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Lecture Risk management and insurance - Lecture No 31: Annuities and individual retirement accounts

Lecture Risk management and insurance - Lecture No 31: Annuities and individual retirement accounts. This chapter’s objectives are to: Individual annuities, types of annuities, taxation of individual annuities, individual retirement accounts. | Annuities and Individual Retirement Accounts Lecture No. 31 1 Objectives Individual Annuities Types of Annuities Taxation of Individual Annuities Individual Retirement Accounts 2 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: Fixed annuity Variable annuity Equity-indexed annuity 3 Exhibit 14.1 How Tax Deferral Works 4 Fixed Annuities A fixed annuity pays periodic income payments that are guaranteed and fixed in amount During the accumulation period prior to retirement, premiums are credited with interest The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity The current rate is based on current . | Annuities and Individual Retirement Accounts Lecture No. 31 1 Objectives Individual Annuities Types of Annuities Taxation of Individual Annuities Individual Retirement Accounts 2 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: Fixed annuity Variable annuity Equity-indexed annuity 3 Exhibit 14.1 How Tax Deferral Works 4 Fixed Annuities A fixed annuity pays periodic income payments that are guaranteed and fixed in amount During the accumulation period prior to retirement, premiums are credited with interest The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity 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 5 Transparency Master 1.2 Fixed Annuities 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 6 Fixed Annuities 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 .