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UNIT_10_Insurance_Pensions_Students_Notes - UNIVERSITY OF...

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UNIVERSITY OF TECHNOLOGY, JAMAICA FACULTY OF BUSINESS AND MANAGEMENT SCHOOL OF BUSINESS ADMINISTRATION INSURANCE UNIT 10 - PENSIONS AGENDA 1. Annuities and Individual Retirement Accounts 2. Employee Benefits: Retirement Plans 1. ANNUITIES AND INDIVIDUAL RETIREMENT ACCOUNTS Individual Annuities Types of Annuities Taxation of Individual Annuities Individual Retirement Accounts OBJECTIVES 1. Show how an annuity differs from life insurance 2. Describe the basic characteristics of a fixed annuity and a variable annuity. 3. Explain the major characteristics of an equity-indexed annuity. 4. Describe the basic characteristics of a traditional tax-deductible individual retirement account (IRA). 5. Explain the basic characteristics of a Roth IRA. Individual Annuities An annuity is a periodic payment that continues for a fixed period or for the duration of a designated life or lives The person who receives the payments is the annuitant An annuity provides protection against the risk of excessive longevity The fundamental purpose of an annuity is to provide a lifetime income that cannot be outlived The major types of annuities sold today include: 1
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Fixed annuity Variable annuity Equity-indexed annuity Fixed Annuities A fixed annuity pays periodic income payments that are guaranteed and fixed in amount o During the accumulation period prior to retirement, premiums are credited with interest o The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity o The current rate is based on current market conditions, and is guaranteed only for a limited period A bonus annuity pays a higher interest rate initially The liquidation period is the period in which funds are paid out, or annuitized Fixed annuity income payments can be paid immediately, or at a future date: An immediate annuity is one where the first payment is due one payment interval from the date of purchase Provides a guaranteed lifetime income that cannot be outlived A deferred annuity provides income payments at some future date A deferred annuity purchase with a lump sum is called a single-premium deferred annuity A flexible-premium annuity allows the owner to vary the premium payments The annuity owner has a choice of annuity settlement offers Most annuities are not annuitized Under the cash option, the funds can be withdrawn in a lump sum or in installments A life annuity option provides a life income to the annuitant only while the annuitant remains alive A life annuity with guaranteed payments pays a life income to the annuitant with a certain number of guaranteed payments 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 A cash refund option is similar, but pays the beneficiary a lump sum A joint-and-survivor annuity pays benefits based on the lives of two or more annuitants. The
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UNIT_10_Insurance_Pensions_Students_Notes - UNIVERSITY OF...

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