Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
2001-01-02
2003-08-26
Millin, V. (Department: 3624)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S03600T, C705S004000
Reexamination Certificate
active
06611815
ABSTRACT:
FIELD OF THE INVENTION
The present invention relates generally to a data processing method and system for administering annuity retirement income benefits and, more particularly, to a data processing method and system for the efficient administration of both fixed and variable annuity products in the distribution, or payout, phase. The invention also relates to data processing and administrative systems used to administer such annuities that contain provisions which increase payments to the annuitant in the event specified contingencies occur, such as confinement in a long term care facility, or payment amounts falling below specified levels.
BACKGROUND OF THE INVENTION
Annuities typically serve the useful function of providing economic protection against the risk of longevity. An annuitant has the option of electing a life-contingent retirement income, thereby transferring the risk of outliving one's accumulated assets to the insurer.
A number of different kinds of annuities are available to meet the diverse needs of different individuals. These include deferred annuities and immediate annuities. In a deferred annuity, an individual is typically still in the “accumulation phase” of the annuity, amassing assets intended to sustain him or her during retirement years, when an earned wage from performing work is absent. In an immediate annuity, a lump sum of money is applied to purchase a series of retirement income benefit payments, with the first payment typically being made at the time of purchase, with subsequent benefit payments arriving each month thereafter.
The length of the term of the retirement income benefit payments is determined by the annuity benefit option elected by the annuitant. One type of annuity benefit option can provide lifetime income for the annuitant, regardless of how long he or she survives. Another type provides a similar benefit, but covers two lives, typically the annuitant and spouse.
Various types of additional guarantees can be attached to these life-contingent annuity benefit options. These include an option that guarantees the insurer will make at least a minimum number of monthly payments, typically 120 or 240. Another type of option guarantees that the insurer will pay out in benefits at least as much value as was applied to purchase the annuity. Increasing the guarantees typically has the effect of reducing the amount of the annuity benefit payments.
Non-life-contingent annuity benefit options are also available. For example, an annuity benefit that makes monthly payments for a specified period of time, such as thirty years, and then terminates is available.
Another distinction between the types of annuities available is whether it is classified as a “fixed annuity” or a “variable annuity.” In a fixed annuity, the insurer bears the investment risks. In a deferred fixed annuity the insurer guarantees a rate of interest applicable to each annuity deposit. The guarantee applies for a specified period of time, often one year, and is then reset periodically, moving in an amount and a direction that correlate with fixed-income investment yields available to the insurer in the capital markets.
In a variable annuity, the annuity contract owner bears the investment risk during the accumulation phase of the annuity. The annuitant(s) bear(s) the investment risk during the distribution, or payout, phase of the variable annuity. The individual(s) (owner and/or annuitant, who can be the same person) controlling the variable annuity typically have a choice of funds in which they can direct that annuity deposits be invested. These funds typically each represent one asset class, such as large capitalization U.S. common stocks, corporate bonds, money market instruments, or international stocks.
In a fixed annuity, the account value during the accumulation phase only increases with time. In a variable annuity, the account value during the accumulation phase can either increase or decrease with time, depending on the performance of the fund(s) in which the annuity contract owner has directed that deposits be invested. The hope and expectation, but not guarantee, is that investments in the riskier asset classes typically associated with a variable annuity will provide long-term accumulated values superior to those of a fixed annuity. As annuities are geared toward providing retirement income, there typically is a long-term holding period.
FIG. 1
shows a chart and graph which compares a typical contract value under a variable annuity to a contract value under a fixed annuity earning 5% annually. As illustrated in the second column of the chart of
FIG. 1
, the net investment value for the variable annuity may vary and may be positive or negative.
In a fixed annuity, the dollar amount of each annuity benefit payment during the distribution phase is known with certainty at the time the account value is applied to the purchase of an annuity benefit option. (The point in time where the accumulated value of the deferred annuity is exchanged for a promise by the insurer of a series of future retirement income benefit payments is termed “annuitization.”) The fixed annuity benefit payments are typically level forever, such as $1,000 per month, or increase by a specified percentage, such as $1,000 per month, increasing by 3% each year. However, fixed annuity benefit payments are definitely determinable as to dollar amount at the point where the annuity contract owner elects the annuity benefit option from among his or her choices.
In a variable annuity, the dollar amount of each annuity benefit payment during the distribution phase is not known with certainty at the time the account value is applied to the purchase of an annuity benefit option. Rather, the annuitant(s) typically receive(s) the value of a specified number of annuity units each month. For example, if the annuitant is entitled to the value of 500 annuity units per month and the annuity unit value on the valuation date that determines the annuitant's benefit is $2.00, the annuitant receives an annuity benefit payment of $1,000 that month. If, on the next succeeding valuation date that determines the annuitant's benefit payment, the annuity unit value is $2.05, the annuitant receives an annuity benefit payment of $1,025 that month. If the annuity unit value on the subsequent valuation date is $1.95, the annuitant receives $975 that month.
In contrast to the fixed annuity benefit payments, variable annuity benefit payments are definitely determinable at the time of the annuity option election as to the number of annuity units that will determine the amount of the benefit payment on each future payment date. The variable annuity benefit payments are not definitely determinable as to dollar amount at the point when the annuity contract owner elects the annuity benefit option from among his or her choices.
For variable annuities, “accumulation units” are the measure of value during the accumulation phase. Each specific fund or “subaccount,” such as a domestic common stock fund, has an accumulation unit value that increases daily by realized and unrealized capital appreciation, dividends, and interest, and that decreases each day by realized and unrealized capital losses, taxes, and fees. The worth of a variable annuity contract owner's account is the number of accumulation units owned in each fund multiplied by the accumulation unit value of each fund as of the most recent valuation date (typically daily).
For variable annuities, “annuity units” are the measure of value during the distribution phase. “Annuity units” work very much like accumulation units, with one exception. Annuity units have built into them an assumed interest rate (AIR)—such as 3%, 4%, or 5%—at which a fund is assumed to grow annually in value. Thus, if a fund with a 5% AIR actually grew at 5% during a year, the annuity unit value for that fund would remain unchanged.
To the extent the fund performance exceeds the 5% AIR, the annuity unit value increases. To the extent fund performance falls short of the 5% AIR, the annui
Lewis Stephen H.
Schwartz Denis G.
Barnes & Thornburg
Bashore Alain L.
Lincoln National Life Insurance Co.
Millin V.
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