Annuities and Insurance Products in Retirement Flashcards

What is the key distinction between a fixed annuity and a variable annuity?

Answer: Fixed annuities guarantee a minimum interest rate while variable annuities invest in market-linked subaccounts

Fixed annuities credit a guaranteed minimum interest rate, whereas variable annuities allow investment in market-linked subaccounts with no return guarantee.

What is the primary retirement planning benefit of a single premium immediate annuity (SPIA)?

Answer: Guaranteed lifetime income beginning within one year of purchase

A SPIA converts a lump sum into guaranteed income payments that can begin within one month and continue for the annuitant's lifetime.

What is a deferred income annuity (DIA)?

Answer: An annuity purchased today with income payments beginning at a specified future date

A DIA (also called a longevity annuity) is funded with a lump sum today, with income payments starting at a future date—often an advanced age—to hedge against longevity risk.

How does a fixed indexed annuity (FIA) credit interest?

Answer: It credits interest linked to an index subject to caps or participation rates while protecting principal from losses

FIAs credit interest linked to an index such as the S&P 500, subject to caps or participation rates, while protecting the principal from negative index returns.

What is the exclusion ratio used to calculate for a non-qualified immediate annuity?

Answer: The tax-free portion of each payment as a return of after-tax cost basis

The exclusion ratio determines what portion of each annuity payment is a tax-free return of the owner's after-tax cost basis.

What is the 'free look' period for annuity contracts?

Answer: A state-mandated period (typically 10–30 days) to cancel the contract for a full refund

The free look period gives annuity buyers a window after purchase to review the contract and cancel for a full refund if it does not meet their needs.