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1. What is an Annuity?
An annuity is an income
stream – a regular periodic payment for life or another defined period. It
converts an accumulated sum of money into a series of payments over number
of years or a lifetime.
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Each payment consists
partly of principal which the annuity owner contributed in the form of
premiums, and partly of interest earned on the yet-to-be distributed
principal. |
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An annuity’s principal
function is to liquidate an estate by periodic payment of money out of a
contract to the owner. |
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The accumulation period
is that time during which funds are being paid into the annuity, in the
form of premiums by the contract holder, and interest is earned on those
premiums. The payout or annuity period refers to the point at which the
annuity ceases to be as accumulation vehicle and begins to generate
benefit payments on a regular basis. Typically payments begin at age 65.
However, variations can be made to the start date. |
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Beneficiaries can be
designated to receive payments during certain payment options selections. |
2. What is the
difference between a life annuity and a time certain or period certain
annuity?
If the payments are
contingent upon a life or lives, the annuity is known as a life annuity. If
the payments are for a certain number of years without regard to life
contingency, the annuity is a term certain or period certain annuity.
3. What is the
difference between an immediate annuity and a deferred annuity?
An immediate annuity is
designed to make its first benefit payment at one payment interval from the
date or purchase. An immediate annuity is really nothing more than a
distribution vehicle – a way to convert a sum of money into a stream of
income. A deferred annuity is designed to provide income payments beginning
as some specified future date.
4. How are payments
made?
Period or term certain
payments are not based on life contingency. Instead it guarantees payments
for a certain period of time, such as 10, 15 or 20 years, whether or not the
annuitant is living. At the end of the specified period payments cease. In
the event the annuitant dies before the end of the specified period, the
beneficiary becomes the recipient of the income until the end of the term.
Straight life- only option represents the purest form of life annuitization.
It provides a series of guaranteed payments for as long as the annuitant
lives; when death occurs, payments cease. If at the annuitant’s death there
is any principal remaining that has not been paid out, it is forfeited. On
the other hand, the annuitant cannot outlive the payments. Of all the
payment options based on a life contingency, the straight life option
produces the largest payment per $1.00 of principal.
5. What is a joint –
life option?
This typically applies to a
husband and wife. A joint and full survivor payout provides for the same
monthly payment as long as long as either of the two people are living. It
is only at the death of the second individual that payment ceases.
The alternative to this is the joint and -half survivor option, which provides
regular income payments to two people while they are both living and, upon
the death of the first, continues payments of half the original amount to
the survivor until his or her death.
6. What is the
difference between a fixed annuity, an equity annuity and variable annuity?
A fixed annuity earn a
guaranteed rate of interest for a specific time period, such as one, three
or five years. Once the guarantee period is over, a new interest rate is set
for the next period. It also provides a guaranteed fixed benefit amount to
the annuitant, expressed in terms of dollars per payment period.
An equity – indexed annuity (EIA) is fixed annuity that offers all the
advantage of traditional fixed annuities plus inflation protection because
it invests in the stock market. It is subject to the up and down savings of
the stock market.
A variable annuity shifts much of the investment risk from the insurer to
the contract holder because there is no certainty – and no guarantee – as to
its return. With a variable annuity it is the contract holder who determines
how his or her premium will be invested. The return on a variable annuity
will depend on how well these underlying investments programs perform. The
disadvantage of a variable annuity is that its lack of guarantees has the
owner open to the ups and downs of market risks. Because a variable annuity
is considered a “security”, it can only be sold by agents who have a
securities license as well as a life insurance license.
7. What is a surrender
charge?
This is a charge applicable
during early years of the contract’s accumulation phase in the event the
contract holder surrenders or cashes in his or her annuity before the
insurer has had the opportunity to recover the cost of obtaining the
business and issuing the contract.
8. What are withdrawal
privileges?
It is the ability to
withdraw a limited amount of fund without having to pay a surrender change.
A typical withdrawal provision allows the contract holder to withdraw up to
10% of the annuity fund each year. Individual income tax ramifications may
apply.
9. What fees and taxes
apply to annuities?
Most fixed annuities are
sold as back-end loaded contracts, meaning no fees are assessed at the time
of this product’s purchase. The insurer makes its money – on the “spread”
between the interest it earns on invested premiums and the amount that it
credits to an annuity.
During the accumulation period, interest credited or earned on an annuity is
not currently taxable to the contract holder. As long as the funds remain in
the annuity, they preserve their tax – deferred status. However, if the
contract holder accesses those funds prior to the contract’s maturity – if
he or she takes a withdrawal or loan or complete surrender- it may be a
taxable event.
When an annuity matures and
its fund is annualized into a series of periodic payments, a different tax
sale applies. Each payment consists partly of principal and partly of
interest earnings.
10. I am currently an
annuity owner and want to know if my money is guaranteed in the event your
organization fails. I need to know before I invest any more money, that it
is protected in some way.
Please be assured that your money is secure. Economic factors regarding
insurability of funds are handled in three main ways, descriptions of which
follow below:
According to the Federal Deposit Insurance Corporation (FDIC) government
website, “FDIC preserves and promotes public confidence in the U.S.
financial system by insuring deposits in banks and thrift institutions for
up to $250,000 (through December 31, 2013); by identifying, monitoring and
addressing risks to the deposit insurance funds; and by limiting the effect
on the economy and the financial system when a bank or thrift institution
fails.” This benefit is available because existing banks pay into an
insurance fund for insolvency. If additional funds are needed, Washington,
DC will need to rely on taxpayer funds. In essence, the banks rescue one
another.
Commercial life insurance companies (mutual or stock) rely on support from
the state guarantee fund through state guaranty associations which provide
coverage in the event of insolvency – but this fund has limits as well. The
fund is supported by a tax placed on the life insurance company’s premium
income. This is the system that is in place to rescue commercial life
insurance companies. On occasion, taxpayer funds may be used as well.
As a fraternal, PRCUA insures itself, without support from taxpayers or
premium taxes payable to the state. In the unlikely event that PRCUA were to
become insolvent and needed funds which were not available, PRCUA members
would be assessed. As a fraternal organization, members rescue each other,
without relying on government assistance as banks and commercial life
insurance companies do. If this is not possible, the PRCUA would merge with
another fraternal if rescue is required.
The latter is a highly unlikely occurrence as the PRCUA is very solvent.
Currently, PRCUA is meeting all death claims and cash surrenders. We are
also crediting monthly interest to our annuity account holders. The
adjustment in Annual Percentage Yields (APY) offered on annuities is a
reflection only on the return on investments that is available to the PRCUA.
Since 1997, three fraternals have merged with our organization – two of
which merged within the last five years. One of the fraternals was
insolvent, while the other was on the verge of becoming insolvent.
PRCUA’s domicile is Illinois. A recently completed state audit of our
organization has found no major deficiencies. The recent state examination
report is shared with all insurance departments in states in which we do
business.
Standard Analytical Service, Inc. has identified and analyzed our growth
pattern as compared to the average 25 largest life insurance companies. Our
growth percentage is comparatively higher than the average 25 largest life
insurance companies.
One cannot rely strictly on ratings by rating agencies. Recently we have
discovered that an Indiana commercial life insurance company, rated in the A
category for many years, has had a Rehabilitation Petition filed against it
by the Department of Insurance Commissioner of the State of Indiana.
Economic problems have developed across the United States. Very recently,
Harrisburg, the capital of Pennsylvania, has missed a bond payment for the
second time (WSJ, April 30, 2010). Luckily, the bonds were insured by an
insurance company which covered the payment on bonds. The PRCUA does not
claim any ownership to these bonds.
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