2.3. MARCO TEÓRICO REFERENCIAL
2.3.5. Sistemas conductuales del modelo de Bowlby
The estate tax treatment given annuities depends on whether death occurred before or after the annuity starting date. If death occurred before the annuity starting date, i.e. during the accumulation period, the entire value of the annuity contract is includible in the decedent’s federal gross estate.
If death occurred after the annuity starting date, the commuted value of any remaining payments under the contract is included in the decedent’s federal gross estate. Therefore, if the decedent had selected a straight life annuity no value would be included in his or her federal gross estate because no benefits are payable to a beneficiary under a straight life annuity. However, if the decedent elected a period certain and died before the end of the selected period, the commuted value of those remaining payments due the beneficiary is included in the decedent’s estate.
Summary
Non-qualified annuities unquestionably provide important owner benefits that are not associated with the product’s tax treatment. Despite those non-tax benefits, however, the tax treatment of non-qualified annuities remains central to the product’s consumer popularity.
Although non-qualified annuity premiums are non-deductible, the contract offers owners the opportunity to defer recognition of contract gains until distributed. As a result of this tax treatment, earnings that might have been needed to pay current income taxes on those earnings may remain in the account producing additional earnings. A sometimes forgotten, but important, feature is the contract owner’s ability to re-allocate his or her cash value in the contract to other variable subaccounts, as needed. This facility enables the contract owner to respond to changes in the market and in his or her own risk tolerance.
Unlike withdrawals from a life insurance policy’s cash value, which are considered to be a withdrawal of basis before any earnings are withdrawn, withdrawals from a non-qualified annuity are considered to be earnings first. Only after all earnings are withdrawn from the annuity contract is the investment in the contract withdrawn.
Non-qualified annuity tax benefits are provided to encourage taxpayers to save for their retirement. Accordingly, there is a penalty for distribution of annuity funds before the owner’s age 59½. Unless the premature distribution meets a particular exemption, it is subject to a 10 percent tax penalty to the extent the distribution must be included in the contract owner’s taxable income.
Non-qualified annuity tax benefits don’t end with tax deferral. Periodic income payments received from a non-qualified annuity are deemed to be comprised of a tax-free return of basis along with taxable earnings. As a result of that favorable tax treatment, a portion of each annuity payment is tax-free until the entire investment in the contract has been recovered.
The tax benefits of non-qualified annuities apply principally during the contract owner’s lifetime. The tax treatment at death is somewhat less favorable. Non-qualified annuity death benefits are income taxable to the beneficiary to the extent of any gain on the contract. Unlike the treatment given to many other assets, annuities do not receive a step-up in basis at the death of the owner. Furthermore, the value of a non-qualified annuity at the owner’s death is included in his or her federal gross estate.
Glossary
Accumulation period The period before the annuity starting date and during which the
contract owner is paying premiums on the annuity contract is known,
appropriately, as the accumulation period.
Annuitant The annuitant is the person whose life governs the duration of life
annuity periodic payments. In the majority of cases, the contract owner is also the annuitant; however, the contract owner and annuitant need not be the same person.
Annuity The term “annuity” hearkens back to a Greek word, annus, which
means “year” and connotes an annual income payment. As initially conceived, an annuity is simply a product that, through annual payments, systematically liquidates a principal sum over a lifetime. In its traditional meaning, an annuity offers a benefit that can’t be found in any other financial vehicle; that benefit is an income that cannot be outlived, no matter how long-lived the individual is.
Annuity contract owner The annuity contract owner is the person that owns the contract, pays
the premiums and has certain rights, including the right to name a beneficiary to receive any survivor benefits.
Annuity starting date The annuity starting date is the date on which periodic income
payments are scheduled to begin.
Asset allocation Asset allocation involves dividing one’s portfolio into various asset
classes in order to preserve capital by protecting against negative developments while still taking advantage of positive developments.
Automatic asset re-
balancing Automatic asset re-balancing is a variable annuity feature that can normally be implemented by the contract owner without cost.
Periodically, it re-balances the variable annuity portfolio by re- allocating the funds so that the cash value allocation is returned to its pre-determined percentages among the variable sub-accounts. Funds in the fixed account are not usually considered in this re-balancing.
Bonus annuity A bonus annuity is a deferred annuity on which the first-year interest-
crediting rate is greater than the current rate that the insurer anticipates it will credit in subsequent years. The difference in these rates is the “bonus.”
Cash refund annuity In a cash refund annuity, the insurer guarantees that if the sum of the
periodic income payments received by the annuitant does not at least equal the amount of the annuity purchase price at the time of the annuitant’s death, the difference will be paid in a lump sum to the annuitant’s beneficiary.
