section 1 - The American College Online Learning Center

way to obtain increasing payments to address the need for inflationprotection.b. It is a little hard to characterize how this product line fits into the various incomestrategies. It is best suited for flooring, although you can argue that the lack ofcertainty in payments makes it less appropriate than a fixed life annuity with builtin inflation protection.7. Deferred income annuitiesa. In the course to this point we’ve discussed longevity insurance—which in its purestform is a life or joint life annuity that provides for fixed annuity payments, butbeginning at an advanced age.(1) These annuities are intended to be purchased a number of years beforebenefits begin.(2) They are an inexpensive way to address the longevity risk becausepayments begin much later and payments are made for a limited periodof time or no payments will be paid at all if the annuitants die prior to thestart date.b. Variations on longevity insurance(1) A refund feature if the participant dies before payments begin(2) If annuity payments are deferred for many years, inflation protection shouldbe considered.c. Another type of deferred income annuity is the fixed term annuity that providesfixed benefit payments at a later date.8. Deferred annuities(1) This type of product fits into the bucket strategy well as deferred incomeannuities can be purchased in advance to fill income needs for any of thebuckets created for different time periods.(2) This allows the advisor to target very specific income levels for differenttime periods.(3) These annuities can be purchased with or without inflation protection.(4) The limitation of this approach to providing guaranteed income is the lackof longevity protection.(5) The advantage as compared to life annuities is that they provide a deathbenefit in the case of an early death.a. Deferred annuities are annuities intended to pay out benefits at a later date.b. Types include those that pay a fixed rate of return, those that provide a rate whichis tied to an equity index, and variable annuities that give annuitants the option tochoose the investment options in the annuity.c. All deferred annuities provide for settlement options—meaning various forms ofannuity payments under terms specified in the contract or allow the contract holderto keep the policy in the deferred status throughout retirement.d. Deferred annuities will have a surrender charge for a specified period, and it isnot uncommon for the penalty to be reduced during the surrender period. Forexample, take an annuity with an 8 year surrender period. It may have a 7%surrender charge in the first year and a 1% charge in year 7.7.16