knowledge topics
Annuity
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Define an annuity.
- Explain parties to an annuity, such as:
- Annuity provider
- Plan owner
- Annuitant
- Explain advantages of annuities, such as:
- Guaranteed income
- Potential deferral of taxation
- Simplified income stream
- Protection against outliving income
- Protection against fluctuating returns on investment
- Protection against cash flow mismanagement
- Explain disadvantages of an annuity, such as:
- Loss of capital
- Loss of flexibility
- Subject to interest rate risk
- Subject to inflation risk
- Extra cost for additional benefits
- Define the parties to an annuity.
- Annuity provider
- Plan owner
- Annuitant
- Define types of annuities, such as:
- Life annuities
- Single life
- Joint life
- Single life with a guaranteed period
- Joint life with a guaranteed period
- Impaired
- Term certain annuities
- Temporary
- Life annuities
- Explain the features that may be added to the types of annuities, such as:
- Variable rates
- Inflation protection
- Guarantee period
- Return of premium
- Identify the terms that may be used to describe an annuity based on the source of capital used to purchase it.
- Non-registered annuities
- Registered annuities
- Identify which annuities may only be sold by insurance companies.
- Explain the permissible sources of capital for each type of annuity.
- Registered funds
- Non-registered funds
- Identify the sources that may be used to fund a registered annuity.
- Identify the types of annuities that may be purchased using registered funds.
- Identify that the plan owner and the annuitant must be the same person for a registered annuity.
- Compare the tax treatment of prescribed and non-prescribed annuities, specifically:
- Value of invested capital
- Interest rate assumptions
- Annuitant’s age
- Annuitant’s sex
- Guarantee period of payments
- Payment options (Fixed, variable, indexed)
- Annuitant’s health (for impaired annuities)
- Explain the relationship between the variables that may impact the income provided by an annuity and the payment amount.
- Explain the requirements for an annuity to qualify for prescribed tax treatment.
- Explain the tax treatment of non-registered annuities.
- When receiving income from a non-prescribed annuity
- When receiving income from a prescribed annuity
- Upon death of the annuitant
- Compare the tax treatment of prescribed and non-prescribed annuities, specifically:
- Level of tax over time
- Level of after-tax income over time
- Total taxable portion over lifetime of annuity
- Explain the tax treatment of income received from an annuity that was purchased using assets from a registered plan.
- When receiving income from the annuity
- Upon the death of the annuitant
- Explain the factors to consider in assessing the suitability of an annuity, such as:
- Requirement for income
- Risk tolerance
- Loss of decision-making control
- Control over timing of receiving income
- Effect on current cash flow
- Effect on future cash flow
- Effect on current net worth
- Effect on future net worth
- Flexibility required
- Current interest rates
- Investment management process
- Expected rates of return
- Age
- Life expectancy
- Tax impact
- Estate planning objectives
- Individual attitudes / preferences
- Evaluate the factors to consider in assessing the suitability of an annuity.
Glossary of Verbs (mouse over to see definition)
-
Define
To state exactly the meaning of
-
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
-
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
-
Compare
To note the similarities and differences between two or more things
-
Estimate
To determine an approximate value for
-
Calculate
To find the value using mathematics
-
Convert
To change from one form or purpose to another
-
Evaluate
To reach a conclusion or make a judgement through careful study
-
Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK