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Risk and Insurance Chapter 14
N/A
32
Finance
Undergraduate 3
05/03/2012

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Term
annuity
Definition
is a periodic payment that continues for a fixed period or for the duration of a designated life or lives
Term
annuitant
Definition
the person who receives the payment
Term
annuity
Definition
provides protection against the risk of excessive longevity (living too long)
Term
annuity
Definition
the fundamental purpose is to provide a lifetime income that cannot be outlived
Term
The major types of annuities sold today include
Definition
O fixed annuity
O variable annuity
O equity-indexed annuity
Term
fixed annuity
Definition
pays periodic income payments that
are guaranteed and fixed in amount
Term
accumulation period
Definition
prior to retirement, premiums are credited with interest
Term
guaranteed rate
Definition
is the minimum interest rate that will be credited to the fixed annuity
Term
current rate
Definition
is based on current market conditions, and is guaranteed only for a limited period
Term
liquidation period
Definition
is the periods in which funds are paid out, or annuitized
Term
immediate annuity
Definition
is one where the first payment is due one payment interval from the date of purchase
provides a guaranteed lifetime income that cannot be outlived
Term
deferred annuity
Definition
provides income payments at some future date
Term
_single premium deferred annuity
Definition
A deferred annuity purchase with a lump sum
Term
flexible premium annuity
Definition
allows the owner to vary the premium payments
Term
life annuity option
Definition
provides a life income to the annuitant only while the annuitant remains alive
Term
life annuity with guaranteed payments
Definition
pays a life income to the annuitant with a certain number of guaranteed payments
Term
installment refund option
Definition
pays a
life income to the annuitant
 If the annuitant dies before receiving the total income payments, the payments continue to a beneficiary
Term
cash refund option
Definition
but pays the beneficiary a lump sum
Term
joint-and-survivor annuity
Definition
pays
benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies
Term
inflation-indexed annuity
Definition
option provides periodic payments that are adjusted for inflation
Term
variable annuity
Definition
pays a lifetime income, but
the income payments vary depending on common stock prices
o the purpose is to provide an inflation hedge by maintaining the real purchasing power of the payments
Term
accumulation units
Definition
Premiums are used to purchase _______ during the period prior to retirement
Term
annuity units
Definition
At retirement, the accumulation units are converted into _________.
Term
guaranteed death benefit
Definition
protects the principal against loss due to market declines
• Typically, if the annuitant dies before retirement, the amount paid to the beneficiary will be the
higher of two amounts: the amount invested in the contract or the value of the account at the time of death
Term
equity-index annuity
Definition
is a fixed, deferred annuity that:
o Allows the owner to participate in the growth of the stock market
 A cap specifies the maximum percentage of gain that is credited to the contract
o Provides downside protection against the loss of principle and prior interest earnings if the annuity is held to term
Term
participation rate
Definition
is the percent of increase in the stock index that is credited to the contract
Term
individual retirement account
Definition
(IRA) allows workers with taxable compensation to make annual contributions to a retirement plan up
to certain limits and receive favorable income‐tax treatment
Term
traditional IRA
Definition
allows a worker to take a tax deduction for part or all of their IRA contributions
o The investment income accumulates income tax free on a tax deferred basis
o distributions are taxed as ordinary income
o The participant must have earned income during the year, and must be under age 70.5
o For _2012_, the maximum annual contribution is _$5000_ or 100% of earned compensation, whichever is less
•workers over 50 can contribute up to $6000
Term
A full deduction for IRA contributions is allowed if:
Definition
• The worker is not an active participant in an employer’s retirement plan
•the worker’s modified adjusted gross income is below certain thresholds
Term
spousal IRA
Definition
allows a spouse who is not in the paid labor force or a low‐earning spouse to make a fully deductible contribution to a traditional IRA
Term
_$5000 ($6000 if over 50)_
Definition
The maximum annual IRA deduction for a spouse who isn’t an active participant
Term
Roth IRA
Definition
type of IRA that provides substantial tax advantages
O the annual contributions to a Roth IRA are not tax deductible
o The investment income accumulates income tax free
o Qualified distributions are not taxable under certain conditions
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