AD Banker Life & Health Chapter 5

Market-Value Adjustment (Adjusted) Annuity

This is an annuity product that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the surrender value to fluctuate in response to market conditions. Upon withdrawal, the MVA will add or deduct an amount from the annuity or the withdrawal amount. If the interest rates on which the MVA is based are higher than when the annuity was purchased, the MVA will likely be negative, meaning an additional amount may be deducted from either the annuity or the withdrawal amount. If the interest rates on which the MVA is based are lower than when the annuity was purchased, the MVA will likely be positive, meaning money may be added to either the annuity or to the withdrawal amount.

Which of the following annuities requires the producer to hold a securities registration (license) in order to sell it?

Variable

The annuity pay-in period is also referred to as the ________ period.

Accumulation

A contract that is designed to accumulate value over time with the intent to distribute the funds over the lifetime of an individual is called _________.

An annuity

The pay-out period of an annuity is also referred to as the ______ period.

Annuity

Before taking an application for an annuity, it is important to:

Determine the suitability of the product to the intended purchaser

Which of the following is not a suitability factor to be considered prior to the sale of an annuity:

Gender

Which Payment Option pays an income for the life of the annuitant or for a specified period, whichever is longest?

Life Income with Period Certain

Electing a _____________ option for an annuity means that the annuitant will receive an income for life or for a temporary period of time.

Settlement

What is "fixed" in a fixed annuity?

The interest crediting rate

Annuity Classifications are based on:

Method of premium payment (single, flexible, and periodic) Funding (fixed vs. variable) When income benefits are payable (immediate vs. deferred) The payout option selected (Life only vs. Annuity certain) Number of lives covered (individual vs. joint)

Premium Payment Options

Single Premium - A lump sum payment is made into an annuity. Periodic Premium - Continuous premiums paid into the contract. The most common example of a periodic premium is a flexible premium. Flexible Premium - Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum dollar amount they will accept.

Annuities and Medi-Cal Eligibility

A life agent who offers for sale, or sells any financial product based on its treatment under the Medi-Cal program must provide, in writing, a disclosure entitled "Notice Regarding Standards For Medi-Cal Eligibility". This notice is a brief description of the Medi-Cal eligibility rules. It is to be clearly separate from any other document, and signed by the prospective purchaser, that person's spouse and legal representative, if any

Indexed (or Equity Indexed) Annuity

An annuity product with interest rates that are linked to the positive performance of a related index, such as the Standard & Poor's 500 Index.

Period Certain Annuity

Period Certain - Annuity benefit payments are received for a specified period of time. If the annuitant dies with time remaining on the period certain, the named beneficiary receives the balance of the payments. An annuity guaranteed to pay out for a specific number of years (such as a typical, state lottery prize) is called a fixed period.

Insurance Aspects of an Annuity

Annuities are insurance products based on a mortality table. If a life settlement option is chosen, the insurance company guarantees to provide an income benefit payment as long as the annuitant lives (for example, life only or joint and survivor). Actuarial assumptions based on the law of large numbers allow this to occur. Those who live a shorter life span than expected allow the insurance company to have the reserves in place to be able to pay out guaranteed lifetime income benefit payments to those who live well beyond life expectancy.

Suitability and Taxation

If a life agent offers to sell any life insurance or annuity product to a senior, the agent must advise in writing that the sale of any asset used to fund the purchase of the insurance product may have tax consequences, early withdrawal penalties, or other costs assessed as a result of the sale. The agent may recommend the individual consult independent legal or financial advice before selling assets prior to the purchase of any life or annuity products.

Only a(n) __________ can guarantee to provide an income benefit payment for as long as the annuitant is alive.

Insurer

If an annuity lifetime benefit is selected in most cases, it is an _________ election.

Irrevocable

The Payment Option that pays an income to two annuitants while both are living, and stops upon the death of the first annuitant, is which of the following?

