Chapter 12 - Variable Annuities Flashcards
What is an annuity?
Life insurance product that provides supplemental retirement income. A stream of income payments guaranteed for life.
What is a key difference between variable and fixed annuities?
Fixed annuities offer a payment that never falls below a minimum, the insurer assumes investment risk, and is subject to purchasing power risk (inflation). Variable annuities are the opposite.
What is a combination annuity?
Offers aspects of both fixed and variable annuities which contribute to both general and separate accounts.
What is a separate account?
On the variable annuity side, funds pooled together and invested in a diversified portfolio of stocks, bonds, and mutual funds.
What are some key difference between variable annuities and mutual funds?
Earnings on dollars accumulate tax deferred. Mutual funds distribute dividends and cap gains which are taxable. These distributions never go to owners of annuities. Tax liability occurs at withdrawal. Variable annuities also guarantee lifetime income, mutual funds do not.
What are some rights of an investor who has purchased a variable annuity?
Right to vote on proposed investment changes. Right to vote for the investment adviser.
What does a variable annuity guarantee?
A fixed mortality expense (payments for life), and a fixed administrative expense?
Is there such a thing as an immediate deferred annuity?
No, deferred annuities have delayed payouts. Immediate annuities are purchased with a lump sum and payout commences in 60 days.
What are the two phases of variable annuities?
Accumulation phase when an investor pays into the annuity and buys accumulation units. Annuity phase when the purchaser receives payout from the annuity and receives annuity units which are fixed once the contract has been annuitized.
What is the assumed interest rate?
At annuitization company determines value of annuity units and establishes an assumed interest rate, which is a conservative projection of the performance of the separate account over the estimated life of the contract.
An investor who is the middle of annuitization, for a variable annuity, receives a check that is less than last months payment. Why would this happen?
Account performance was less than the assumed interest rate.
If life income is selected for a payout options on a variable annuity what does that mean?
Insurance company will pay the annuitant for life. At death payments cease.
Explain life period certain.
Annuitant is guaranteed monthly income for life but if they die within a specified period, e.g. 10 years, payments will continue on to a beneficiary to fulfill 10 years of payments.
Explain joint life with last survivor.
Usually for husband and wife. If husband dies first then the wife will receive payments until she dies.
Which payout option will pay the most and which will pay the least?
Life income will pay the most, risky. Joint life with last survivor will pay the least as it costs more for two people essentially.
