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  • 1. INSTITUTE OF INSURANCE EDUCATION & TRAINING, INC. Servicing the Insurance Industry Since 1996 ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS 3 Hour Continuing Education Self-Study On Line Course PART ONE Level: Intermediate
  • 2. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE PART ONE - ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) NEW LEGISLATION O I.PURPOSE U THE SENIOR MARKET AN EASY TARGET FOR FRAUD (1) Ethical violations. T (2) Complaints: II. DEFINITIONS L A. Annuity contract – I B. Suitability. C. Ethical conduct N D. Recommendation E. Senior Consumers E III. PRODUCTS CLASSES OF ANNUITIES. A. Fix Annuities B. Equity Indexed Annuities C. Variable Annuities D. Group Annuities Part One - 1 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009
  • 3. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE PART ONE – ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) NEW LEGISLATION Annuity Investments The amendment giving the legislation governing the sale of annuities to senior individuals by seniors new strength was signed into law and became effective January 1 2009. It is commonly known now in our field as the “senior suitability law” and it is considered by our authorities as a good first step to correct the problem of senior fraud. More formally this legislation is known as: Annuity investments by seniors and pertains to the section 627.4554 F.S. I. PURPOSE SECTION OVERVIEW: The purpose of the section is to set the standards and procedures for recommendations made to senior consumers which would result in a sale or exchange involving annuity products. One of the main aims consists of appropriately addressing the insurance needs, investment ability and financial objectives of such senior consumers at the time of such transaction. The purpose …a recommendation The section applies to recommendations to purchase or exchange an annuity made to a madeof a Senior to the Consumer senior consumer involving an insurance agent, or an insurer whether no agent is involved. Senior to purchase an annuity Suitability Law or life product deals mostly with… (Press Space Bar) Part One - 2 © Copyright INSTITUTE OF INSURANCE, INC 1996 2009 / Senior Suitability Outline
  • 4. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE THE SENIOR MARKET AN EASY TARGET FOR FRAUD For several years now Florida’s senior population, which soon will represent a 30% of the whole state’s population, has been the target of unscrupulous individuals who have taken advantage of this group of people. Florida, because of its privileged climactic and geographical conditions, is selected by many as their retirement paradise. Unfortunately the sociological, psychological and economical characteristics of this group of consumers have made Florida a paradise for those who seek to harm our seniors. Florida, It was in the early first half of this decade when various authorities started been aware of the situation. Of course, among those authorities our Department of Financial Services was a retirement included. It was due to the calls of many senior individuals who wanted, for example, an paradise evaluation of an investment or an annuity product they had just purchased the way the Department, little by little, found out about the full extent of the problem. A typical example consisted of investments products which resulted to be unregistered securities or where the salesperson was not licensed either as a security broker or as an insurance agent. To make things worse, it was found in many instances within our own insurance field that 2 activities The sale of some agents used different predatory tactics to approach the senior market. After a little targeting unregistered securities while the department started receiving complaint after complaint with respect to Senior Market for Fraud are… Transactions conducted transactions involving annuity products or Life Insurance which was “not suitable” for the by unlicensed personnel client. (Press Space Bar) Part One - 3 © Copyright INSTITUTE OF INSURANCE, INC 1996 2009 / Senior Suitability Outline
  • 5. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Investigation by the department of several hundreds of those complaints led to the need for new resources which would allow the department to fight something that was becoming at the time, a sort of epidemics. Those resources came in the form of a piece of legislation which was originally signed into law in 2004 (Sect. 627.4554 F.S.). That was a good start but not enough to confront the problem. Such legislation was amended by the 2008 Florida Legislature. The amendment resulted in a much stronger instrument against fraud to seniors and becomes the central topic of this course. (1) Ethical violations. The following are examples of common ethical violations which even if incurred not purposely, may result in harm: Misrepresentation of Provisions or Benefits. This is one of the most common sources of complaints with respect to ethical behavior. A deceptive sales presentation is one which consists of a presentation that gives the prospect or client a false or wrong impression about one or more aspects of an insurance contract or plan. A typical example, a presentation in which no complete disclosures are made. Another example of a deceptive sales presentation is one which includes a misleading or incomplete product comparison. As you may figure out even if a deception of this type is not intentional that may result in harm to the client. “Senior Investment Fraud” is considered an ethical violation True False Part One - 4 © Copyright INSTITUTE OF INSURANCE, INC 1996 2009 / Senior Suitability Outline