Cash value management tools
The automatic fund-reallocation options that may be offered by insurers selling variable annuities to aid contract owners in managing cash value include: asset allocation, automatic asset re-balancing, interest sweep and dollar cost averaging.
Contribution window An equity indexed annuity’s contribution window is the period during
which premiums must remain in the daily interest account before being credited to the equity index account.
Daily interest account An equity indexed annuity’s daily interest account is an account in
which the owner’s premiums are accumulated when paid. It is convenient to characterize this account as a “staging area” in which the funds are placed before being moved to the equity index account. While the premiums remain in the daily interest account, they receive interest at a rate declared by the insurer.
Declared-rate annuity A declared-rate annuity contract is an annuity contract on which the
crediting interest rate is declared from time to time by the issuing insurer.
Deferred annuity A deferred annuity is an annuity under which a period longer than one
payment interval must elapse before the first benefit payment is due.
Diversification Diversification refers to the inclusion of a number of different
investment vehicles in a portfolio in order to increase returns or reduce risk exposure.
Dollar cost averaging The basic principle behind the dollar cost averaging concept is that
the investor will invest the same amount at regular intervals,
irrespective of the price of the purchased securities. Because the same amount is regularly invested, it will purchase a greater number of shares of the security when its price is lower and a fewer number of shares when its price is higher. Because of this dynamic, in a market in which the share price is fluctuating, the investor will always have an average per-share cost that is less than the average per-share price over the purchase period.
Equity index An equity index is a measure of performance of certain stocks that are
included in a particular “portfolio” in relation to a base value set for that portfolio at an earlier time.
Equity index account The equity index account in an equity indexed product is that account
in which the growth, if any, of credited funds is determined by changes in an equity index.
Equity indexed annuity An equity indexed annuity is one whose cash values are based on the
performance of a selected equity index, such as the S&P 500 Index. If the equity index on which the cash value is based increases the contract’s cash value will increase.
Exclusion ratio A fixed annuity’s exclusion ratio is the ratio that the total investment in the contract bears to the total expected return. The exclusion ratio is generally expressed as a percentage and is derived by dividing the investment in the contract by the expected return. It is used to determine the portion of each fixed annuity income payment that is received tax free as a return of cost basis.
Fixed account The fixed account is an investment option in a variable annuity
contract that offers owners two important guarantees:
• The principal invested in the fixed account is guaranteed
and
• A minimum level of interest crediting is guaranteed by the
fixed account
Fixed amount annuity A fixed amount annuity is a temporary annuity under which a
principal sum plus interest is liquidated and each payment is a specified, level amount. When the principal and interest have been liquidated, the payments cease whether or not the annuitant is alive.
Fixed annuity A fixed annuity is one under which the insurer, rather than the
contract owner, bears the risk of loss of principal. The insurer guarantees the contract owner that:
• Principal will not be lost, regardless of the insurer’s
investment performance and
• Interest at least equal to a stated minimum rate will be
credited
Fixed period annuity A fixed period annuity is a temporary annuity under which level
income payments are made for a specified period. At the conclusion of the specified period, income payments cease, whether or not the annuitant is alive.
Flexible premium annuity
In a flexible premium annuity, the insurer sends regular premium notices on the chosen frequency to the contract owner who may remit the billed premium, more or less than the billed premium, or no premium at all. (There are, typically, certain minimum and maximum premiums permitted by the insurer.) Under the flexible premium approach, the contract owner may pay a premium when his or her cash flow permits and pay no premium when it doesn’t.
Guaranteed interest crediting rate
A fixed annuity’s guaranteed interest crediting rate is that interest rate
that the insurer guarantees it will credit to the contract’s cash value at
a minimum. The insurer must credit interest to the contract’s cash value at least equal to its guaranteed interest crediting rate, even though it may be earning less than that amount on its invested assets.
Immediate annuity An immediate annuity is one in which the first periodic income payment is due one income payment interval after the date that the annuity was purchased.
Index call option An index call option is a financial product by virtue of which insurers
may hedge against the risk that it will be required to credit excess interest in an equity indexed product. By purchasing an index call option, an insurer insures itself against the probability that it will be required to credit interest in excess of the guaranteed interest.
Index call option budget An insurer’s index call option budget is the amount of money it has available to purchase the index call options that ensure it will be able to credit any excess interest promised on its equity indexed products. To determine its index call option budget, the insurer deducts from the amount credited to the equity index account certain amounts for:
• The funds that the insurer needs to invest in bonds and
bond-like investments in order to be sure it will have
sufficient funds to credit the guaranteed interest
• Administrative and sales expenses
• Profits
Index term period The index term period is the period of time over which equity index
benefits are calculated. Installment refund
annuity
In an installment refund annuity, the insurer guarantees that if the sum of the periodic income payments received by the annuity does not at least equal the amount of the annuity purchase price at the time of the annuitant’s death, income payments will continue to a beneficiary until the difference is paid.
