CHAPTER 15ANNUITIES

Annuities

Explain the purpose if an annuity Identify five different ways that

annuities can be classified or described Explain why some annuities come with

guarantees Identify the special features of a

variable annuity

DEFINITIONS An Annuity Insurance Policy is a contract

in which the insurer promises the insured, called the annuitant, a series of periodic payments, often for a lifetime.

Annuity insurance operation transfers funds from those who die at a relatively early age to those who live to relatively old ages.

USES OF ANNUITIES AND SUITABLE ISSUES

An annuity guarantees a steady stream of income that recipient cannot outlive, most people use them to finance their retirement cash flow needs.

An annuity maximizes annual cash flow for people who are willing to liquidate their assets.

USES OF ANNUITIES AND SUITABLE ISSUES Annuities are especially useful to people

in good health when they begin to receive annuity payments from the insurer.

Annuities are used to liquidate wealth and if the annuitant dies soon after beginning to receive annuity payments, a substantial amount of wealth may be lost.

USES OF ANNUITIES AND SUITABLE ISSUES Courts often approve the use of

annuities in structured settlements in negligence cases.

Instead of the defendant paying a lump sum to a plaintiff, the defendant paying a lump sum to a plaintiff, the defendant promises a series if payments to the injured party.

CLASSIFICATION OF ANNUITIES

Method of premium payment Time when benefits begin Promises purchased Number of annuitants covered Type of benefits

Method of Premium Payment A single-premium annuity is purchased with a

single premium or a series of premium.$500 a month will be paid, when he retires in 25 years, at age 65. He has 3 options.

1. one payment of $70,000 on his 65th birthday ( single –premium immediate annuity).

2. a series of 25 payments of $1600 , beginning on his 40th birthday( level-premium deferred annuity)

3. one payment of $16,000 on his 40th

birthday(single-premium deferred annuity)

Beginning of Benefits If a person pays for an annuity and the benefits

begin after a relatively short delay, this is an immediate annuity.  If a person pays for an annuity and the benefits

do not begin at once, this is a deferred annuity.

X person can pay $70,000 for benefits of $500 a month beginning immediately.

Pay $16,000 premium, wait 25 years and collect benefits of $500 a month.

Beginning of Benefits Single Premium Deferred Annuity If a single premium is paid more than one

period before the initial receipt of benefits, the contract is called a single premium deferred annuity contract (SPDA).

  Flexible Premium Deferred Annuity They are used for deposits of smaller

amounts. It does not require the annuitant to make an even series of level payments.

3. PROMISES PURCHASED

Pure Annuity( straight-life annuity)

There is no guarantee that the annuitant will receive the total amount of money.

e.g. pure annuity for $70,000 ; if he dies after only one payment of $500. Insurer is not obligated to make more payments.

PROMISES PURCHASED ii. Annuity five years certain; if the annuitant dies

after a month then a successor beneficiary will receive for an additional

four years and 11 months.

iii.Period Certain Annuity Limited to ceratin years. Usually to 20 years.              

PROMISES PURCHASED

 iv.Cash Refund Annuity If an annuitant dies before receiving the annuity

payments equal to the premium paid, a second beneficiary will receive the difference in cash at the time of the annuitant death.

  v.An Installment Refund Annuity The payments continue to a successor beneficiary until

the insurer pays out a total amount of $s equal to the premium.

 

Number of Annuitants i.single life annuity

ii.joint life annuity

iii.joint and survivor annuity  

5.Types of benefits

i. fixed no.of $s

ii.variable no. of $s