Risk Management and Insurance Questionnaire

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Q1

Annuities account for a great part of the protection one affords self against death. They do not follow the application of the law of large numbers as the law is traditionally utilized in life insurance. It has, therefore, been referred to as “upside-down life insurance.” When an annuitant passes away during the period of accumulation, their beneficiaries are paid a death benefit. The common treatment of annuities is to account for gross premium returns excluding interest or to account for the cash value, whichever is greater. The principle is for the principal sum to be liquidated over the annuitant’s lifetime regardless of the means of accumulation.

Q2

Annuities can fall under various classes. Traditionally, the following classifications have been used to differentiate annuities:

i. Individual vs. group annuity

ii. Fixed-dollar vs. variable annuity

iii. Deferred annuity vs. immediate annuity

iv. Installment annuity vs. single-premium annuity

v. Single life vs. joint life annuity

vi. Annuity certain vs. pure life annuity

In the case of specialized annuities, the contract options available include:

i. Single-premium deferred annuity (SPDA)

ii. Two-Tier Annuity

iii. Market-Value-Adjusted Annuities

iv. The Variable Annuity

v. Index Annuities

vi. The Contingent Deferred Annuity

vii. Survivorship or Reversionary Annuity

Q3

Investors have to account for inflation when projecting the future value of their investments. The Variable Annuity helps investors cope with the effects of inflation on investment portfolios. The underlying theory is that while the value of a dollar will change over time, a diversified investment portfolio will adjust to reflect the prevailing prices of commodities and services in the economy with inflation factored in. Common stocks represent the value of companies offering goods and services in the economy and their value will generally move in the direction of the general prices.

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Variable annuities have been consistent with this theory. The number of accumulation units credited to an investor’s account will reflect the current market value of the same units. This value is determined by dividing the current securities value accumulated by a client by the outstanding number of accumulation units.

Q4

Just like in life insurance, annuities’ earned investment income during the period of accumulation is not taxable. Taxation happens only when the income is disbursed. The disbursed amount is taxed on the basis that the payment made is in excess of the investment made in the contract. Further, an early withdrawal of an annuity attracts a premature penalty of 10 percent. However, this penalty is not applicable where the holder of the contract suffers a disability during the life of the contract.

Q5

In the case of the joint and last-survivor annuity, the contract is such that the insurance company makes payments until the death of the two annuitants. This makes the contract attractive to retired married couples. There are variations to the contract that may provide for the amount being paid out to be reduced after the passing of one annuitant with the reduced disbursement continuing until the passing of the second party.

In the case of joint life annuity, the contract is such that payments stop on the passing….....

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