CHAPTER 15 ANNUITIES

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 65 th birthday ( single –premium immediate annuity). 2. a series of 25 payments of $1600, beginning on his 40 th birthday( level-premium deferred annuity) 3. one payment of $16,000 on his 40 th 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