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640 Class 11 Outline

640 Class 11 Outline - Class 11 Outline Business Finance...

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Class 11 Outline Business Finance 640 Winter Quarter, 2008 This class has two parts. The first part reviews the basic characteristics of individual annuities. Concepts stressed include the annuity principle and the different types of annuities. For ease of understanding, we classify annuities into three categories: (1) fixed annuity, (2) variable annuity, and (3) equity-indexed annuity. The second part discusses the different types of IRAs. In this context, we will compare the eligibility requirements, annual contribution, income taxation and other features of Traditional IRA’s with Roth IRA. I. Individual Annuities A) Annuity principle – Periodic payment that continues for 1. Fixed period, or 2. Duration of a designated life or lives B) Types of annuities 1. Fixed annuity a. Pays periodic income payments that are guaranteed and fixed in amount b. During the accumulation period prior to retirement, premiums are credited with interest c. The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity d. The current rate is based on current market conditions, and is guaranteed only for a limited period e. A bonus annuity pays a higher interest rate initially f. The liquidation period is the period in which funds are paid out, or annuitized 2. Fixed annuity income payments can be paid immediately, or at a future date: a. An immediate annuity is one where the first payment is due one payment interval from the date of purchase b. Provides a guaranteed lifetime income that cannot be outlived c. A deferred annuity provides income payments at some future date d. A deferred annuity purchase with a lump sum is called a single-premium deferred annuity e. A flexible-premium annuity allows the owner to vary the premium payments 3. Annuity settlement options (payment of benefits) – Most annuities are not annuitized: a. Under the cash option, the funds can be withdrawn in a lump sum or in installments b. A life annuity option provides a life income to the annuitant only while the annuitant remains alive
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2 c. A life annuity with guaranteed payments pays a life income to the annuitant with a certain number of guaranteed payments d. An installment refund option pays a life income to the annuitant. If the annuitant dies before receiving the total income payments, the payments continue to a beneficiary e. A cash refund option is similar, but pays the beneficiary a lump sum f. A joint-and-survivor annuity pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies g. An inflation-indexed annuity option provides periodic payments that are adjusted for inflation 4. Variable annuity a. Basic characteristics – i. A variable annuity provides an inflation hedge by maintaining the real purchasing power of the periodic payments during retirement.
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640 Class 11 Outline - Class 11 Outline Business Finance...

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