FIN Final Ch. 14

Donna, age 50, is single and earns $50,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $5,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution?

Her contribution is fully tax deductible.

Which of the following statements is (are) true with regard to a qualified longevity annuity contract (QLAC)?

I. A lump sum premium is paid to provide income at some future date. II. A QLAC can be purchased to address the risk of exhausting retirement income from an employer-sponsored qualified retirement plan.

Which of the following persons can establish a traditional IRA?

I. A person whose only income received is from investments. II. A 75 year-old man who has earned taxable income. Neither

Which of the following statements is (are) true with regard to IRAs?

I. Contribution limits are higher for workers aged 50 and older. II. The minimum distribution rules after attainment of age 70.5 do not apply to Roth IRAs.

Which of the following statements regarding individual retirement accounts (IRAs) is (are) true?

I. If an individual's only income during the year is from investments, he or she cannot make an IRA contribution. II. IRA contributions can be invested in stocks, bonds, and mutual funds.

Which of the following statements is (are) true with regard to an annuity payout option that includes a cost-of-living adjustment?

I. The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age. II. Periodic payments to the annuitant are adjusted for inflation.

Which of the following statements is (are) true with respect to variable annuities?

I. The price at which accumulation units can be purchased fluctuates during the funding period. II. The value of annuity units fluctuates over time.

Which of the following statements is (are) true with respect to the cash annuity settlement option?

I. The taxable portion of the distribution is subject to federal and state income taxes. II. The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds.

An immediate life annuity offers all of the following benefits EXCEPT

Immediate annuity payments are entirely exempt from federal income tax.

Which of the following statements is (are) true about a longevity annuity?

Longevity annuities are low-cost because there are usually no cash values or death benefits in the policy.

Which statement is true regarding IRA distributions?

Minimum annual distribution rules apply to traditional IRAs.

Which of the following is an advantage of a longevity annuity?

Monthly benefits begin at an advanced age when other assets are likely to have been depleted.

Which of the following statements is (are) true regarding the taxation of distributions from individual annuities?

Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable.

Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true?

Qualified distributions from a Roth IRA after a conversion are received tax-free.

Rita is 66 years old. She earned $25,000 this year working part-time at a store and her modified adjusted gross income was $35,000. Rita is considering making a $4,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?

Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.

Which of the following statements is (are) true regarding the Roth IRA?

Roth IRA investment income accumulates income-tax free.

Which of the following statements is (are) true with respect to a joint-and-survivor annuity?

Some joint-and-survivor annuities reduce the income payment after the first annuitant dies

Which of the following statements is (are) true with respect to a fixed indexed annuity?

The maximum percentage gain is usually capped.

All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT

The withdrawal is used to pay living expenses after unemployment insurance benefits cease.

Which of the following statements is true concerning traditional and Roth IRAs?

There are minimum distribution requirements for traditional IRAs.

Which of the following statements is (are) true with regard to Roth IRAs?

There is a maximum income level above which Roth IRA contributions are not allowed.

Which of the following statements is (are) true concerning a joint-and-survivor annuity?

This annuity is often selected by married couples.

All of the following statements about traditional and Roth IRAs are true EXCEPT

Traditional IRAs are exempt from the penalty tax on premature distributions.

Which of the following statements about variable annuities is true?

Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement.

Which of the following statements about the withdrawal of funds from a traditional IRA is true?

Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.

During the funding period, the premiums paid for a variable annuity are used to purchase

accumulation units

Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the

administrative charge.

Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)

deferred annuity

When selling life annuities, what risk is the insurer pooling?

excessive longevity

Which of the following is a characteristic of a longevity annuity?

forfeiture of the purchase price if the annuitant dies during the deferral period

Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

investment management charge.

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

joint life annuity.

Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following life income options will provide Brad with the highest monthly income?

life annuity (no refund)

Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it

life annuity with period certain

Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called a(n)

longevity annuity.

Chris, age 52, invested $50,000 in a 10-year deferred annuity that pays an interest rate higher than the rate offered on bank certificate of deposits. After 10 years, Chris can annuitize the account balance, withdraw part of all of the balance, or leave the funds invested at a renewed rate of interest. The deferred annuity contract Chris purchased is a

multi-year guaranteed annuity (MYGA).

One type of deferred annuity allows the purchaser to invest a lump sum for a specified time period. The interest rate paid on the deposit is typically higher than the rate of return paid on certificates of deposit offered by banks. This type of deferred annuity is a(n)

multi-year guaranteed annuity (MYGA).

Which of the following is a permissible IRA investment alternative?

mutual funds

James is concerned that if he purchases a fixed immediate annuity his funds will be tied-up and not accessible if an emergency arises. His insurance agent said that a rider could be attached to his annuity to address this concern. The rider is a(n)

partial cash withdrawal rider.

The fundamental purpose of a variable annuity is to

provide a hedge against inflation.

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

surrender charge.

Carl is concerned that if he purchases a fixed indexed annuity, he will lose money long-term if the stock index declines. Which equity indexed annuity provision assures Carl that he will not lose money if he holds the equity indexed annuity to term?

the guaranteed minimum value

With a fixed indexed annuity, what name is given to the method of crediting interest to the annuity?

the indexing method

Under a fixed indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?

the participation rate

Life annuity payments are made up of all of the following EXCEPT

unliquidated principal of annuitants who live too long.

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

using an IRA rollover account.

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

$3,000

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

$6,000

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case?

50.00 percent

Which of the following statements regarding the taxation of individual annuities is (are) true?

After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable.

Which of the following statements is (are) true with respect to annuities?

Annuities are the opposite of life insurance.