Joint Life

Match the Annuity Payment Option with the correct description

Life Income Monthly income for the life of the annuitant with no payment to the beneficiary Life Income with Refund Lifetime income to the annuitant, balance refunded to beneficiary upon death of the annuitant Joint Life Payable on more than one life and payments will stop upon the first to die Life Income Joint and Survivor Payable on more than one life. Upon death of the annuitant, payment continues to survivor Life Income with Period Certain Life income to the annuitant or for a specified period, whichever is longer

Deferred Annuity Characteristics

Deferred annuities are normally purchased to defer taxes on any contract earnings. They are ideal for accumulating a retirement fund. During the accumulation period, only the contract owner can sign the request for surrender of a deferred annuity. During the early part of the accumulation period, the insurer normally assesses a surrender charge. Tax-Deferred Growth - Since an annuity is an insurance contract, the accumulation value grows tax deferred. Deferred annuities allow for the naming of a beneficiary to receive any policy values if the annuitant dies prior to annuitizing. Withdrawals prior to age 59½ are subject to income tax and generally a 10% tax penalty as well. Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option.

Which of the following statements apply to life insurance or an annuity:

Life Insurance Pays a death benefit Provides a benefit upon death Creates an estate Owner, insured, beneficiary Issued as a policy Protects against premature death

Life Insurance vs. Annuities

Life Insurance vs. Annuities Provides a benefit upon death of the insured (LI) Provides steady income until death of the annuitant (Annuities) Creates an estate (LI) Liquidates an estate (Annuities) Pays a death benefit (LI) Pays a living benefit (Annuities) Protects against premature death (LI) Protects against living too long (Annuities) Owner, insured, beneficiary (LI) Owner, annuitant, beneficiary (Annuities) Policy (LI) Contract (Annuities)

Any broker or agent who violates the prohibition against selling annuities to qualify a senior for Medi-Cal is liable for an administrative penalty of how many dollars for the first violation and possible suspension of the agent or broker license by the Commissioner?

$1,000

A retiree elected the Life Income with 10 Year Period Certain. He/she dies the day after receiving 119 monthly payments. The beneficiary will receive _______ more payment(s):

1

Qualified vs. Nonqualified Annuities

A qualified annuity is funded with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes. Qualified annuities may be used to hold qualified retirement plans such as IRAs or Tax Sheltered Annuities. Contributions are limited by the IRS under these types of plans. A non-qualified annuity is funded with after-tax dollars, meaning taxes on the money were paid before it goes into the annuity. Upon distribution, only the earnings are taxable as ordinary income. Most individual annuities are nonqualified. Exam questions will be about nonqualified annuities unless specifically stated concerning qualified annuities.

What must an insurance producer have in order to market variable annuities?

A securities license as a variable contracts and investment company representative in addition to a life agent license A licensed life agent also needs a securities license to be able to transact variable life or annuity contracts. Each of the other answer choices is an accurate statement but does not answer the question appropriately

Free Look and Cancellation

A senior citizen is defined as an individual who is 60 years of age or older on the date of purchase of the policy. Persons who are 60 years of age or older must be given a 30-day free look period. This allows additional time to seek the counsel of others to assist in the decision to keep or cancel the new policy. Every individual life insurance and annuity contract delivered or issued for delivery to a senior citizen in California must include a notice in 12-point bold print that the policy may be returned within 30 days after receipt of the policy by the owner for a full refund by returning it to the insurance company or agent who sold the policy. The notice must include that if returned after 30 days, cancellation may result in a substantial penalty, known as a surrender charge, unless those penalties or charges do not apply. During the 30 day cancellation period, the premium for variable annuities may be invested only in fixed-income investments and money—market funds, unless the owner specifically directs that the premium be invested in the mutual funds underlying the variable contract. If the policyowner has not directed that the premium be invested in mutual funds, cancellation will void the policy from the beginning and all premiums will be refunded within 30 days. If the owner has directed that the premium be invested in mutual funds, cancellation entitles the owner to a refund of the account value within 30 days. Disclosures of the investment requirement/option and return of premium/fees in case of cancellation must be in 12-point bold print and displayed on the policy cover page. If the insurer fails to refund all the premiums paid in a timely manner during the 30-day free look period, the applicant is entitled to receive interest on the unreturned premium from the date the insurer the returned contract.

While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a non-qualified annuity, which is _________.

A stream of income the annuitant cannot outlive

Lump Sum vs. Annuitization

Lump Sum The annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a stream of income. There could be tax consequences and tax penalties depending upon when this occurs. Annuitization The election to receive payments from the annuity for life, or for a specified period depending on the settlement option selected.

Nonforfeiture Provisions

An annuity owner will not lose the value accumulated up to the point where they stopped paying into the contract. Nonforfeiture provisions give the owner the rights to the accumulation in the contract. The owner has the right to surrender the contract during the accumulation period. Remember, these provisions only apply to deferred annuities since immediate annuities do not have an accumulation period. Tax Penalty - To discourage the use of annuities as short-term tax shelters, a 10% penalty tax is levied against any premature withdrawals prior to 59½ years of age. This discourages withdrawals. The tax penalty does not apply if premature distributions occur due to the death or disability of the contract owner. Surrender Charges - When a contract is fully surrendered, any surrender charges will lessen the contract payout. This is also referred to as a back-end load. Surrender charges diminish over a stated number of years, set by the insurer, until they disappear.

All of the following are correct regarding an annuity, EXCEPT:

An immediate annuity must start providing income within 3 years of the first premium payment An immediate annuity must start providing income within a year of the first premium payment.

Determine which of the following statements apply to life insurance or an annuity:

Annuity Protects against living too long Owner, annuitant, beneficiary Issued as a contract Provides steady income until death Liquidates an estate Pays a living benefit

Annuity (Benefit) Payment Options

Annuity Payments - Once a contract is annuitized, the insurance company takes ownership of funds in the account. In return, the annuitant is entitled to a guaranteed income stream based on the terms of annuitization. Depending on the option chosen, the annuitant may be able to name a beneficiary to receive any remaining benefits available upon the annuitant's death. Annuity income is based on annuity tables which are similar to mortality tables used for life insurance. Other factors that determine the income include the accumulation amount, interest rate return, age and gender of the annuitant, and the payment option selected. The available payment options include:

Annuity Uses

Before determining the use of an annuity, it is important to determine the suitability of the product to the intended purchaser. Suitability describes the steps that must be taken by a producer to ensure that an annuity is addressing a prospective owner's needs and financial objectives at the time of the sale. Additional factors used when determining suitability include the age, income, risk tolerance, and potential use of the annuity.

Fixed (Guaranteed) Annuity

During the accumulation period, the insurer guarantees a minimum fixed interest rate. The fixed amount purchasing power decreases as the cost of living increases. The actual rate of interest created at any one time is based on the earnings rate of the insurer's general account and the insurer bears any investment risk. A life-only insurance license is required in order to sell fixed annuities in California. Some fixed annuities offer a base interest rate plus a bonus interest rate which becomes the current rate credited into the annuity. The current rate is set by the insurance company at the time the contract is issued and is guaranteed for a specific time period. These contracts typically have a fixed account from which funds are transferred into the index selected. They also tend to have higher surrender charges and longer surrender charge periods.

Business Uses

Employer Sponsored Qualified Retirement Plans Annuities are usually purchased by individuals. They may also be purchased as part of a structured corporate pension plan referred to as a Group Annuity. A Group Annuity is a contract between the insurer and the employer and is set up for eligible employees. Each employee receives a certificate. This is a defined benefit plan under IRS rules. Corporations may use annuities to provide pensions for employees, funding nonqualified deferred compensation plans or qualified retirement plans, and even to structure payments from liability settlements, known as structured settlements. Corporate owned annuities lose the tax-deferral aspect of the policy and interest or gains are taxable as income in the year earned.

Variable Annuity

General Account vs. Separate Account - As mentioned previously, fixed annuity products require premiums to be invested in the insurer's general account. The general account consists of safe investments that allow the insurer to guarantee a minimum rate of return. Variable annuities require the insurer to maintain a separate account. Performance of the separate account is based on the underlying investments in the stock market and are not guaranteed. Variable annuities are regulated by the SEC and State insurance departments. Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation. The contract owner bears the investment risk and receives the return earned on invested assets, less any charges assessed by the insurer and investment managers. There is no guaranteed return. The premium paid during the accumulation period is invested in separate account; the underlying investment in the separate account is similar to a mutual fund. The investment return varies according to the separate account selected based on the assumed interest rate (AIR). If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month. Both an insurance license and a securities license (FINRA) are required. This annuity is considered a security, and therefore, must comply with the Federal Securities and Exchange Commission (SEC) rules as well as the state insurance laws. A prospective buyer of a variable annuity must be provided with a document called a prospectus. The prospectus gives detailed information on the separate account available in the annuity. This information provides the contract owner the opportunity to make a better decision based on the historical performance of the separate account. The prospectus must be provided at or before the time of the sale. The premium payments made during the accumulation period may be flexible in amount and frequency limited only to the contract's provisions. Premiums purchase accumulation units of the separate account. These are similar to shares of a mutual fund. Upon annuitization, accumulation units are converted into annuity units. The number of annuity units liquidated remains level, but the unit value fluctuates, based upon the performance of the separate account.

Immediate and Deferred Annuities

Immediate Annuity - The immediate annuity does not have an accumulation period and is used to generate immediate income within a year of the issue date. Deferred Annuity - A deferred annuity will pay periodic benefits starting at some specified time in the future; benefits begin more than 1 year from the issue date.

Death Benefits

In addition to providing a guaranteed income benefit payout for life, an annuity also has another guarantee if the annuitant dies prior to annuitizing the contract. In this case, the policy has a named beneficiary, just like a life insurance policy, whereby the insurer pays out an amount equal to the premiums paid or the account value, whichever is greater.

Which of the following annuities will be directly impacted by rising and falling interest rates?

Market Value Adjustment If the interest rates on which the MVA is based are higher than when the annuity was purchased, the MVA will likely be negative. If the interest rates on which the MVA is based are lower than when the annuity was purchased, the MVA will likely be positive.

Individual Annuity with Lifetime Income

Life Income (Pure or Straight Life) - Annuity is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options. Life Income Period Certain - Annuity is payable for life, or for a specified period of time, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for life of the annuitant. If the annuitant dies prior to the end of the period certain a beneficiary receives the balance of the payments for the remaining time period. Life Income with Refund (Installment or Cash Refund) - Annuity is payable for the lifetime of annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary as a lump sum, cash refund, or in installments, sometimes referred to as the installment refund.

Joint Annuity with Lifetime Income

Life Income Joint & Survivor - Annuity is payable to 2 annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. Depending on which option is selected, these options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor. Joint Life - Annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.

Which of these annuity distribution options promises the largest possible payment to a single annuitant?

Life income only Because the insurance company has no way of knowing how long the annuitant will live, and because the contract is created for the benefit of the annuitant, a life only option provides the largest possible payment. The insurance company is at greater risk of paying more than the principal value at the time of annuitization, so it pays a larger amount based on the life expectancy of the annuitant.

The addition of several different types of riders may make annuities more desirable.

Long-Term Care (LTC) - A Long-Term Care rider will permit the owner of the policy to use all or a substantial portion of the annuity cash accumulation value to pay for the expenses of LTC under the same requirements to trigger and pay benefits as a traditional LTC policy. Cost of Living - An inherent risk in a fixed annuity is the loss of purchasing power due to inflation. A Cost of Living rider will increase the annuity payments according to changes in the Consumer Price Index (CPI). Accelerated or Living Benefit - As in life insurance, this rider permits the policyowner to withdraw funds without a surrender charge prior to annuitization in the event of the annuitant's terminal illness diagnosis. Death must be expected within 2 years. Some terminal illness riders also permit withdrawals due to permanent total disability.

Control of the Contract

Owner - The individual who controls the contract and is responsible for making payments into the contract as well as having all of the contractual rights in the policy is the owner. Annuitant - The individual whose life the contract is based upon. Upon a lifetime annuitization, payments will be made to the annuitant according to the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments. Beneficiary - The individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization or if the settlement option selected offers any residual benefit after the annuitant's death. As with life insurance, annuities may have beneficiaries named and designated by the owner prior to the annuitization or guaranteed payout period. The beneficiary may be named at receipt of the first purchase payment and may only be changed by the owner. The owner's rights begin at the time of purchase. An owner, who may also be the annuitant, may change the annuity date, beneficiary, and payout option. During the accumulation period, if the contract owner and the annuitant are the same person and the designated beneficiary is the annuitant's spouse, the IRS code allows the spouse to assume ownership of the annuity upon the death of the annuitant. All rights of ownership are assumed to include tax deferment

A flexible premium deferred annuity permits all of the following, EXCEPT ______________.

