Chapter 4 - Annuities
The minimum interest rate on an equity indexed annuity is often based on?
An index like Standard and Poor's 500
An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only dew %2. What interest rate will the insurer pay to its policyholders?
%2.5
An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?
$3,000
Which of the following is a feature of a single premium immediate annuity?
Income payments start within one year
When a fixed annuity owner pays a monthly annuity premium to the insurance company, where is this money placed?
the insurance company's general account
Which of the following is a feature of a variable annuity?
Benefit payment amounts are not guranteed
Which of the following will NOT be an appropriate use of a deferred annuity?
Creating an estate
If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?
$3,000
An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?
Spouse
Which of the following best describes taxation during the accumulation period of annuity?
Taxes are deferred
If a person purchases a Flexible Premium Deferred Annuity, when is the soonest that income payouts will begin?
After 1 year
If taken as a lump sum, life insurance proceeds to beneficiaries are passed
Free of federal income taxation
Which of the following would most directly affect the purchasing power of benefits paid on a fixed annuity?
Economic inflation
In insurance policies, cash value increases
Grow tax deferred
Annuities can be used to fund which of the following?
Retirement plans
Which two terms are associated directly with the way an annuity is funded?
Single payment of periodic payments
Which of the following is NOT true regarding the annuitant?
The annuitant cannot be the same person as the annuity owner
Your client uses $50,000 in inheritance money to purchase a single premium immediate annuity. How soon can he begin receiving income payments?
No later than 1 year from the time of purchase
An individual buys a flexible premium deferred life annuity with 20 year period certain. What would his beneficiary receive if he died 5 years after beginning the annuity phase?
Payments for 15 years
In a fixed annuity, which of the following is true regarding the guaranteed interest rate on the investment?
The annuitant will receive the higher of either the guaranteed minimum rate or current rate
Which of the following describes the taxation of an annuity when money is withdrawn during the accumulation phase?
Withdrawn amounts are taxed on a last in, first out basis.
Which of the following terms is used to name the nontaxed return of unused premiums?
Dividend
A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called
1035 exchange
Which of the following is true regarding a market value adjusted annually?
The owner is guaranteed a fixed interest rate for a specific period of time
Which of the following ultimately determines the interest rates paid to the owner of a fixed annuity?
Insurer's guaranteed minimum rate of interest
Which of the following is NOT true regarding policy loans?
Money borrowed from the cash value is taxable
When the owner of a $250,000 life insurance policy died, the beneficiary decided to leave the proceeds of the policy with the insurance company and selected the Interest Settlement Option. If at the time of withdrawal the interest paid was $11,000, the beneficiary would be required to pay income tax on
$11,000
Which of the following is NOT an allowable 1035 exchange?
A whole life insurance policy is exchanged for a term insurance policy
If a person purchases a flexible premium deferred annuity, when is the soonest that income payouts will begin?
After 1 year
if the annuitant dies before annuitization occurs, what will the beneficiary receive?
Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount
Which type of annuity can be purchased with a single premium and provides benefit payments immediately?
Immediate
If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a
Settlement option
What type of annuity activity will cause immediate taxation of the interest earned?
Surrendering the annuity for cash
During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?
Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 1/2
The president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true?
The annuitant must be a natural person
Which of the following is NOT true regarding Equity Indexed Annuities?
They earn lower interest rates than fixed annuities.
Which of the following can surrender a deferred annuity contract?
only the annuity owner
Mike purchased a $10,000 single premium annuity. During the first year of the contract, Mike decided to change his investment strategy and wants to cancel that annuity. What is the minimum nonforfeiture value of the annuity?
$8,925
All other factors being equal, which of the following individuals would receive the largest monthly check from a single premium straight life immediate annuity?
A 60 year old man
A married couple's retirement annuity pays them $250 per month. The husband dies and his wife continues to receive $125.5 per month for as long as she lives. When the wife dies, payments stop. What settlement option did they select?
joint and survivor
Equity Indexed annuities
Seek higher returns
An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?
The interest will continue to accumulate tax deferred
What determines the penalty for surrendering a market value adjusted annuity prematurely?
The current interest rate at the time of surrender