A fixed period annuity pays an income for a specified period of time, such as ten years. The amount that is paid doesn’t depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the pay-out period.
A lifetime annuity provides income for the remaining life of a person (called the “annuitant”). A variation of lifetime annuities continues income until the second one of two annuitants dies. No other type of financial product can promise to do this. The amount that is paid depends on the age of the annuitant (or ages, if it’s a two-life annuity), the amount paid into the annuity, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected pay-out period.
With a “pure” lifetime annuity, the payments stop when the annuitant dies, even if that’s a very short time after they began. Many annuity buyers are uncomfortable at this possibility, so they add a guaranteed period—essentially a fixed period annuity—to their lifetime annuity. With this combination, if you die before the fixed period ends, the income continues to your beneficiaries until the end of that period.
Sunday, July 20, 2008
Accelerated Death Benefits
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
A-SHARE VARIABLE ANNUITY
A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge.
Variable annuity
As a financial product sold by life insurance companies, it's no surprise that variable annuities have similar features to life insurance. Variable annuities are a hybrid financial product, combining features of mutual fund investing and life insurance.
A variable annuity is a contract. You buy the contract with an initial purchase payment, investing in a variety of subaccounts that the insurance company sells. Similar to investing in a mutual fund, you should always read the prospectus of a subaccount before investing.
Some of the features that variable annuities share with life insurance include:
Designating a beneficiary. Life insurance policies and variable annuities require you to designate a beneficiary. In the event you die during an annuity's accumulation period, or before a certain point in the payout period, your beneficiary receives a death benefit.
Your beneficiary is generally entitled to receive the greater amount of the annuity's contract value or value of purchase payments. Death benefits are paid as a lump sum or as an annuity. For an extra charge, you can usually buy an enhanced death benefit.
Payments based on investment performance. When you buy a life insurance policy, you pay a premium. With permanent life insurance, your premiums accumulate a cash value. Depending on the type of permanent life insurance coverage, some of your premiums are invested in riskier investments such as stocks or bonds. Universal and variable universal life insurance policies let you switch to flexible premiums, or stop paying premiums temporarily, when your cash value grows to an adequate level.
Cash value accumulates to provide continued coverage. With permanent life insurance, the cash value of your policy continues to provide insurance coverage even if you stop making premiums. (If you're buying term life insurance, your premiums do not accumulate a cash value and your policy lapses when you stop paying premiums.) In other words, the cash value is a reserve of funding future premiums. This reserve gives you flexibility in paying your premiums.
It's helpful to think of a variable annuity's contract value in a similar way. The contract value is the source of annuity payments when the payout period begins. If investment performance is better than expected, it boosts an annuity's contract value, giving you a respite from additional purchase payments.
Optional premiums buy extra or enhanced coverage. With life insurance policies, you can often pay a premium to guarantee a minimum death benefit. Variable-annuity contracts also include options (at an extra charge) for guaranteeing a minimum annuity payment or death benefit. Guarantees are insurance in their purest form: a chance for you to swap uncertainty for certainty with an insurer that is willing to underwrite that risk in exchange for a fee.
A variable annuity is a contract. You buy the contract with an initial purchase payment, investing in a variety of subaccounts that the insurance company sells. Similar to investing in a mutual fund, you should always read the prospectus of a subaccount before investing.
Some of the features that variable annuities share with life insurance include:
Designating a beneficiary. Life insurance policies and variable annuities require you to designate a beneficiary. In the event you die during an annuity's accumulation period, or before a certain point in the payout period, your beneficiary receives a death benefit.
Your beneficiary is generally entitled to receive the greater amount of the annuity's contract value or value of purchase payments. Death benefits are paid as a lump sum or as an annuity. For an extra charge, you can usually buy an enhanced death benefit.
Payments based on investment performance. When you buy a life insurance policy, you pay a premium. With permanent life insurance, your premiums accumulate a cash value. Depending on the type of permanent life insurance coverage, some of your premiums are invested in riskier investments such as stocks or bonds. Universal and variable universal life insurance policies let you switch to flexible premiums, or stop paying premiums temporarily, when your cash value grows to an adequate level.
Cash value accumulates to provide continued coverage. With permanent life insurance, the cash value of your policy continues to provide insurance coverage even if you stop making premiums. (If you're buying term life insurance, your premiums do not accumulate a cash value and your policy lapses when you stop paying premiums.) In other words, the cash value is a reserve of funding future premiums. This reserve gives you flexibility in paying your premiums.
