6.1 Annuity Fundamentals
Annuities are contracts between an individual and a life insurance company. Fixed annuities guarantee income but suffer from purchasing power risk, while variable annuities offer equity market participation to outpace inflation.
Key FINRA Exam Takeaways
- Annuity contracts are designed to provide retirement income that cannot be outlived (longevity protection).
- Fixed Annuity: Guaranteed fixed rate of return, investment risk born by insurance company, backed by general account, NOT a security.
- Variable Annuity: Return tied to separate account subaccounts, investment risk born by purchaser, IS a security requiring Series 7 + state insurance license.
- Accumulation Phase: Investor deposits premium, purchasing Accumulation Units that grow tax-deferred.
- Annuitization / Payout Phase: Accumulation units convert into a fixed number of Annuity Units with fluctuating unit values.
The Two Phases of an Annuity
1. Accumulation Phase: The pay-in period. The investor deposits funds and purchases accumulation units. Earnings grow tax-deferred. 2. Payout (Annuitization) Phase: The contract value is converted into a lifetime income stream. The investor cannot switch back or surrender once annuitized.
Payout Settlement Options
Life Annuity (Straight Life): Highest monthly payout; payments cease immediately upon annuitant's death (no beneficiary). Life with Period Certain: Guaranteed payout for life or a minimum number of years (e.g., 10-year period certain). Joint and Last Survivor: Covers two lives, continuing until the second annuitant dies.
Which annuity payout settlement option provides the LARGEST initial monthly check for a given contract value?