Understanding Annuities and Insurance

Oct 17, 2024

Lecture Notes: Annuities and Insurance Provisions

Study Tips

  • Study for 20-30 minutes daily is more effective than long study sessions.
  • Rewrite notes daily for better retention.

Annuities

  • Purpose: To liquidate an estate (unlike life insurance, which creates an estate).
  • Function: Provide a guaranteed income over a lifetime using a lump sum paid to an insurance company.
    • Example: Jack and Jill convert their savings to a lifelong income stream.
  • Risks: Outliving your money; annuities help mitigate this.

Annuity Periods

  1. Accumulation Period:
    • Money is being put into the annuity.
    • Grows tax-deferred.
    • Early withdrawal penalties apply before age 59½.
  2. Annuitization Period:
    • Money is withdrawn.

Types of Annuities

  • Fixed Annuity: Guaranteed interest rate.
  • Variable Annuity: Returns based on stock market performance (requires a securities license).
  • Fixed Index Annuity: Linked to an index with a guaranteed minimum.

Payout Options

  1. Straight Life Annuity:
    • Largest monthly check.
    • No beneficiary.
  2. Life with Period Certain:
    • Income for life plus guaranteed period for beneficiaries.
  3. Life with Refund:
    • Refund of principal to beneficiaries.

Insurance Provisions

Non-Forfeiture Options

  • Definition: Options to retain some benefit if the policy is cancelled.
  1. Cash Surrender Value:
    • Take cash and cancel policy.
  2. Extended Term:
    • Use cash value to buy term insurance for the same face value.
    • Automatic option.
  3. Reduced Paid-Up Insurance:
    • Permanent policy with reduced coverage.

Dividend Options

  • Insurance companies’ dividends: Overcharged premium returned.
  1. Cash: Immediate cash return.
  2. Reduction of Premium: Lowers next year’s premium.
  3. Accumulate at Interest: Leave dividends to earn interest.
  4. Paid-Up Additions: Buy more permanent insurance.
  5. One-Year Term: Buy temporary insurance equal to cash value.

Settlement Options

  • For beneficiaries upon policyholder's death.
  1. Cash: Lump-sum payment.
  2. Life Income Options:
    • Similar to annuity options.
  3. Interest Only:
    • Receive interest, keep principal intact.
    • Look for "protect principal" in test questions.
  4. Fixed Amount:
    • Beneficiary chooses payment amount.
  5. Fixed Period:
    • Beneficiary chooses payment period.

Deferred vs. Immediate Annuities

  • Immediate Annuity: Withdrawals start within 12 months.
  • Deferred Annuity: Withdrawals start after 12 months.

Summary

  • Key Concepts: Liquidating estate, annuity periods, non-forfeiture, dividend, and settlement options.
  • Study Strategy: Regular, concise study and note rewriting.
  • Emphasize understanding over memorization for success.