  • 6. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Overstating Guarantees. Policy illustrations in most instances are based on certain expectations that may or will happen depending on a vast array of circumstances. It is not uncommon that some of these projections never occur. The worst will occur when an agent Typical will, on purpose, confusing projections with guarantees. Complaints Misrepresenting Coverage Name or Type. Included here is the reference to an insurance or annuity product or contract in a deceiving way. For example, when an agent calls a product by a name other than its correct one. Included, there may be a variety of situations which may lead to misrepresentation, such as: Inadequate disclosures Inaccurate or incomplete statements (2) Complaints: Seniors for several years have been complaining on how they have been the target of different schemes. Scams used to cheat senior investors amount to several hundreds of millions of dollars. The department has been on the lookout for scammers for a long period of time. The following are some of the most notorious scams perpetrated against Floridian seniors: a. Senior investment fraud. Because of their access to a lifetime of savings, seniors continue to face investment fraud by con artists offering unsecured promissory notes and other investment vehicles that are either fraudulent or unsuitable for them. For example, a senior consumer invests an important amount of money in a deferred annuity. Such contract is supposed to start paying benefits 15 years from now. The senior investor is currently 87 ½ years old. Part One - 5 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 7. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE b. Ponzi schemes. Named after Charles Ponzi who in the early 1900’s was involved in a Ponzi millionaire fraud of this type. Ponzi did not invent the scheme, but his operation been the Schemes first of that sort to be known throughout the United States, took in so much money and became so popular at the time and that is known until our days after his name. The scheme, a fraudulent investment operation, consist of paying returns to investors from their own money or money paid by subsequent investors rather than from profit. The only people who make any money are the promoters of the scam. c. Fraudulent promissory notes High yield investments schemes. Con artists lure investors with promises of double or even triple-digit returns through access to quot;risk-free guaranteed high-yield instrumentsquot; or something equally deceptive. d. Affinity Fraud: Scammers continuously target religious, ethnic, cultural, and professional groups. A few years ago, a case involving a Miami Beach couple who was told about an investment by a neighbor who attended the same church was reported. An amount of $25,000 was stolen along with another $180 million by a bogus company dedicated to these type of scam through churches across this state of Florida. e. Internet Fraud: Stock promoters use online quot;boiler roomsquot; instant messaging, and fake websites to lure investors into quot;pump-and-dumpquot; stock schemes. Part One - 6 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 8. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE All these fraudulent activities have a common denominator: the promise of a High –Yield Investments Return. The new legislation, which intends to correct all these mishaps, makes strong emphasis on the following points: Law • Agents licensed in Florida must take a minimum of three hours of continuing Intent education on the subject of suitability in annuity and life insurance transactions. • Any person who willfully submits fraudulent signatures on an application or policy- related document commits a felony of the third degree. • Any agent who misuses a designation to imply they have specialized training or knowledge or misrepresents their actual qualifications, commits a violation of the unfair trade practices. • The legislation also significantly expands the type of information the agent is required to collect from the senior consumer to determine suitability when recommending an annuity. • It requires the agent to complete a detailed comparison form comparing the benefits of the senior consumer's existing annuity to the one being recommended by the agent as a replacement. • Increases the period in which the consumer can obtain an unconditional refund if the •More Info Gathering 3 “new law” features consumer decides not to accept the life or annuity policy from 10 to 14 days from the •False signatures addressing resulting in felony date the policy is received. senior suitability charges issues are… • Imposes fine maximums of $30,000 for each willful violation of twisting, churning •Modified CE requirements and submission of fraudulent signatures. (Press Space Bar) Part One - 7 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 9. