Contract with an insurance company that provides for payments to the customer over the life of the contract term. These payments are made by the insurance company that issued the contract. The contract specifies that purchasing deposits be made into the contract either in lump sum, or periodic installments. In return, contract will provide income for remaining lifetime, or other terms.
What are the two categories of annuities?
Fixed and Variable
This annuity guarantees a certain amount of income based on the purchase payments deposited. The insurance company assumes investment risk of generating the return. The purchase payments are invested into the general account of the insurance company for fixed products.
Contract where the annuitant bears the investment risk in the separate account. The performance determines the amount of income the annuitant will receive. The underlying assets of the contract cannot be kept in the general account, but a separate professionally managed account.
How do the two types of annuities handle inflation?
Variable has opportunity, fixed does not keep up
Account established and maintained by the insurance company under which income, gains and losses are credited to or charged against the company without regard to other income, gains or losses. In a variable contract, it is a pool of securities. This account is managed by a board of managers.
Separate Account for VA
Account that is fundamentally invested in long-term debt instruments, with the primary objective of providing a stable return to to fund the guarantees made by the insurance company.
What are the two classifications regarding annuity payments?
Immediate and Deferred
Annuity that is funded only with a single lump sum payment because the contract begins making payments to the annuitant on the first interval after the deposit is received. Income amount is based upon the annuitant's life or the settlement option chosen.
Annuity either purchased with a single, lump sum, or periodic payments, where the payout is delayed until the contract is annuitized in the future. Dollars invested are generally after-taxes, tax deferred growth. If surrendered prior to 59 1/2, income tax will be paid, in addition to 10% penalty. Random withdrawal leads to LIFO by IRS.
Period beginning with the date on which the annuity contract becomes effective and continues until the payout period begins.
Accounting measure used to identify the contract owner's interest in the separate account during the accumulation period, is directly related to separate account performance, purchased at the separate account's NAV, with new units purchased using forward pricing.
Period that begins at the conclusion of the accumulation period. At the beginning of this period, the annuitant can either withdraw the value of all acuumulation units in a lump sum, or to purchase annuity units with the accumulation units so that periodic payments can begin.
Accounting measure used in the determination of the payment amounts to an annuitant during the payout period. The number of these units is fixed during the payout period, and is determined by the value of the accumulation units of the contract.
This is the date when the exchange of accumulation units into annuity units occurs. The exchange rate is a combination of factors including age, life expectancy, settlement option and Assumed Interest Rate (AIR)
Date of Annuitization
What are these steps for?
- Calculate annuitant's interest in separate account
- Calculate first monthly payment
- Calculate value of future payments
Conversion of accumulation units to annuity units
Rate assigned to an investment portfolio that is an assumption of a reasonable rate of return on the investments in the separate account. This rate is not guaranteed. If the separate account's investment performance equals this rate, next monthly payment equals preceding month's payment. If greater, next month's payment is higher. If performance is lower, next month's payment is lower.
Assumed Interest Rate (AIR)
Payment option that gives annuitants the highest periodic payment but carries the most risk. Annuitants will receive payments as long as they live. Upon death, all payments end, even if annuitant only received one payment.
Payment option where annuity payments will be made for a minimum period of time, usually 10 or 15 years. If the annuitant lives past period, annuitant continues receiving payments. If annuitant dies, beneficiary receives payments.
Life Annuity with Period Certain
Payment option where periodic payments are made to the annuityant for specified number of years. If the annuitant dies before the end of the period, remaining payments due will be made in lump sum or installments to beneficiaries. No life guarantee.
Period Certain (Fixed Period)
Payment option that provides periodic payments during the annuitants lifetime. If the annuitant dies prior to receiving amount equal to annuity unit value, the remaining portion will be paid in a lump sum or installments to the beneficiary.
Unit Refund Life Annuity
Payment option where payments are made to 2 people. If one annuitant dies, payments continue to surviving annuitant. Payments cease when remaining person dies.
Joint and Last Survivor Life Annuity
What voting rights do annuity contract owners have?
- Election of members of the board
- Changes in investment policies of separate account
- Other issues as defined in the Investment Company Act of 1940
Annuity company guarantees payments as long as the annuitant lives through this. The insurance company deducts a mortality expense risk fee from separate account to protect against an annuitant outliving expected mortality.
Contract provision that requires annuity companies to project their administrative expenses, establishes the maximum the can charge the contract, and makes company responsible for any increase in expenses beyond amount guaranteed in contract. Operating expense risk fee deducted from separate account to protect against rising operatings costs.
Contract provision that says in the event that the contract owner dies during accumulation period, beneficiary will receive greater of gross payments made into contract or the accumulated value at time of death.
Contract provision that says an annuity can be terminated anytime during the accumulation period for the current value of the assets held in the separate account less any surrender charges. Contracts with high and/or long-term surrender charges may not be suitable for older investors.
Privilege that allows a policy holder to roll cost basis from first product to second, thereby deferring recognition and tax on any capital gain realized in the exchange.
How can a 1035 Exchange be used?
- Life insurance to another life insurance
- Life insurance to an annuity
- Endowment contract to annuity contract
- Annuity contract to annuity contract
NOT ANNUITY CONTRACT TO INSURANCE
What are the two sales charges for variable annuities?
Level and Deferred
Insurance policy for policyowners who seek greater death benefits and higher cash values than those of traditional whole life and universal life policies. Policyowners expect separate account investment returns to be superior to traditional life contracts and offset inflation. Fixed premium payments.
When a whole life or variable life policy includes this term, contract owner is allowed to vary the amount and frequency of premiums as long as the minimum cash value maintained is sufficient to support costs.
Universal or Variable Universal Whole Life