7.2 Annuity Basics
An annuity is called the "opposite side of the coin" when compared to a life insurance policy. The basic risk insured against by purchasing a life insurance contract is the risk of dying too soon. The basic risk insured against by an annuity contract is the risk of living too long.
What is the difference between a participating and nonparticipating variable annuity policy?
Under a participating variable policy, the annuitant participates not only in the investment performance of the company but, if the company should experience savings in underwriting or expense factors beyond that which was charged in the contract as an administrative load, the contract provides that the company may credit the expense savings realized to the individual variable annuity accounts.
Under the nonparticipating variable policy, the annuitant participates only in investment earnings, and the company would stand to profit from any savings realized.
Explaining the basics of how an annuity works is actually very simple. A certain amount of money is set aside and a certain amount of money is paid out over a certain amount of time. When the funds in the annuity account have been depleted, the annuity is terminated.
But how do the funds manage to get there in the first place?
A single payment or periodic payments are made into the annuity contract, those funds are invested, and the annuity fund is credited with a certain rate of interest tax free. The amount invested and what the interest rate yields will determine the ultimate payout amount.
If the annuitant dies before payout begins, most annuities are equipped with a death benefit. This benefit amount is usually limited to the amount paid into the contract plus interest credited to that point in time.
Before the payout period begins, the annuity is in the accumulation phase. Once the accumulation period ends, the payout period begins through a monthly, quarterly, semi-annual or annual payment schedule.
Existing law requires applications for insurance policies or annuity contracts to display the name of the insuring entity prominently on the first page of the application and state that:
"...such applications must also disclose the name and license identification number as shown on the agent's license issued by the Office, which information may be typed, printed, stamped or handwritten if legible."