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE II. DEFINITIONS SECTION OVERVIEW: Annuity A. Annuity contract – Contracts According to section 627.4554 F.S. annuity contract refers to a fixed annuity or variable annuity that is individually solicited, whether the product is classified as an individual annuity or a group annuity. Annuity Essentials Annuities are a means of providing a stream of income for a guaranteed period of time, a period which in many instances may be defined in terms of the recipient's life. An annuity is a cash contract with an insurance company or with another type of entity such as a bank. It is important to mention that life insurance companies, because of their expertise in the handling of “mortality” and/or survivorship tables and because by definition they are designed as massive investors, play a very important role in the field of annuities and other products of similar nature. While almost anybody who is part of the investment arena, could provide a “period certain“ type of annuity, (including a two year or five year payout period). However, life insurance companies only can offer annuities which would pay benefits to an annuitant for periods What are A means to provide a much longer than their counterparts, (i.e. financial institutions such as banks), even for annuities? for stream of income life. a specific period of (Press Space Bar) time Part One - 8 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 10. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Unlike life insurance products where policy issue and pricing are based largely on mortality Annuity risk, annuities are primarily investment products. One of the most generalized uses of Contracts annuities is for retirement purposes. Individuals purchase or fund annuities with a single sum amount or through a series of periodic payments. The insurer credits the annuity fund with a certain rate of interest, which is not currently taxable to the annuitant. This way, the annuity grows at a fast pace. The ultimate amount that will be available for payout is, in part, a reflection of these factors. Most annuities guarantee a death benefit payable in the event the annuitant dies before payout begins; however, it is usually limited to the amount paid into the contract plus just some of the accrued interest which has been credited into the account. You can figure out then how important annuities are for the senior market and why seniors have been the subject of an intense criminal activity. However, due to the importance of this market segment you, the life insurance agent, have an opportunity to professionally grow to levels perhaps unimagined while you provide the senior market with a qualified type of service. The new law will empower you with new tools to accomplish this task. Remember!!! Annuities are not based on mortality tables Part One - 9 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 11. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE B. Suitability. Suitability Transacting life insurance or annuity contracts in accordance with suitability principles specifically refers to the need to determine whether such transaction meets the standards indicated by an applicant’s profile. If that is the case, then the product may be deemed “suitable” for that applicant. To Accomplish that, an agent must have objectively reasonable reasons for believing that a specific recommendation is suitable for the senior prospective client. Such determination should be based upon the facts disclosed by the client regarding • his or her investments • other existing insurance products • his or her financial situation The new legislation demands that, in order to determining suitability the agent to make reasonable efforts to obtain all pertinent information concerning the senior's financial status, tax status, and investment objectives, among other specified and other relevant information. Part One - 10 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 12. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Discussion points: Suitability Therefore, there is a right way to accomplish this task. The appropriateness with respect to a recommended transaction is determined when considering the risks associated with such transaction as related to: 1. customer’s assets. 2. current insurance holdings. 3. financial situation (income and net worth) which leads to the ability to pay for the proposed coverage. 4. financial needs and investment objectives as related to the proposed product. 5. value, benefits and costs of the prospect’s existing insurance, if any when compared Remember !!! with the recommended purchase, if such is either an addition or an if exchange. The appropriateness with respect to a recommendation is determined by the risk associated to it Part One - 11 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 13. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE C. Ethical conduct Ethical Discussion points: Conduct 1. Ethical conduct Characteristics. Ethics comprises standards of conduct that indicates how one should behave, based on our obligation towards other human beings. It deals with the ability to distinguish right from wrong, good from evil, and propriety from impropriety – and the commitment to do what is right, good and proper. 