Chapter 7 Quiz

If a contract provides a set amount of income for two or more persons with the income stopping upon the first death of the insured, it is called a A. Deferred annuity. B. Pure annuity. C. Joint life annuity. D. Joint and survivor annuity.

C. Joint life annuity (Joint life annuity settlement option pays benefits to two or more annuitants, but stops upon the death of the first.)

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n) A. Keogh Plan. B. SEP. C. Roth IRA. D. 403(b) Plan (TSA).

D. 403(b) Plan (TSA) (Under a 403(b) Plan, tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious and other 501c(3) organizations, including teachers in public schools systems. Such plans generally are not available to other kinds of employees.)

All of the following statements are true regarding installments for a fixed amount EXCEPT A. The annuitant may select how big the payments will be. B. This option pays a specific amount until the funds are exhausted. C. Value of the account and future earnings will determine the time period for the benefits. D. The payments will stop when the annuitant dies.

D. The payments will stop when the annuitant dies. (Installments for a fixed amount option has no life contingencies. A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.)

Under a pure life annuity, an income is payable by the company

Only for the life of the annuitant. (With pure life annuity, income payments cease at the annuitant's death and there is no refund or payments to survivors. This type of annuity is also referred to as Life Only or Straight Life.)

Your client is planning to retire. She has accumulated $100,000 in a retirement annuity, and now wants to select the benefit option that will pay the largest monthly amount for as long as she lives. As her agent, you should recommend

Straight life (With the straight life option, the annuity payments cease at death. However, because there are no other guarantees that might incur additional charges, this option provides the highest monthly benefits for an individual annuitant.)

If a beneficiary is NOT named for annuity benefits, to which entity will the benefit be paid?

The Annuitant's estate (If an annuitant dies during the accumulation period, the beneficiary is paid either the cash value of the policy or the amount of premiums paid, whichever is the larger amount. If a beneficiary is not named, the money will be paid to the annuitant's estate.)

Which of the following is TRUE regarding variable annuities?

The annuitant assumes the risk of investments. (The payments that the annuitant invests into the variable annuity are invested in the insurer's separate account. The separate account under many annuities provides the annuitant with a dozen or more investment options ranging from "money market funds" to "growth stock funds" to "precious metal funds". Therefore, the annuitant assumes the risk of the investment.)

All of the following are true of an annuity owner EXCEPT

The owner must be the party to receive benefits. (The "owner" is the person who purchases the contract and has all of the rights such as naming the beneficiary and surrendering the annuity. The owner, however, does not have to be the one who receives the benefits; it could be the annuitant (if different from the owner) or the beneficiary.)

Which of the following products requires a securities license?

Variable annuity (A variable annuity is considered to be a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. For that reason, a person must hold a securities license in addition to a life agent's license in order to sell variable annuities.)

The annuitant dies while the annuity is still in the accumulation stage. Which of the following is TRUE? A. The insurance company will retain the cash value and pay back the premiums to the owner's estate. B. The money will continue to grow tax-deferred until the liquidation period, and then will be paid to the beneficiary. C. The beneficiary will receive the greater of the money paid into the annuity or the cash value. D. The owner's estate will receive the money paid into the annuity.

C. The beneficiary will receive the greater of the money paid into the annuity or the cash value. (If the annuitant dies during the accumulation period, the beneficiary receives benefits from the annuity: either the amount paid into the plan or the cash value, whichever is greater.)

All of the following statements are true of a nonqualified retirement plan EXCEPT

Contributions are tax exempt. (Nonqualified retirement plans do not meet the IRS' requirements for favorable tax treatment. Contributions to these plans grow tax deferred; however, they are not tax exempt. Increases of funds during the accumulation period are not taxed until they are actually received.)

Why is an equity indexed annuity considered to be a fixed annuity?

It has a guaranteed minimum interest rate. (While equity indexed annuities earn higher interest rates than fixed annuities, both types of annuities guarantee a specific minimum interest rate.)

Under a straight life annuity, if the annuitant dies before the principal amount is paid out, the beneficiary will receive

Nothing; the payments will cease. (Straight or pure life annuity will pay a specific amount of income for the remainder of the annuitant's life. This payment will cease at death, regardless of the amount of principal that hasn't been paid out. There is no refund or payments to survivors.)

The term "fixed" in a fixed annuity refers to all of the following EXCEPT

A. Guaranteed rate of Interest B. Death Benefit C. Equal Annuity Payments D. Amount and Length of Payments B. Death Benefit (A fixed annuity is fixed in the sense that it provides a guaranteed minimum rate of interest and income payments that do not vary from one to the next. The company also guarantees the specified dollar amount for each payment and the length of the payout period. Annuities do not provide a death benefit.)

The advantage of qualified plans to employers is A. Tax deductible contributions. B. Taxable contributions. C. Tax free earnings. D. Do not have to provide lump sum payments.

A. Tax-deductible contributions (Qualified plans have these tax advantages: Employer contributions are tax deductible and are not taxed as income to the employee; the earnings in the plan accumulate tax deferred; lump sum distributions to employees are eligible for favorable tax treatment.)

Which of the following is NOT true regarding an annuity certain?

Benefits stop at the annuitant's death. (Annuities Certain are short-term annuities which limit the amount paid to a certain fixed period or until a certain fixed amount is liquidated. There are no life contingencies.)