Interest crediting method The interest crediting method in any equity indexed product is that process by which the amount of interest in excess of the guaranteed interest is determined. The raw interest rate crediting methods normally employed are:
• Total interest rate methods
• Annual interest rate methods
and
• Combination indexing methods
Interest indexed annuity An interest indexed annuity is one whose cash values are based on the
performance of a selected interest index, such as the 10 Year Treasury Note Index.
Interest rate cap An interest rate cap in an equity indexed product is a limit on the interest rate that will be credited to the funds in the equity index account. The cap may apply to each year in a multi-year index term period, or it may apply to the overall index term period. An equity indexed annuity contract’s actual interest rate may be subject to both a cap and a participation rate, each further limiting the interest that is eventually applied to the cash value.
Interest sweep Under the interest sweep feature, interest earned in the variable
annuity contract’s fixed account is “swept” periodically into one or more of the owner’s chosen variable sub-accounts. Interest sweep is usually available monthly, quarterly, semi-annually or annually, and the contract owner needs to indicate the date on which the insurer is to begin making interest sweeps, the frequency of the sweeps and the percentage of the interest “swept” into each chosen variable sub- account.
Joint and survivor annuity
A joint and survivor annuity is a life annuity under which an income continues until the last of the two covered individuals dies.
LIFO Under LIFO tax treatment—an acronym for “last in, first out”—any
gain on the annuity contract is deemed to be distributed before any cost basis is received.
Mortality & expense risk charge (M&E)
The mortality and expense risk charge—usually identified as M&E risk charge—is designed to cover the insurer’s mortality and expense risk. In an annuity contract, the insurer assumes the risk that the group of lives it has insured under its policies will survive longer than expected; this risk is the mortality risk part of the M&E risk charges. Additionally, the insurer assumes the risk that its cost of issuing and administering the variable annuity contracts will exceed its estimates; this is the expense risk part of the M&E risk charges. Insurers
typically charge a current M&E risk charge but guarantee that the
M&E risk charge will not exceed a guaranteed maximum. Multi-year guarantee
annuity
A multi-year guarantee annuity is a fixed annuity on which the current interest rate is guaranteed for a period greater than one year. Although some multi-year guarantee annuities offer a two-year rate period, these contracts generally offer current interest rates for periods of three to ten years.
Non-qualified annuity Non-qualified annuities are annuities purchased outside of any tax-
advantaged plan such as a tax-sheltered annuity or individual retirement account.
Participation rate An equity indexed annuity’s participation rate is the percentage of the
change in the underlying index that is credited to the contract’s cash value.
Period certain Under a life annuity with a period certain, the insurer promises to pay an income for the life of the annuitant, but if the annuitant should die before a particular period—the period certain—ends, payments will continue to a beneficiary for the balance of that period.
Qualified funding asset A qualified funding asset is an annuity that is purchased and held to
fund periodic payments for damages on account of personal injury or sickness.
S&P 500 index The S&P 500 Index is one of several major common stock indexes
published by Standard & Poor’s Corporation and is often the preferred equity index for use in equity indexed products. It is a broad-based index consisting of 500 stocks that are included in the industrials, transportation, utilities and financials index.
Separate account A variable annuity issuer normally establishes a separate account
comprised of a number of variable subaccounts. The separate account
is so named because it is separate from the insurer’s general asset
account. Variable subaccounts are generally differentiated by objective, risk level and underlying portfolio.
Single premium annuity Single premium annuity contracts are annuities in which only one premium is envisioned. Generally no further premiums are either expected or permitted.
Straight life annuity In the basic life annuity—generally known as a straight life annuity—
periodic income payments are made for the annuitant’s entire life, whether the remaining lifetime is measured in months or decades. However, if the annuitant receives at least one periodic payment and
then dies, no further payments are due.
Suitability When recommending the purchase of a securities product, such as a
variable annuity to a customer, NASD rules require that an agent or registered representative must have reasonable grounds to believe that the purchase is suitable for the customer.
Surrender charge It is possible that a contract owner may elect to withdraw funds from
a fixed or variable annuity contract or surrender it entirely before the insurer has been able to fully recover its sales charges. In such a case, the insurer generally charges the contract owner a withdrawal or surrender charge. Surrender charges apply only during the surrender charge period and usually (although not always) reduce over the period.
Temporary annuity A temporary annuity is an annuity in which no life contingencies are
involved. In other words, the payout is not affected by whether or not the annuitant dies.
Total interest rate methods
Total interest rate methods of determining excess interest in an equity indexed annuity contract are generally categorized into the following: