Unit 12: Annuities Flashcards

Study Notes

Purposes of Annuities

Annuities primarily serve to liquidate an estate and provide financial protection against longevity risks.
Can be purchased individually for retirement income or specific needs, or grouped for employer-sponsored retirement plans.

Distribution of Lifetime Income

Annuities systematically liquidate a principal sum over a specified period, primarily to save for retirement.
Cash accumulation in annuities grows tax-deferred until withdrawal.

Lump Sum Settlements

If an annuitant dies before the fund is depleted, beneficiaries receive a lump-sum cash payment of the remaining balance.
This amount is calculated as the initial fund less the income already distributed.

Accumulation of Retirement Fund

Annuity contracts provide periodic payments starting at a specific or contingent date, lasting for the annuitant's lifetime or a set term.
Many annuities guarantee lifetime income for the beneficiary.

Accumulation of Education Funds

Annuities can also be utilized to save for educational expenses, such as college tuition.

Tax-Deferred Growth

Benefit payments from annuities comprise both principal and interest elements; the principal portion is tax-exempt.
A 10% penalty tax is levied on early withdrawals before age 59 1/2, and partial withdrawals are taxed as earnings first.

How Annuities Work

Represents a contract between a purchaser and an insurance company where the purchaser pays premiums.
The insurer believes that the annuitant will not outlive the principal and interest paid.

The Accumulation Period

The timeframe between the purchase of an annuity and when benefits start.
Owners can make changes during this period, with tax deferral benefits until payouts occur.

The Annuity Period

Follows the accumulation period when annuity benefits are disbursed.
The insurance company manages the funds and distributes them as per the contract.

Fixed Payout

For fixed annuities, the cash value at the beginning of the annuity period is converted into a fixed stream of periodic payments for the contract duration.

Variable Payout

Payouts can vary based on the performance of the invested principal.

Nonforfeiture Provisions

Contract owners who stop premium payments retain their accumulated value and have rights to cash value.
Annuities can be surrendered for lump sums, subject to surrender charges and penalties if taken before age 59 1/2.
A "bail out" provision permits surrender under certain conditions without penalties.

Description

Explore the key concepts related to annuities in this quiz based on Unit 12. Learn about their purposes, types, and how they function in estate planning and retirement income. This quiz is perfect for students looking to deepen their understanding of financial products and retirement planning.

Unit 12: Annuities Flashcards

Choose a study mode

Podcast

Questions and Answers

What is the principal function of annuities?

What is the basic function of an annuity?

A lump-sum cash payment is made to the beneficiary if an annuitant dies before the annuity fund is depleted.

An annuity provides for a series of periodic payments that begin on a specific date or a contingent date, and continue for the duration of a person's ____.

What can an annuity be used for in addition to retirement income?

The portion of benefit payments that represents a return of principal is taxed.

What type of contract is an annuity?

During what period can an individual make changes to their annuity?

What happens during the annuity period?

A fixed annuity converts the cash value accumulation into a stream of variable payments.

What happens if an annuity contract owner stops making premium payments?

What is a bail-out provision in an annuity contract?