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chapter10.pptxAnnuities
Life and Health Insurance FIN 3660
Chapter 10
Annuities
Annuity – a series of periodic payments
Annuity contract: a legally enforceable agreement under which an insurer promises to make a series of periodic income payments to a named individual in exchange for a premium or series of premiums.
Introduction to Annuities
The parties to an annuity contract are (1) the insurer that issued the contract and (2) the person or other entity, known as the contract owner, who owns and exercises all rights and privileges of the annuity contract.
Annuity considerations - premiums that insurers receive for annuities
Payee – the person or entity who receives the periodic income payments according to the terms of the annuity contract.
Contingent payee – will receive any remaining annuity payments upon the death of the payee.
Annuitant – whose lifetime is used to determine the amount of benefits payable under the contract.
Maturity date – date on which the insurer begins to make the periodic income payments, also known as the annuity date or the income date.
Payout period – period during which the insurer makes periodic income payments, also known as the liquidation period.
Annuity period – time span between each of the payments in the series of periodic annuity payments
Annual annuity: annuity period of one year; monthly annuity: annuity period of one month
Types of Annuity Contracts
Categorized in a number of ways:
When periodic income payments begin
How often premiums are paid
How annuity premiums are invested
Immediate and Deferred Annuities
Immediate annuity – provides periodic income payments that generally are scheduled to begin one annuity period after the date the contract is issued.
Deferred annuity – annuity under which periodic income payments are scheduled to begin more than one annuity period after the date on which the annuity was purchased.
Types of Annuity Contracts
Accumulation period – the period between the contract owner’s purchase of a deferred annuity and the beginning of the payout period.
Accumulated value – accumulation value or contract value, is equal to the amount paid for the annuity, plus the investment earnings, minus the amount of any withdrawals and fees.
Single-Premium and Flexible-Premium Annuities
Single-premium annuity – an annuity that is purchased by the payment of a single, lump-sum amount
Single-premium immediate annuity (SPIA) contract: purchased with a lump-sum premium payment and provides periodic income payments that begin one annuity period after the annuity is purchased. All immediate annuities are single-premium annuities
Types of Annuity Contracts
Single-premium deferred annuity (SPDA) contract: purchased with a lump-sum premium payment and provides periodic income payments that begin more than one annuity period after the annuity is purchased.
Flexible-premium annuity: an annuity that is purchased by the payment of periodic premiums that can vary between a set minimum amount and a set maximum amount.
Because every annuity purchased with flexible premiums is a deferred annuity, most insurers refer to the flexible-premium annuities they issue as Flexible-premium deferred annuity (FPDA) contracts
Types of Annuity Contracts
Fixed and Variable Annuities
Fixed annuity- an annuity contract under which the insurer guarantees the minimum interest rate that will be applied to the annuity’s accumulated value during the accumulation period and the minimum amount of the periodic income payments that will be made during the payout period.
Immediate annuity: the amount of the periodic income payments is known when the insurer issues the contract.
Deferred annuity: the accumulated value earns interest throughout the accumulation period.
Variable annuity- an annuity under which the amount of the accumulated value and the amount of the periodic income payments fluctuate in accordance with the performance of one or more specified investment funds.
Fixed subaccount – subaccount that guarantees payment of a fixed rate of interest for a specific period of time.
Types of Annuity Contracts
The owner of a variable annuity may allocate premiums among a number of subaccounts and has the right to…
Transfer money among subaccounts.
Change the percentage of money allocated to specific subaccounts.
Change the subaccounts in which future premiums are invested.
At the beginning of the payout period, the variable annuity contract owner typically has the option of receiving income payments that…
Are fixed in amount from a fixed subaccount
Fluctuate as the result of the investment performance of specified variable subaccounts
Are based on the results of a combination of fixed and variable subaccounts, so that a portion of the periodic income payments will be stable and another portion will fluctuate
Types of Annuity Contracts
Hybrid Annuities
Equity-Indexed Annuities- a type of annuity that offers certain principal and earnings guarantees, but also offers the possibility of additional earnings by linking the contract to a published index.
Market Value Adjusted Annuities – (modified guaranteed annuity) is an annuity that offers multiple guarantee periods and multiple fixed interest rated.
Annuity Contract Provision
Entire contract provision – states that the entire contract consists of the annuity contract, the application if it is attached to the contract, and any attached riders.
Free-look provision or free-examination provision – gives the contract owner a stated period of time—usually 10 to 30 days—after the contract is delivered in which to examine the policy.
Misstatement of age or sex provision – states that if the annuitant’s age or sex was misstated in the application, then the periodic income payments will be those that the premiums paid would have purchased for the correct age or sex.
Dividends provision – describes the contract owner’s right to share in the insurer’s divisible surplus, if any, and the dividend payment options available to the contract owner.
Annuity Contract Provision
Incontestability provision – describes the insurer’s right to contest the validity of the annuity contract. Generally, the application for an annuity does not contain questions relating to the insurability of the applicant, and the applicant does not make representations on which the insurer bases its decision to issue the annuity. As a result, the incontestability provision in an annuity contract typically states that, once the contract becomes effective, the insurer may not contest the validity of the contract. However, some insurers offer supplemental benefit riders, such as a waiver of premium for disability benefit rider. The applicant for such a rider generally must provide evidence of insurability, and the annuity’s incontestability provision in such cases gives the insurer a specified period, usually one or two ears, in which to contest the validity of the coverage provided by the rider on the basis of a material misrepresentation in the application. The annuity contract itself remains in force.
Annuity Contract Provision
Deferred Annuity Contract Provisions
Withdrawal provision – gives the contract owner the right to withdraw all or part of the contract’s accumulated value during the accumulation period.
Withdrawal charge – insurer imposes this if the contract owner withdraws more than that stated percentage in one year.
Surrender value – the accumulated value less any surrender charges included in the policy.
Surrender charge – a fee typically imposed if the annuity contract is surrendered within a stated number of years after it was purchased
Death benefit – (survivor benefit) an amount of money payable to a beneficiary designated by the contract owner.
Annuity Contract Provision
Guaranteed Benefits
Guaranteed minimum death benefit (GMDB) – a variable annuity contract feature which guarantees that, if the annuitant dies before periodic income payments begin, the beneficiary will receive at least a state amount, regardless of the contract’s accumulated value at that time.
Guaranteed minimum withdrawal benefit (GMWB) – a variable annuity contract feature which guarantees that up to a certain percentage of the amount paid into the contract will be available for withdrawals annually during the accumulation period, even if subaccount investments perform poorly.
Annuity Contract Provision
Guaranteed minimum income benefit (GMIB) – a variable annuity contract feature that guarantees a minimum periodic income payment regardless of the annuity’s investment performance if the contract remains in force for a specified period of time—typically 7 to 10 years.
