Question

investors can invest in a wide variety of annuities and can also use different annuity settlement options to meet specific retirement needs. For each of the following retirement objectives, identify either (1) a specific annu-ity or (2) an annuity settlement option that can be used to meet the objective. Treat each situation separately.

a. Jose, age 35, is a sales representative and plans to retire at age 67. His monthly income varies. He would like to invest in an annuity that allows him to change the frequency and amount of premium payments.

b. Nancy, age 67, plans to retire in 6 months. She has $200,000 in a savings account. She would like to receive lifetime monthly income that is guaranteed.

c. Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested.

d. Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retire-ment benefits to be protected against the risk of inflation.

e. Jung, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible.

f. Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants her principal guaranteed against loss.

Answer 1

a) James, age 35, is a sales representative and plans to retire at age 67. His monthly income varies,he would like to invest in an annuity that allows him to change the frequency and amount of premium payments. James should purchase a flexible premium deffered annuity, which allows changes in the amount and frequncey of payments. The flexible premium annuity can be ethier fixed annunity or a variable annuity.A flexible premium deferred annuity lets him fund his annuity with multiple premium payments. As a result, he don’t have to make one large lump sum premium payment. He make one initial premium payment, then additional payments at his own pace. There are no scheduled payments. The money in the annuity grows as he make new premium payments and accumulate interest.This type of annuity is guaranteed and grows on a tax-deferred basis. He won’t pay taxes until he take payments.

b.) Nancy, age 67, plans to retire in six months. She has $200,000 in a savings account. She would like to receive lifetime monthly income that is guaranteed. Nancy should purchase a fixed annuity and select a life income annuity option that guarantees her a lifetime income regardless how long she lives depending on her needs and objectives the life income option can be selected within a certain number of guaranteed payments.Fixed annuities are lower risk than variable annuities and can provide a steady stream of income in retirement.

c.) Jennifer, age 63, plans to retire in 90 days. She has $100,000 to invest in an annuity and would like to receive lifetime monthly income to supplement her Social Security benefits. However, she is concerned that she might die before she receives back the amount invested. Life annuity is an insurance product in which the annuitant receives a series of future payments for her lifetime after retirement. The annuitant has to pay a predetermined payment or a series of regular payments till she is working.This provides financial support to the retirees and helps them maintain a similar standard of living as before retirement. In a life annuity the uncertainty of the annuitant's life span is shifted to the insurer.
d.) Fred, age 70, recently retired and has $50,000 to invest for additional income. He wants the retirement benefits to be protected against the risk of inflation. Fred should purchase a a variable annuity which is designated to provide a inflation hedge after retirement.These are popular among retirees and pre-retirees who want a shot at capital appreciation in tandem with guaranteed lifetime income.

e.) Jung, age 75, is a widow with no dependents who needs additional retirement income. She has $25,000 to invest in an annuity. She wants to receive the maximum amount of monthly annuity income possible.Fixed life annuity.These are fixed interest investments issued by insurance companies. They pay guaranteed rates of interest, typically higher than bank CDs, and you can defer income or draw income immediately. These are popular among retirees and pre-retirees who want a no-cost, modest and guaranteed fixed investment.

f.) Kathy, age 32, would like to invest in the stock market, but she is conservative and risk averse. She would like to participate in any stock market gains, but she also wants her principal guaranteed against loss.These allow investors to choose from a basket of subaccounts (mutual funds). Account value is determined by the performance of the subaccounts, and a rider can be purchased to lock in a guaranteed income stream regardless of market performance — a key hedge if subaccounts perform poorly. These are popular among retirees and pre-retirees who want a shot at capital appreciation in tandem with guaranteed lifetime income.