Unit 9 - Annuities Flashcards
(24 cards)
Define
Annuity
Longevity hedge
Unit9p.189Intro
A contract that accumulates money and/or distributes it as a stream of income, guaranteeing payments the annuitant cannot outlive.
Opposite of life insurance—pays while you live, not when you die.
Unit9p.189Intro
Explain
PurposeofAnnuity
Living too long
Unit9p.189Intro
Provides steady cash flow in retirement and protects against longevity risk (outliving assets).
Imagine turning your 401(k) into a personal paycheck that never stops—like giving yourself a pension.
Unit9p.189Intro
Define
AccumulationPeriod
“Pay‑In” phase
Unit9p.191§9.3.1.1
Phase when the owner funds the contract, money grows tax‑deferred, and the owner retains control.
Think of filling a piggy bank—you can add coins, shake some out, or cash it in.
Unit9p.191§9.3.1.1
Define
AnnuitizationPeriod
“Pay‑Out” phase
Unit9p.191‑192§9.3.1.2
Phase when accumulated value converts to a guaranteed income stream; owner relinquishes access in exchange for payments.
Breaking the piggy bank, handing coins to the insurance company, and receiving a scheduled allowance back for life.
Unit9p.191‑192§9.3.1.2
List
PartiestoContract
4 roles
Unit9p.192§9.3.2
• Contract Owner
• Annuitant (insured)
• Beneficiary
• Insurer
Owner = driver, Annuitant = engine, Beneficiary = heir, Insurer = automaker backing the warranty.
Unit9p.192§9.3.2
Define
ImmediateAnnuity
Income ≤ 12mo.
Unit9p.194§9.4.1
A single‑premium contract (SPIA) that begins periodic payments within one year of purchase—often next month.
Trade a lump‑sum lottery win for monthly checks that start almost right away.
Unit9p.194§9.4.1
Define
DeferredAnnuity
Income later
Unit9p.195§9.4.2
Contract that postpones income until a future date; can be funded by single or flexible premiums during an accumulation phase.
Like planting a fruit tree—you water it for years before picking the fruit.
Unit9p.195§9.4.2
Identify
SPDA vsFPDA
Single vs flexible
Unit9p.195§9.4.2.1
SPDA – Single Premium Deferred Annuity (one payment).
FPDA – Flexible Premium Deferred Annuity (ongoing payments).
Single shot versus drip‑feed funding—both grow until you retire.
Unit9p.195§9.4.2.1
Define
WithdrawalPenalty
10 % before 59½
Unit9p.196§9.4.2.2
IRS imposes an additional 10 % tax on taxable earnings withdrawn before age59½, plus any insurer surrender charge.
Early snacking from the retirement cookie jar triggers a tummy ache—tax and fees.
Unit9p.196§9.4.2.2
Define
SurrenderPeriod
Waiting window
Unit9p.196§9.4.2.2
Contract‑specified number of years during which early withdrawals incur a declining surrender charge (e.g., 7 % in Year1, then 6 %, etc.).
Think of a CD: break it early, pay a penalty.
Unit9p.196§9.4.2.2
Define
Deferred Annuity Death Benefit
Accum value or premiums
Unit9p.197§9.4.2.3
Pays the greater of the accumulated value, or total premiums minus withdrawals, if the owner dies during accumulation.
It’s a refund promise—not full life insurance—but at least heirs get the savings.
Unit9p.197§9.4.2.3
Define
LifeOnly Annuity
Highest income
Unit9p.198§9.5.1.1
Payments last as long as the annuitant lives and stop at death—no refund to beneficiaries.
Great if you live to 105; risky if you get hit by a bus next year.
Unit9p.198§9.5.1.1
Define
Life with Refund
Guarantees principal
Unit9p.199§9.5.1.2
Pays for life; if total received is < premium paid, beneficiary gets the difference (cash or installments).
Safety net: you or someone you love will get at least what you put in.
Unit9p.199§9.5.1.2
Define
Lifewith PeriodCertain
Income for life or years
Unit9p.199§9.5.1.3
Life payments guaranteed at least 5, 10, or 20years; beneficiary receives balance if annuitant dies early.
Combines longevity hedge with a minimum legacy.
Unit9p.199§9.5.1.3
Define
Joint Life & Survivor
Pays until both die
Unit9p.200§9.5.1.4
Income continues to surviving annuitant after first death—full or reduced (e.g., ⅔).
Like a married couple’s pension—survivor keeps the checks.
Unit9p.200§9.5.1.4
Define
JointLife
Stops at first death
Unit9p.200§9.5.1.5
Pays two or more annuitants but terminates when the first annuitant dies.
Higher monthly amount, but risky for the survivor—income ends.
Unit9p.200§9.5.1.5
Identify
TemporaryAnnuity Types
No lifetime guarantee
Unit9p.210Temporary Annuities
• FixedPeriod (pays for chosen years)
• FixedAmount (pays chosen $ until exhausted)
Set the timer (years) or the faucet (dollar flow) and payments stop when it runs out.
Unit9p.210
List
4 Payment Amount Factors
Life annuity math
Unit9p.200‑201
- Annuitant’s age
- Annuitant’s gender
- Payment guarantee period
- Assumed interest rate
Younger female with long refund period = smaller paycheck; older male, life‑only = larger paycheck.
Unit9p.200‑201
Define
FixedAnnuity
Guaranteed principal
Unit9p.202§9.6.1
Backed by insurer’s general account; guarantees minimum interest during accumulation and level income when annuitized.
Steady like a CD—safe but vulnerable to inflation creep.
Unit9p.202§9.6.1
Define
VariableAnnuity
Market‑based
Unit9p.203§9.6.2
Separate‑account investment; owner bears risk and rewards—payments fluctuate with market performance.
Ride the WallSt. roller‑coaster inside a retirement wrapper.
Unit9p.203§9.6.2
Define
Equity‑IndexedAnnuity
Hybrid
Unit9p.210§9.6
Fixed annuity that credits interest linked to a stock index (e.g., S&P 500) while guaranteeing no loss of principal.
Upside potential, floor protection—like training wheels on a mountain bike.
Unit9p.210§9.6
Define
Market Value Adjusted Annuity
Interest rate window
Unit9p.211§9.6
Single premium deferred annuity offering a fixed rate for a set term; early surrender triggers adjustment up/down based on current rates.
Break the CD when rates rise—expect a haircut; when rates fall—you might get a bonus.
Unit9p.211§9.6
List
Personal Uses of Annuities
4 common goals
Unit9p.206§9.7
• Lifetime retirement income
• Tax‑favored savings
• Funding IRAs
• Education fund accumulation
Mnemonic “Li‑Ta‑I‑E” (Life income, Tax savings, IRA, Education).
Unit9p.206§9.7
Compare
Life Insurance vsAnnuity
Estate create vs liquidate
Unit9p.194
Life insurance pays when you die (creates an estate). Annuity pays while you live (liquidates savings to prevent outliving money).
Two sides of the same coin—one guards against dying too soon, the other against living too long.
Unit9p.194
