Quiz Show

Donna M. Kesot, CPCUCPCU 556 Annuities

April 10, 2012

The parties to an annuity?

Insurer, Contract Owner & Annuitant

•Insurer

•Contract Owner: the party who purchases the annuity from the insurer and who makes premium payments. May be the annuitant.

•Annuitant: the person insured under the annuity

Purpose of Annuities (3):Tax efficient retirement savings. Annuities can be distributive or accumulative. Income earned is not taxable until distribution.

Income that cannot be outlived: based on expected lifespan of annuitant

Guaranteed death benefit: Amount stated in the annuity contract

Contract = A promise to leave an inheritance to a specific individual

TRUE or FALSE?FALSE

Real Answer:Contract = A legally enforceable agreement between two or more parties in which each party makes some promise to the other. The false definition above would be a true definition for promissory estopple.

Match the concept

Annuitization Period

Accumulation Period

Qualified Annuity

Fixed Annuity

Variable Annuity

Regulated by SEC

Tax Deferred

Distribution period

Cash build up

Insurer Guarantees

Immediate Annuity:An annuity contract

Bought with a single payment

With a specified payment plan

That starts right away

Annuity starting date

• The date in a deferred annuity contract when periodic payments, based on the annuity’s cash value, are scheduled to begin

Features of annuity contracts:

Immediate or deferred

Single or installment premium

Fixed or variable

Qualified or nonqualified

Temporary or life

TRUE or FALSE?TRUE or FALSE?An annuity is a type of life insurance policy or contract that makes periodic payments to the recipient for a fixed period or for life in exchange for a specified premium.

Qualified Annuity

• An annuity that is used as a funding vehicle in a qualified plan, such as an individual retirement account, a tax-sheltered annuity, or a 401(k) plan.

• 10% tax penalty for early withdrawal (age 70.5)

TRUE or FALSE?TRUE or FALSE?

In contracts arranged by agents, both the principal and agent may have right of recovery against 3rd parties.

A.

B.

C.

D.

E.

A variable annuity has certain unique characteristics, like:

A, B & C

Mortality and expense charges, accumulation and annuity units, and death benefits

Mortality and expense charges, and death benefits

Fund expense charges, accumulation and annuity units, and surrender value

A & B only

Right Answer: Mortality and expense charges, death benefits, fund expense charges, accumulation and annuity units, and surrender value

Accumulation unit = Share in a variable subaccount’s investment portfolio purchased by allocating variable annuity premiums and/or cash value to the variable subaccount.

Annuity Units = the current value of the retirement variable annuity investment fund, converted into units of retirement income; the annuitant receives an income of a certain number of calculated “annuity units” per month.

Charges and expenses imposed by the insurer on the variable subaccounts to which a contract owner has allocated funds designed to compensate the insurer for the risk that the death benefit payable will be greater than the cash value on the date of death.

Mortality and Expense Charges

M&E charges: 1. Stated as a percentage of variable subaccount assets2. Typically ~1.25%

Advantages of a structured settlement

The courts—in cases involving minors or others who cannot manage their own affairs

The injured party—receives the security of a regular stream of nontaxable income or benefits, also may offer death benefit

Society—If an injured party is guaranteed an income for period, that party is less likely to become a ward of the state

Attorneys—Attys who failed to recommend a structured settlement have been sued when their clients squandered their lump-sum settlementsMedicare/Medicaid—when the settlement includes a significant medical component like workers comp.