A.2 Variable Deferred Annuities

Question 1

Compare: VA vs Mutual Funds vs Fixed DA

Answer 1

• VA’s are insurance contracts with settlement options
• Gains inside a VA are tax-deferred (interest, divs, capital gains
• MF: gains inside are not tax deferred
• MF have no insurance, no NF or settlements

VA vs fixed DA:

• VA ph can allocate money into SA funds, or fixed accounts
• DA is only backed by GA assets
• no gt return on SA funds, only fixed account
• fixed account has a gt min credit rate

Question 2

VA administration

Answer 2

• purchase ‘units’ with premiums paid to VA
• divs and capital gains earned are reinvested by PAU
• Units are sold from the SA fund and transferred to GA to cover the following:
• monthly expense charges
• M&E charges (marketing, issuing charges)
• risk charges
• withdraws, death
• policy loans
• investment mgmt charges are taken from the SA fund directly

Question 3

GMDB

DB calc and enhanced plans

Answer 3

DB = max(actual FV, GMDB)

enhanced GDB plans:

• 7-year reset
• roll ups
• step up ratchets

7 year resets (lowest value)

• GMDB yrs 1-7 = sum(prem) - sum(wd) since issue
• GMDB yrs 8-14 = FV(7) + sum(prem) - sum(wd) since start of yr 8
• etc

Roll up: GMDB increases at a constant roll up rate per year

GMDB(t) = GMDB(t-1) * (1+r) + prem(t) - wd(t)

Step up / 1 yr ratchet (highest value)

• GMDB = highest FV in any past anniversary + sum(prem) - sum(wd) since anniversary with highets FV
• locks in investment gains

Question 4

4 types of GLBs

GMxBs list

Answer 4

GMAB - gt min AV

GMIB - gt min income benefits
- once annuitized, lose AV, no liquidity

GMWB - similar to GMIB, but dont lose AV or liquidity.

GLWB - same as GMWB but lasts for life
- gts a min wd amount even when FV reaches 0 since this lasts for life