Annuities & Insurance-Based Products
Key facts on fixed, variable, and indexed annuities, payout options, taxation, and variable life insurance.
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Questions Covered in This Set
11 cards to master
What risk does an annuity transfer to the insurer?
Mortality risk — the risk of living too long and outliving your money. An annuity can guarantee income you cannot outlive.
Is a fixed annuity a security?
No. A fixed annuity is an insurance product only, requiring just a state insurance license — no securities registration.
Where are fixed vs. variable annuity funds held?
Fixed annuity premiums go to the insurer's general account; variable annuity premiums go to a separate account invested in subaccounts.
Main weakness of a fixed annuity?
Purchasing power (inflation) risk — the fixed check buys less over time. The insurer bears investment risk.
What licensing and disclosure does selling a variable annuity require?
Both a securities registration (SIE + Series 6 or 7) and a state insurance license; it must be sold with a prospectus. The separate account is registered under the Investment Company Act of 1940.
Three features that limit indexed annuity returns?
Participation rate (e.g., 80% of index gain), a cap (e.g., 9% max), and a floor (often 0%, protecting principal).
What happens to units at annuitization?
Accumulation units are exchanged for a fixed number of annuity units. The number of annuity units never changes, but their value fluctuates, so the check varies. Annuitization is generally irrevocable.
Rank payout options from largest to smallest check.
Life only (straight life) largest, then life with period certain, then joint and last survivor (smallest).
How are random (non-annuitized) withdrawals taxed?
LIFO — earnings come out first, taxed as ordinary income (never capital gains), plus a 10% penalty if before age 59½.
What is the exclusion ratio?
For annuitized payments, it splits each check into a tax-free return of cost basis and taxable earnings.
Key guarantee gap in variable life insurance?
There is a guaranteed minimum death benefit but NO guaranteed cash value; poor subaccount performance can drop cash value to zero and lapse the policy.
