This review list covers important topics for Exam 2 (Annuities, Health Insurance, Chapter 19 to 24, and Special Topic 2). This list should be used only as a reference for exam preparation. All materials that are covered in the lectures and in the related sections of the textbook are testable unless explicitly excluded.
Annuities (Chapter 14)
1. What is “annuity”? Why do we need it?
An annuity provides periodic payments to an annuitant, which continue for either a fixed period or for the duration of a designated life or lives. The fundamental purpose of a life annuity is to provide lifetime income that cannot be outlived.
2. Understand how annuities work.
3. What are common types of annuities? Understand how fixed annuity and variable annuity work and their differences.
Fixed annuity pays periodic income payments that are guaranteed and fixed in amount. It can be purchased so that the income payments start immediately, or the payments can be deferred to some later date. Deferred annuities typically provide for flexible premiums.
Variable annuity pays a lifetime income, but the income payments vary depending on investment experience of the subaccount in which the premiums are invested. The purpose of this type of annuity is to provide an inflation hedge by maintaining the purchasing power of the periodic payments.
Equity indexed annuity offers the guarantees of a fixed annuity and limited participation in stock market gains. It is a fixed deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term.
4. What are the settlement options for annuities?
Cash option: the funds can be withdrawn in a lump sum or in installments. The taxable portion of the distribution is subject to federal and state income taxes. The cash option also leads to adverse selection against the insurer because those in poor health will take cash rather than annuitize the funds.
Life annuity (no refund). A life annuity option provides a life income to the annuitant only while the annuitant is alive. No additional payments are made agent the annuitant dies. This type of settlement option pays the highest amount of periodic income payment because it has no refund features. It is suitable for someone who needs maximum lifetime income and has no dependents or has provided for them thought other means. However, because of the risk of forfeiting the unpaid principal of death occurs early, relatively few annuity owners elect this option.
Life annuity with guaranteed payments. It pays a life income to the annuitant with a certain number of guaranteed payments, such as 5, 10, 15 or 20 years. If the annuitant dies before receiving the guaranteed number of payments, the remaining payments are paid to a designated beneficiary. This option can be used by someone who needs lifetime income but who also wishes to provide income to the beneficiary in the event of an early death, because of the guaranteed payments, the periodic income payments are less than the income paid by a life annuity with no refund.
Installment refund option. It pays a life income to the annuitant. If the annuitant dies before receiving total income payments equal to the purchase price of the annuity, the payments continue to the beneficiary until they equal the purchase price of the annuity, the balance is paid in a lump sum to the beneficiary.
Joint and survivor annuity. It pays benefits based on the lives of two or more annuitants, such as a husband and wife or a brother and sister. The annuity income is paid until the last annuitant dies. Some contracts pay the full amount of the original income payments until the last survivor dies. Other plans pay only two thirds of on half of the original income after the annuitant dies.
Inflation indexed annuity option. Many insurers offer a…