It's helpful to think of a variable annuity's contract value in a similar way. The contract value is the source of annuity payments when the payout period begins. If investment performance is better than expected, it boosts an annuity's contract value, giving you a respite from additional purchase payments.
Optional premiums buy extra or enhanced coverage. With life insurance policies, you can often pay a premium to guarantee a minimum death benefit. Variable-annuity contracts also include options (at an extra charge) for guaranteeing a minimum annuity payment or death benefit. Guarantees are insurance in their purest form: a chance for you to swap uncertainty for certainty with an insurer that is willing to underwrite that risk in exchange for a fee.
Certificate of Insurability
A certificate of insurability is an insurance company's verification that you are entitled to receive insurance coverage. For life insurance, a certificate may require that you complete a health condition questionnaire and pass a health exam.
Term Life Insurance
A term life insurance policy provides a death benefit for a specific term, generally measured in years. Unlike permanent life, there is no buildup in cash value. When the coverage term expires, the policyholder buys a new term that matches his insurance needs. Since the policyholder is older, they will pay a larger premium to reflect their shorter life expectancy.
Term life insurance vs permanent life
The two main categories of life insurance are term and permanent life insurance.
Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.
You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.
A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)
Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.
You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.
A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)
Policy rider
A policy rider is a provision or modification to an existing insurance policy that provides additional coverage to an insurance policy. Generally, policy riders are sold separately from insurance policies.
Examples of riders include buying coverage to pay an accelerated death benefit, add your children to a life insurance policy, or to protect against an accidental death. A double indemnity rider pays twice the amount of the policy if you die accidentally.
A waiver of premium rider is a rider that lets you stop paying premiums for a policy if you become disabled for a sustained period of time before reaching age 60 or 65. The rider keeps your policy active by paying premiums for you. (In normal cases, a term life policy lapses when you stop paying premiums.)
Another example of a rider guarantees additional life insurance coverage without first having to obtain a certificate of insurability. (A certificate is often issued after you pass a physical exam.) This kind of policy rider is often called a guaranteed insurability rider.
You should evaluate whether a policy rider offers additional protection that you deem worth the extra expense. In some cases, a life insurer offers free rider coverage.
Examples of riders include buying coverage to pay an accelerated death benefit, add your children to a life insurance policy, or to protect against an accidental death. A double indemnity rider pays twice the amount of the policy if you die accidentally.
A waiver of premium rider is a rider that lets you stop paying premiums for a policy if you become disabled for a sustained period of time before reaching age 60 or 65. The rider keeps your policy active by paying premiums for you. (In normal cases, a term life policy lapses when you stop paying premiums.)
Another example of a rider guarantees additional life insurance coverage without first having to obtain a certificate of insurability. (A certificate is often issued after you pass a physical exam.) This kind of policy rider is often called a guaranteed insurability rider.
You should evaluate whether a policy rider offers additional protection that you deem worth the extra expense. In some cases, a life insurer offers free rider coverage.
Premium
The amount an insurance policyholder pays periodically to maintain insurance coverage. Bonds: A price more than the face value of the bond. A $1,000 bond that trades for $1,050, for example, trades at a premium of $50.
Cost-of-living adjustment (COLA)
The U.S. government pays a cost-of-living adjustment (COLA) to qualified federal employees and to all Social Security beneficiaries. COLAs are used to equalize cost-of-living differential and to protect against inflation. COLAs are based on the change in a widely used price index. For 2008, Social Security beneficiaries will receive a COLA of 2.3% for their benefits. This increase in benefits is based on the change in the consumer price index in the year ended in September 2007. Federal workers in Hawaii, Alaska, and the U.S. territory of Guam receive a salary COLA to compensate for the higher-than-average cost of living in those places.
Death Benefit
A death benefit is the payment you receive as a beneficiary of a life insurance policy. The death benefit may be paid as a lump sum or annuity.
If you receive an annuity, the amount you receive may be either a fixed or variable annuity.
A death-benefit annuity may include a cost-of-living adjustment (COLA) to protect against inflation. In most cases, a death benefit is paid monthly.
If you receive an annuity, the amount you receive may be either a fixed or variable annuity.
A death-benefit annuity may include a cost-of-living adjustment (COLA) to protect against inflation. In most cases, a death benefit is paid monthly.
Estimating Coverage needs
Life insurance provides payments to your beneficiaries that replaces some or all of your income if you die during the coverage period.
In exchange for insurance coverage, the insured person makes periodic payments called premiums to the insurance company. The person making payments is also called insuree and the insurance company is called the insurer. The insuree is also called the policy holder.
Most life insurance policies are taken out to replace family income in the event of an untimely death. As a result, these policies often designate a spouse, child, sibling or parent as beneficiary. The policy may also designate more than one beneficiary.
