Questions and Answers
What is an annuity?
A life insurance company product designed to provide supplemental retirement income
What does the term annuity specifically refer to?
A stream of income payments guaranteed for life
What makes annuities unique from other securities?
Guarantees it offers
What are the two types of annuities?
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What is a fixed annuity?
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Which type of license is needed to sell fixed annuities?
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Who guarantees the rate of return for fixed annuities?
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Who bears the investment risk for fixed annuities?
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What are fixed annuities subject to?
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Why are fixed annuities subject to purchasing power risk?
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What is a variable annuity?
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Who assumes investment risk with variable annuities?
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Which type of licenses are needed to sell variable annuities?
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Are variable annuities considered investment securities?
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What is the primary purpose for purchasing variable annuities?
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What is the objective of the separate account?
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What does it mean to annuitize the contract?
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What are the penalties of early withdrawals from annuities?
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Variable annuities are similar to ______.
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What advantage do variable annuities offer?
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Study Notes
Annuities Overview
- Annuity: A life insurance product providing supplemental retirement income.
- Specifically refers to a life-long stream of income payments.
Types of Annuities
- Two main types: Fixed Annuities and Variable Annuities.
Fixed Annuities
- Premiums paid to the insurance company, invested in the company's general account.
- Insurance company guarantees set payout amounts (typically monthly) to the annuitant.
- Requires only an insurance license to sell, not a securities license.
- Insurer guarantees both the rate of return and bears investment risk.
- Characteristics include after-tax payments, fixed administrative expenses, lifetime income guarantees, and insurance regulation.
- Subject to purchasing power risk, due to fixed payments potentially losing value over time from inflation.
Variable Annuities
- Allow investors to potentially keep pace with inflation while assuming investment risk.
- Payments are made with after-tax dollars, invested in a separate account consisting of a diversified portfolio.
- Considered a security, requiring both insurance and securities licenses for sale.
- Guarantees lifetime income but payment amounts may vary based on separate account performance.
- Regulated by several acts including the 1933 and 1940 Acts.
- Earnings accumulate tax-deferred until withdrawal.
Accumulation and Annuity Phases
- Accumulation Phase: Growth phase where annuity investments increase in value.
- Annuity Phase: Payout phase where the annuitant receives income.
Annuity Units
- Accumulation Units: Reflect the contract owner's interest in the separate account, vary based on performance.
- Annuity Units: Becomes fixed once the contract is annuitized, used to calculate monthly income.
Assumed Interest Rate (AIR)
- A conservative projection of separate account performance, impacting monthly income during the annuity phase.
- Monthly income changes based on whether account performance exceeds, equals, or falls below the AIR.
Payout Options
- Life Income: Payments for the entire lifetime with no continuance after death.
- Life with Period Certain: Guarantees minimum payments for a specified period, even if the annuitant dies.
- Joint Life with Last Survivor: Payments continue for two lives, ensuring ongoing income for the survivor.
Withdrawal Benefits
- Guaranteed Minimum Withdrawal Benefits (GMWBs): Ensure regular payments until principal is returned or contract ends.
- Lifetime Withdrawal Benefit (LWB): Guarantees regular payments for life even if account balance reaches zero.
Taxation and Penalties
- Contributions typically made with after-tax dollars; earnings taxed as ordinary income upon withdrawal.
- Early withdrawals (before age 59½) incur a 10% penalty plus ordinary income tax on earnings.
Variable Life Insurance
- Permanent life insurance that protects beneficiaries and invests premiums in general and separate accounts, facing investment risks.
- Cash value fluctuates based on account performance but has a minimum guaranteed benefit.
- Wavier of premium rider may apply if the insured becomes totally disabled.
Suitability of Annuities
- Ideal for those looking for supplemental retirement income and can fund the contract with cash.
- Not suitable for those needing capital preservation or facing potential immediate cash needs.
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Description
Test your knowledge on variable annuities with these flashcards. This quiz covers key terms and concepts related to annuities and their unique features. Perfect for anyone preparing for the Series 7 exam or looking to enhance their understanding of retirement income products.
