What happens with these investments
contributions are tax dedictable, subject to a stated max. amount. People who do not have a registered pensions plans may deduct larger contributions amounts that people with EESP. The funds are not taxed until withdrawn
In germany, most individuals with income establish a riester pension. What is this?
it can take form of an annuity or other investment plans. person can contribute a portion of their income, subject to a stated max, and the federal government will contribute a cetain amount to the pension.
- contributions are tax-exempt and earnings are tax-deferred.
In Brazil, people with establish a retirement plan known as a PGBL or VGBL. Define PGBL .
its a deferred annuity to whyich an individual may contribute a percentage of their income, up to a max.
Contibutions are tax-deductible and earnings are tax-deferred.
- periodic income payments are taxable.