Insurance Ce – Reserves For Individual Deferred Annuities

As stated, there are 3 basic forms of annuities – flexible or fixed-premium deferred annuities, single-premium deferred annuities, and single-premium immediate annuities. The policy reserve for the majority of the annuities is equal to the present value of future benefits because most annuities in today’s market are either flexible-premium deferred annuities (FPDAs) or single-premium immediate annuities.

For the FPDAs, insurance companies cannot know for sure what premiums the contract holder may make in the future. Therefore, the policy reserve must be calculated on the premise that the contract owner will pay no future premiums. This, then, makes the policy reserve equal to the present value of future benefits for both single-premium and flexible-premium policies.

Then, when an annuity starts paying benefits, the reserves are based on a (legally recognized) mortality table and interest rate according to the annuitant’s attained age and monthly income – taking into consideration any minimum benefit guarantees. The assumed mortality is calculated conservatively – meaning lower mortality rates.

FPDAs are simply policies where the owner pays annual premiums during the period of accumulation, until the owner starts receiving benefits in the form of income. When the benefits start, the annuitant receives the monthly income based on the cash value of the policy at that time and an annuity factor for the attained age of the annuitant.

Contracts in which there are no further payments are reserved as net single premiums (the present value of future benefits), including single-premium life and endowment contracts, immediate life annuities, and paid up life and endowment contracts and supplementary contracts used in lieu of lump-sum payments.

REGULATIONS REGARDING FUNDING AGREEMENTS

When an insurer accepts funds to provide for an accumulation of funds for the purpose of making payments in future dates in ”amounts that are not based on mortality or morbidity contingencies, this is called a ”funding agreement.” The regulations state that ”no amounts shall be guaranteed or credited under any funding agreement except upon reasonable assumptions as to investment income and expenses and on a basis equitable to all holder of funding agreements of a given class.

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