Payments to the annuitant beginning within one month of the issuance of the contract

Personal Uses - Individual Annuities

Retirement Income - The funds accumulated inside an annuity can be used to fund all or part of a consumer's retirement income. The accumulated funds can be used to purchase a settlement option that can provide for a lifetime income stream or an income stream that can end prior to the annuitant's death. The income received will be tax-free as far as the portion of the payment is counted as a return of premium while the balance would be taxable as ordinary income. If premiums were deductible then the entire income received would be subject to tax. The only exception is if the income comes from a Roth IRA annuity whereby the income stream would be tax-free under certain qualifying situations. Lump Sum Structured Settlements - Lump sum payments from lawsuits, lottery winnings, or an inheritance can be used to purchase a structured settlement in the form of an annuity. The annuity can then be used to provide guaranteed lifetime income to the annuitant.

At the time of her retirement at age 62, Jolene chose a Life Income Payment Option to have her annuity distributed. Five years later, when her health declines, she needs the distribution to be increased. How is this accomplished?

She cannot change the distribution once commenced

Susan, age 65, inherits a substantial sum of money and wants to have the money distributed to her over the rest of her life starting next month. Which product offered by the life insurance industry will allow her to accomplish her objective?

Single Premium Immediate Annuity

Annuity Mechanics

Single Premium Immediate Annuity (SPIA) A single premium (lump sum) is put into an annuity from which the annuitant may immediately begin drawing benefits (within a year of the issue date). A retirement plan rollover, savings account balances or CDs, mutual funds, deferred annuity values, or the death proceeds of a life insurance policy might be used to purchase a SPIA. Single Premium Deferred Annuity (SPDA) A single premium (lump sum) is put into an annuity from which the annuitant will draw the benefits at some specified time in the future, more than 1 year from the issue date. Flexible Premium Deferred Annuity (FPDA) Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum amount for contributions. Benefits begin more than 1 year from the issue date

Which of the following annuities does not have a traditional accumulation phase?

Single premium immediate

Tax-Sheltered Annuities (TSAs)

Tax-Sheltered Annuities (TSA) are qualified annuity plans benefitting employees of public schools under the Internal Revenue Code Section 403(b), as well as other nonprofit organizations qualified under Section 501(c)(3). Employees of nonprofit organizations may have an arrangement with the employer where the employer agrees with each participating employee to reduce the employee's pay by a specified amount and invest it in a retirement fund or contract for the employee. Employees do not make direct payments to the retirement fund. These accounts are owned by the employee and are nonforfeitable and will be paid upon death, retirement, or termination of the employee. Contributions are pre-tax and interest earned grows tax deferred.

Pre-Meeting (Scope of Appointment) Notice

The Insurance Code requires producers who meet with prospective clients age 65 and older in their homes for the purpose of transacting life insurance, annuities, or disability insurance products to provide a written notice of the first meeting at least 24 hours in advance. The notice includes information about the products that will be discussed, and the insurance license numbers of those attending the meeting. The notice also explains that they may have any other persons—family members or advisers of their choosing—at the meeting, and that they have the right to terminate the meeting at any time. The notice may be delivered in person, by mail, fax, or email. Producers must retain a copy of notices in their files for a minimum of 5 years. Established clients may be given the notice at the time of an appointment.

An annuity may not be sold to a senior if:

The senior's purpose in purchasing the annuity is to affect Medi-Cal eligibility and either of the following are true: The purchaser's assets are equal to or less than the community spouse resource allowance established annually by the State Department of Health Services pursuant to the Medi-Cal Act. The senior would otherwise qualify for Medi-Cal. The senior's purpose in purchasing the annuity is to affect Medi-Cal eligibility and, after the purchase of the annuity, the senior or the senior's spouse would not qualify for Medi-Cal. Any broker or agent who violates the prohibition against selling annuities to qualify a senior for Medi-Cal is liable for an administrative penalty of $1,000 for the first violation and $5,000 up to $50,000 for subsequent violations and possible suspension of the agent or broker license by the Commissioner.

When the owner and annuitant is the same person, a spouse beneficiary is permitted what choice under the Internal Revenue Code if the annuitant dies prior to annuitizing the contract?

To adopt the annuity as his/her own and become the annuitant or to name another annuitant

A "Joint and ½ Survivor" distribution option means which of the following statements is correct?

When one of the joint annuitants dies, the survivor's continuing payments will be half of the total payment both were receiving