Some types of life insurance allow you to change your premiums or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments that are funded by some of your premiums earn a higher than expected rate of return.
The following can help you determine your coverage needs.
1. Determine your coverage period
2. Calculate the expenses that require coverage
3. Reduce the amount of required coverage by available assets and income
4. Add estimates for inflation,interest rates on savings, and taxes
5. Find other ways to lower your premiums
Since your health is a large determinant of your premiums, consider avoiding tobacco and alcohol. A healthy medical history helps. Skydiving, motorcycle riding and scuba diving are activities with higher accident and fatlity rates. Avoiding these kinds of insurance risks can help to lower your premiums.
In exchange for insurance coverage, the insured person makes periodic payments called premiums to the insurance company. The person making payments is also called insuree and the insurance company is called the insurer. The insuree is also called the policy holder.
Most life insurance policies are taken out to replace family income in the event of an untimely death. As a result, these policies often designate a spouse, child, sibling or parent as beneficiary. The policy may also designate more than one beneficiary.
Some types of life insurance allow you to change your premiums or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments that are funded by some of your premiums earn a higher than expected rate of return.
The following can help you determine your coverage needs.
1. Determine your coverage period
2. Calculate the expenses that require coverage
3. Reduce the amount of required coverage by available assets and income
4. Add estimates for inflation,interest rates on savings, and taxes
5. Find other ways to lower your premiums
Since your health is a large determinant of your premiums, consider avoiding tobacco and alcohol. A healthy medical history helps. Skydiving, motorcycle riding and scuba diving are activities with higher accident and fatlity rates. Avoiding these kinds of insurance risks can help to lower your premiums.
Types of Fixed Annuities
An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index, usually computed as a fraction of that index's total return.
A market value adjusted annuity is one that combines two desirable features- the ability to select and fix the time period and interest rate over which your annuity will grow, and the flexibility to withdraw money from the annuity before the end of time period selected. This withdrawal flexibility is achieved by adjusting the annuity's value, up or down, to reflect the change in the interest rate "market" from the start of the selected time period to the time of withdrawal.
Life Insurance
A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceed and is thereby safeguarded from the financial impact of the death of the insured.
The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example who will be responsible for your funeral costs and final medical bills? would your family have to relocate? will there be adequate funds for the future or ongoing expenses such as daycare, mortgage payments and college? it is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.
Stretch Annuity
An Annuity option where tax- deferred allowances are passed on to the beneficiaries, offering the beneficiaries more flexibility and control over maintaining he investment. Therefore, the beneficiary has less restraints on wealth transfer, and he or she is able to receive a larger sum of benefits stretched over a longer period of time.
Legacy annuities or stretch annuities are not offered by many insurers, unfortunately. This type of annuity is very advantageous because the beneficiary isn't burdened with paying a huge tax bill on his or her gains. this often can be stressful for a family that has just dealt with the loss of a loved one.
Fixed vs Variable Annuities
In a fixed annuity, the insurance company guarantees the principal and a minimum rate of interest. In other words, as long as the insurance company is financially sound, the money you have in a fixed annuity will grow and will not drop in value. The growth of the annuity and/ or the benefits paid may be fixed at a dollar amount or by an interest rate, or they grow by a specified formula. The growth of the annuity;s value and or/ the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. Some fixed annuities credit a higher rate of interest than the minimum, via a policy dividend that may be declared by the company's board of directors, if the company's actual investment, expense and mortality experience is more favorable than was expected. Fixed annuities are regulated by state insurance departments.
Money in a variable annuity is invested in a fund, like a mutual fund but one open only to investors in the insurance company's variable life insurance and variable annuities. The fund has a particular investment objective, and the value of your money in a variable annuity- and the amount of money to be paid out to you- is determined by the investment performance of that fund. Most variable annuities are structured to offer investors many different fund alternatives. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission.
Deferred Annuity
Deferred Annuity -
A type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received .
A deferred annuity can be either variable or fixed.
Earnings on a deferred annuity account are taxed only upon withdrawal, providing the annuity with a tax benefit. This type of annuity also provides a death benefit, so that the beneficiary of the annuity is guaranteed the principal and the investment earnings.
Variable Annuity
Variable Annuity -
An Insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.
Fixed Annuity
Fixed Annuity -
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
Annuity
An Annuity is an Insurance product. An annuity contract is when an individual gives a life insurance company money which may grow on a tax deferred basis and can be distributed back to owners in several ways. The defining characteristic of all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons names in the contract.
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