2. Ethics means doing the right thing, taking the high road and in general, people act ethically out of concern for others, rather than for themselves. Simply put, ethics consist of those things we make ourselves do, no matter what, and those things we will not allow ourselves to do no matter what. 3. Ethics and the Golden Rule. The old golden rule taught us not to do on to others anything we do not want to be done on to us. While there are many definitions we might use the one that seems to serve us best here is to say that ethics are synonymous with our own personal behavior code. 4. Know your product and understand your industry. Insurance, because of its nature is a product which demands ethical behavior at the most. The appropriate knowledge of your product and your industry will be key in avoiding unethical practices which may Remember that… result out of ignorance. Ethical conduct 5. Do what is right for the client. Your clients’ interest comes first always. An agent’s goal is rather should consist, no mater what, in leaving his or her client in a better condition than the concerned with one he or she priorly had. the best interest of the others Part One - 12 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 14. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE D. Recommendation According to (FS 627.4554) a recommendation is defined as advice provided by an Recommendation insurance agent or directly by an insurer, if no agent is involved in the transaction, to an individual senior consumer which results in a purchase or exchange of an annuity (or other life insurance product). E. Senior Consumers Section 627.4554 FS defines a senior consumer as a person 65 years of age or older. In the event of a joint purchase by more than one party, a purchaser is considered to be a senior consumer if just one of the parties is age 65 or older. III. PRODUCTS SECTION OVERVIEW: Annuity Basics. If compared with Life Insurance, annuities themselves constitute its exact opposite. If Life Insurance deals with mortality, annuities deal with survivorship. With Life Insurance benefits are supposed to be paid to a person other than the insured. In the case of Advise provided by A an agent (or insurer) annuities it is the annuitant the one who, in most instances, will enjoy the benefits of the recommendation which results in the contract. In this section we will review a few different annuity products and the way they is… purchase either of an annuity or life work. (Press Space Bar) insurance product Part One - 13 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 15. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE As any other financial product, annuities are designed to satisfy human needs. As those Annuity Basics needs are different depending on the circumstances and the individual prospective client, there are a variety of alternatives with respect to this product. The following are some examples of those alternatives: Funding Method. According to the method employed to fund an annuity we can distinguish two types: Lump-sum premium annuity. It is usual that senior consumers may fund an annuity with a lump-sum. Flexible-premium annuity. This way an annuity is funded throughout a long period of time being this method more appropriate for young investors. Commencement of Annuity Benefits. According to when annuity benefits begin, they again are classified in two types: Immediate. Benefits pertaining to an immediate annuity are paid beginning the next benefit period (i.e. next month, next quarter, next year, etc.) Deferred. Benefits will be paid sometime in the future, specified or if not. According to when benefits 1. begin, how many Immediate Payout Period. Benefit periods vary according to the different annuities, however the types of annuities most common are 5 years; 10, 20 years; for life, etc. 1. Deferred are there? (Press Space Bar) Part One - 14 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 16. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE CLASSES OF ANNUITIES. Classification of Annuities A.Fix Annuities B.Equity Indexed Annuities C.Variable Annuities D.Group Annuities A. Fix Annuities - Characteristics and Mechanics. Fixed annuities provide a guaranteed rate of return. To be able to do that, during the period in which the annuitant is making payments to fund the annuity (also known as the accumulation period), the insurer invests these payments in conservative, long-term securities, such as bonds. In this manner, the insurer is allowed to credit a steady interest rate to the annuity contract. The interest payable during any given year can be declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. In this way, a fixed annuity has two interest rates: • minimum guaranteed rate Remember !!! With Fix Annuities • current rate. the investment risk is bore by the insurer… Part One - 15 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 17. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Fix The current rate, which will never be lower than the minimum rate guaranteed by the insurer, is what the insurer credits to the annuity on a regular basis, usually each year. This Annuities way, the accumulation of funds in a fixed annuity is certain and the annuitant’s principal is secure. As you may figure out, the investment risk is borne by the insurer. This is possible because the interest rate payable on the annuity funds is fixed and guaranteed at the point of annuitization. The amount and duration of benefit payments are guaranteed. Because they provide a specified benefit payable for life (or any other period the annuitant desires), fixed annuities offer security and financial peace of mind. When converted to a payout mode also known as the benefit period, fixed annuities provide a guaranteed fixed benefit amount to the annuitant, typically stated in terms of certain amount of dollars per $1,000 of value accumulated. Pros And Cons Of Fixed Annuities. As we have stated, fixed annuities are a good answer for somebody looking for a stable stream of income. They are also good for Remember !!! somebody who does not want to take a lot of risk. However, since the benefit amount is … however, the fixed, annuitants may see the purchasing power of their income payments decline over the purchasing power of years due to inflation. That is the reason why variable annuities are much more popular. the annuitant will decrease over the years due to inflation Part One - 16 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 18. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE Discussion points: Equity B. Equity Indexed Annuities (including Market Value Adjusted Annuities): Equity indexed annuities (EIA) are a type of fixed annuity that offer the potential for higher Indexed credited rates of return than regular fixed annuities although they also guarantee the owner's principal. Due to this fact, they have became very popular in the last few years. Annuities The interest credited to an EIA is tied to increases in a specific equity or stock index, however underlying the contract for the duration of its term is a minimum guaranteed rate (floor) so a certain rate of growth is guaranteed. The emphasis of equity indexed annuities is placed in the accumulation factor. When it comes time to access the funds, the owner can select a lump-sum distribution or annuitization and such annuitization can be either fixed or variable. The following are some common concepts pertaining to this type of products: 1. Participation rates. This is the percentage of the index growth that is credited to the annuity's values. The cash values in most contracts do not change as much or as fast as stock market indices. •Potential for higher rates 3 typical characteristics •Interest is tied to a specific equityare… of “EIAs” or stock index (Press Space Bar) •Emphasis placed on accumulation factor Part One - 17 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 19. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE 2. Spread. Used sometimes in combination with participation rates, this feature is in most cases expressed as an interest rate and is subtracted from the percentage EIA’s increase in the stock index. Cap. A limit, usually expressed as a percentage, on the increase in cash value. For example, if the stock index rises 25 percent but there is a 20 Characteristics percent cap, the cash value will rise a maximum of 20 percent. 3. Floor. This is a minimum limit, often shown as a percentage per year which is related to the decrease in cash values of the investments. For example, if the stock index drops 12 percent but there is a 10 percent floor, the cash value’s maximum drop will be of no more than 10 percent. 4. Ratcheting. This guarantees that past increases in accumulated cash value (e.g., from previous years) will not be lost. 5. Point-to-point. This method of crediting interest or changing values ignores the average changes in the stock index, and changes contract values according to the change in index from one point in time (often the anniversary) to another. Part One - 18 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 20. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE C. Variable annuities: Variable annuities were created as a response to the issue of protection against inflation. For example, imagine someone who retired with a given amount of income (say, $1000 per month about 10 years ago). That person would find that after a decade of Variable inflation, the real purchasing power of his income would have drastically diminish. The solution was then creation of the variable annuity. Annuities Not only can the value of a variable annuity fluctuate in response to movements in the market, so too will the amount of annuity income fluctuate, even after the contract has annuitized. Regardless of the inevitable fluctuations in the amount of benefit income, the theory is that the general tendency results in an increasing amount of income over time as inflation pushes up the price of stocks. This theory has generally proven true. Discussion points: a) General Accounts vs. Separate Accounts: With variable annuities premiums are invested in an insurer's separate account, as opposed to an insurer's general account. Did you know? (which allow the insurer to guarantee interest in a fixed annuity). Because variable Variable annuities annuities are based on non-guaranteed equity investments, such as common stock, a were created as a sales representative who wants to sell such contracts must be registered with the response to the Financial Industry Regulatory Authority (FINRA) as well as holding a state insurance inflation protection issue license. Part One - 19 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 21. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE b) Non-guaranteed equity investment: The same underlying principles that apply to Variable other variable products such as life insurance apply to variable annuities. As it happens there, variable annuities shift the investment risk from the insurer to the contract Annuity owner. If the investments supporting the contract perform well, the senior investor will probably enjoy an investment growth that exceeds what is possible in a fixed annuity. Characteristics However, the lack of investment guarantees means that the variable annuity owner can see the value of his or her annuity decrease in a depressed market or in an economic recession. c) Accumulation and Annuity Units: To accommodate the variable concept, a new means of accounting for both annuity payments and annuity income has been required. The result is the use of accumulation units during the accumulation period and the annuity unit which will be used during the income payout or annuity period. d) Accumulation Units: In a variable annuity, during the accumulation period, contributions made by the annuitant, less a deduction for expenses, are converted to accumulation units and credited to the individual's account. The value of each accumulation unit varies, depending on the value of the underlying stock investment. For example, assume an accumulation unit initially valued at $20, and the Annuities deal rather with units (accumulation holder of a variable annuity makes a payment of $300. This means he has purchased 15 or payout) accumulation units. Six months later, the annuitant makes another payment of instead of with dollars $300, but during that time, the underlying stocks have declined and the value of the and cents accumulation unit is $15 This means that his $300 payment have now purchased 20 accumulation units. True False Part One - 20 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 22. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE e) Annuity Units At the time the variable annuity benefits are to be paid out to the Annuity annuitant, the accumulation units in the participant's individual account are converted Units to annuity units. It is at the time of initial payout when the annuity unit calculation is made. The number of annuity units then remains the same for that annuitant for the rest of his or her life. The value of one annuity unit, however, will vary from month to month depending on investment results. Just imagine that our annuitant, by the time he is ready to retire and after calculations are made has 100 annuity units in his account. He will always be credited with one hundred annuity units That number will not change. Assume that time of his first benefit payment; each annuity unit was valued at $20. That means his initial benefit payment is $2000 (100 x $20). As long as the value of the annuity unit is equal to $20, his monthly benefit payment will be $2000. But what happens if the value of the stock goes up and his annuity unit value becomes $22? His next monthly payment will be $2,200 (100 x $22). Of course, if the value of the annuity units goes down so will be his benefit income. Payout Annuity units are also known as… Units (Press Space Bar) Part One - 21 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 23. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE f) Principal’s safeguard. The theory is that, despite the fact that not even the principal Variable is guaranteed, the payout from a variable annuity over a period of years will keep pace Annuities with the cost of living and thus maintain the annuitant's purchasing power at or above a constant level. One aspect which is important to take into consideration is the fact that variable annuities are not the right answer for a short period of time. It is in the long run when it proves to respond in a better way than fix annuities. Also, the smart investor will have in his or her portfolio a combination of both concepts. As with fixed annuities, the variable annuity owner has various payout options from which to choose. These options usually include the life annuity, life annuity with period certain, unit refund annuity (similar to a cash refund annuity) and a joint and survivor annuity. Part One - 22 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 24. ANNUITY AND LIFE INSURANCE TRANSACTION SUITABILITY FOR SENIORS (CONTINUED) PART ONE D. Group Annuities: Group The same way it applies to life or health insurance products for example, annuities may also be sold in the form of group contracts. In most instances, employers use a variety Annuities of group products as a way to offer fringe benefit packages to their employees and executives. Other consumers of group products are labor unions, fraternal groups, trade associations, etc. 1. Characteristics of group contracts. In the case of group contracts the insured or contractholder is the sponsoring organization (i.e. the employer). The group plans may be non-contributory meaning that the employer would pay 100% of the premiums or contributory in which employees will pay a portion or the total of them. 2. Insured vs. certificateholder. As stated, it is sponsoring entity the one that is a party to the contract therefore, employee members are not considered insureds or a annuitants but would receive a ”certificate of coverage” indicating their participation in a specific plan. Remember that… With Group Contracts, the insured is usually an sponsoring entity: (i.e. the employer) Part One - 23 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline
  • 25. ANNUITY AND LIFE INSURANCE TRANSACTIONINCLUDING Senior Suitability (CONTINUED) LONG TERM CARE INSURANCE SUITABILITY FOR SENIORS PART I - THE NEED FOR LONG-TERM CARE PART ONE QUIZ 1 (Part One) QUIZ 2 This concludes Part One of your “ANNUITY AND LIFE (Part Two) INSURANCE TRANSACTION SUITABILITY FOR SENIORS” course. Just click on any of the links provided to you to continue with QUIZ 3 your on line material. (Part Three) FINAL GOTO Part Two E X A M GOTO Part Three Part One - 24 © Copyright INSTITUTE OF INSURANCE, INC 1996 2008 / Senior Suitability 2009 Outline