Which of the following is a feature of a variable annuity? A. Payments into the annuity are kept in the company's general account. B. Securities license is not required. C. Benefit payment amounts are not guaranteed. D. Interest rate is guaranteed.

C. Benefit payment amounts are not guaranteed (Under a variable annuity, the issuing insurance company does not guarantee a minimum interest rate or the benefit payment amounts. The annuitant's payments into the annuity are invested in the insurer's separate account. Agents selling variable annuities are required to have a securities license in addition to their life agent's license.)

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n) A. Immediate Annuity. B. Flexible Annuity. C. Variable Annuity. D. Equity Indexed Annuity.

D. Equity indexed annuity (The interest rates of Equity Indexed Annuities are tied to the Standard and Poor's Index.)

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. (Owners of annuities can be individuals or entities like corporations and trusts, but the annuitant must be a natural person, whose life expectancy is taken into consideration for the annuity.)

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution. (Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawal.)

Which of the following products will protect an individual from outliving their money?

annuity (An annuity is a contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving their money.)

The current interest rate on an equity indexed annuity is often based on

An index like Standard & Poor's 500 (Equity indexed annuities are not securities, but they invest on a relatively aggressive basis to aim for higher returns. Interest rates on equity indexed annuities are often tied to a familiar index, such as the Standard and Poor's 500.)

Which of the following ultimately determines the interest rates paid to the owner of a fixed annuity?

Insurer's guaranteed minimum rate of interest (With fixed annuities, the company is required to pay at least a guaranteed minimum rate of interest to the owners. If the company investments perform well, the company will pay a higher interest rate, but since the interest rate can never fall below the guaranteed minimum, that's what ultimately determines what the company will pay.)

Which of the following is NOT true regarding the accumulation period of an annuity? A. It would not occur in a deferred annuity. B. It is the period during which the annuity payments earn interest. C. It is also known as the pay-in period. D. It is the period over which the owner makes payments into an annuity.

A. It would not occur in a deferred annuity. (The "accumulation period" is the period of time over which the annuity owner makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred (which would be the case in a deferred annuity).)

Which of the following best describes what the annuity period is? A. The period of time from the accumulation period to the annuitization period B. The period of time during which money is accumulated in an annuity C. The period of time during which accumulated money is converted into income payments D. The period of time from the effective date of the contract to the date of its termination

C. The period of time during which accumulated money is converted into income payments (The annuity period is the time during which accumulated money is converted into an income stream.)

An individual has been making periodic premium payments on an annuity. The annuity income payments are scheduled to begin after 1 year since the annuity was purchased. What type of annuity is it? A. Flexible premium B. Immediate C. Deferred D. Fixed

C. deferred (Deferred annuities may be purchased with either a single lump sum or periodic payments, but they do not begin the income payments until sometime after 1 year from the date of purchase.)

Annuities can be used to fund which of the following? A. Group life insurance B. Variable life insurance C. Retirement plans D. Estate creation

C. retirement plans (Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans.)

Which of the following is NOT a legitimate use of annuities by businesses?

Creating a tax shelter (Annuities are most often used by businesses to fund employee retirement plans, to provide deferred compensation for employees or as an investment vehicle.)

Which of the following will NOT be an appropriate use of a deferred annuity?

Creating an estate (Deferred annuities grow tax deferred, and are best suitable for accumulating retirement income or funds for children's college education. Unlike life insurance, annuities do not create an estate, but liquidate it.)

What happens if a deferred annuity is surrendered before the annuitization period? A. The insurer can only apply the surrender value toward another annuity. B. The owner will only receive a refund of premium. C. Deferred annuities cannot be surrendered prior to the annuitization period. D. The owner will receive the surrender value of the annuity.

D. The owner will receive the surrender value of the annuity. (If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed according to the nonforfeiture provision.)

Which of the following is NOT true about a joint and survivor annuity benefit option?

Payments stop after the first death among the annuitants. (A joint and survivor annuity will pay until the last annuitant has died; however, the surviving annuitant may receive reduced payments.)

Which of the following types of annuities will generally provide the highest monthly income?

Straight life (Pure or straight life annuity settlement option will only pay for as long as the annuitant lives; therefore, it has the potential to provide the highest monthly income. Any time a "period certain" option is included, it will reduce the monthly payout amount because, even if the annuitant dies, the company must continue to pay benefits for the period certain.)

All of the following statements about equity index annuities are correct EXCEPT

The annuitant receives a fixed amount of return (Equity indexed annuities have a guaranteed minimum interest rate, so while they are aggressive in nature, the annuitant will not have to worry about receiving less than what the minimum interest rate would yield.)

Which of the following products provides income for a specified period of years or for life, and protects a person against outliving their money?

an annuity (An annuity is a contract used to accumulate funds that are to be distributed at a specified time in the future as a periodic payment of accumulated funds.)

Which of the following is a short-term annuity that limits the amounts paid to a specific fixed period or until a specific fixed amount is liquidated?

annuity certain (Annuity certain option allows the annuitant to select the time period or the amount of the benefits to be paid out. Under the installments for a fixed period, distribution begins on a specific date and stops on a specific date.)

A 403(b) plan, commonly referred to as a TSA, is available to be used by

teachers and not-for-profit organizations (Tax sheltered annuities, commonly referred to as 403 (b) plans are designed for teachers and not-for-profit organizations.)