Life Insurance: Annuities

A man purchased a $90,000 annuity with a single premium, and began receiving payments 2 months after that. What type of annuity is it?

Immediate. With an immediate annuity, distribution starts within 1 year of purchase.

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

Teachers and not-for-profit organizations.

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

Only for the life of the annuitant.

HR-10 is designed for...

Self-employed individuals

Before he died, an annuitant had received $12,500 in monthly benefits from his $25,000 straight life annuity. He was also the insured under a $50,000 paid-up whole life policy that named his wife as primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits?

50,000

The equity in an equity index annuity is linked to

An index like Standard & Poors 500.

Under which of the following annuity options does the annuitant select the time period for the benefits, and the insurer determines how much each payment will be?

Installments for a fixed period

Which of the following is a feature of a variable annuity?

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.

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

Joint life annuity

An annuity in which the payments stop at the death of the annuitant regardless of the principal left in the account is called

Straight Life

What qualifies an individual to contribute to an IRA?

Earned Income

Who can make a fully deductible contribution to a traditional IRA?

An individual who has earned income

A couple receives a set amount of income from their annuity. When the wife dies, the husband no longer receives annuity payments. What type of annuity did the couple buy?

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

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?

Payment for 15 years

If the owner prematurely surrenders his deferred annuity before the annuitization period begins, which of the following is most likely to occur?

The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge.

The main difference between immediate and deferred annuities is

When the income payments begin. Immediate annuities will begin payments within the first year, while deferred annuities will not begin payments until sometime after the first year.

A couple near retirement is planning for their golden years. They want to make sure that their retirement annuity provides monthly benefits for the rest of their lives. Should one of them die, the other would still like to continue receiving benefits. Which settlement option should they choose?

Joint and Survivor

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 the annuitant dies during the accumulation period, who will receive the annuity benefits?

Beneficiary

All individuals with earned income may fund an...

IRA.

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 drew 2%. What interest rate will the insurer pay to its policyholders?

2.5%

An employer funded retirement plan for employees is called a

Simplified Employee Pension Plan

When an annuity is written, whose life expectancy is taken into account?

Annuitant The annuitant receives payments from an annuity and is the person whose life expectancy is considered when writing the contract. The annuitant and annuity owner are often the same person but do not have to be.

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 Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which is part of its investment portfolio. The company makes conservative enough investments to insure a guaranteed rate to the annuity owners.

Annuity Period

It's the time during which accumulated money is converted into an income stream. It may last for the lifetime of the annuitant or for a shorter specified period of time depending on the benefit payment option selected.

A married couple's retirement annuity pays them $250 per month. The husband dies and his wife continues to r

Joint and Survivor

The market value adjustment in modified guaranteed annuities refers to which of the following?

The difference between the contracted interest rate and the rate at surrender

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n)

403(b) Plan (TSA).

Joint life annuity settlement option

pays benefits to two or more annuitants, but stops upon the death of the first.

Which of the following best describes the difference between Pure Life and Life with Guaranteed Minimum settlement options?

Life with Guaranteed Minimum will pay the remaining principal to the beneficiary. With the Life with Guaranteed Minimum, if the annuitant dies before the principal amount (the amount he paid for the annuity) has been paid out, the remainder of the principal amount will be refunded to his/her beneficiary. Under the Pure Life option, the payments cease upon the annuitant's death regardless of the amount of the principal paid out.

A deferred annuity is surrendered prior to annuitization. Which of the following best describes the nonforfeiture value of the annuity?

The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges. If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges) due to the nonforfeiture provision.

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.

Before he died, an annuitant had received $12,500 in monthly benefits from his $25,000 straight life annuity. He was also the insured under a $50,000 paid-up whole life policy that named his wife as primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits?

$50,000 The life policy would pay the face amount, but because of the settlement option selected on the annuity, payments would cease upon the annuitant's death. Straight life annuity payments stop at death of the annuitant regardless of the principal left in the account.

Equity indexed annuities

Seek higher returns Equity Indexed Annuities are not securities, but they invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity the Equity Indexed Annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500.

Accumulation Period

The period of time over which the annuitant makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred.

accumulation period

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).

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.

An agent selling variable annuities must be registered with

FINRA Because variable annuities are considered to be securities, a person must be registered with the FINRA (formerly NASD) and hold a securities license in addition to a life agent's license in order to sell variable annuities.

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

The annuitant's estate

The market value adjustment is calculated as...

A percentage of the difference between the contracted rate of interest in the annuity and the current interest rate at the time of the annuity's surrender.

A married couple's retirement annuity pays them $250 per month. The husband dies and his wife continues to receive $125.50 per month for as long as she lives. When the wife dies, payments stop. What settlement option did they select?

Joint and survivor Under a joint settlement option, payments would stop at the first death, but under the joint and survivor, payment would continue until both recipients die. Usually, the surviving beneficiary receives 1/2 or 2/3 of the amount received when both beneficiaries were alive.

The form of life annuity which pays benefits throughout the lifetime of the annuitant and also guarantees payment for a minimum number of years is called

Life income with period certain.

In an annuity, the accumulated money is converted into a stream of income during which time period?

Annuitization period

What license or licenses are required to sell variable annuities?

Both a life insurance license and a securities license

Under which installments option does the annuitant select the amount of each payment, and the insurer determines how long they will pay benefits?

Fixed amount

What is the penalty for excessive contributions to an IRA?

6%

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.

If a deferred annuity is surrendered prematurely, a surrender charge is imposed. How is the surrender charge determined?

The surrender charge is a percentage of the cash value and decreases over time.

Which of the following is true regarding a modified guaranteed annuity?

The owner is guaranteed a fixed interest rate for a specific period of time. Under a modified guaranteed (market value adjusted) annuity, the insurer guarantees a competitive interest rate for a specific period (the longer the period, the better the guaranteed rate). At the end of the period, the owner has the option of taking the accumulated value or reinvesting the values at a new interest rate.

In reference to fixed annuities, what comprises most of a life insurance company's general account?

Conservative investments like bonds

When a fixed annuity owner pays his/her insurance company a monthly annuity premium, where is this money placed?

The insurance company's general account

A prospective deferred annuity owner is concerned about what would happen if he surrendered the annuity before the annuitization period. The agent most likely explained which of the following?

Nonforfeiture option guarantees that the owner will receive a surrender value of the contract. If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges) due to the nonforfeiture provision.

Which two terms are associated directly with the way an annuity is funded?

Single payment or periodic payments Annuities are characterized by how they can be paid for: either a single payment (lump sum) or through periodic payments in which the premiums are paid in installments over a period of time. Periodic payment annuities can be either level, in which the annuitant/owner pays a fixed installment, or the payments can be flexible, in which the amount and frequency of each installment varies.

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.

Joint & Survivor option guarantees...

An income for two or more recipients that none of them can outlive.

In reference to fixed annuities, what comprises most of a life insurance company's general account?

Conservative investments like bonds Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which makes conservative enough investments (like bonds) to ensure a guaranteed rate to the annuity owners.

Which employees are eligible for 403(b) plan or tax-sheltered annuities?

Employees of public education (local, state, or federal), as well as employees of charitable organizations.

After three years of making payments into a flexible premium deferred annuity, the owner decides to surrender the annuity. The insurer returns all the premium payments to the owner, except for a predetermined percentage. What is this percentage called?

Surrender Charge

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?

Deferred

If a Market Value Adjusted Annuity owner surrenders his/her policy prematurely...

A penalty is imposed, the amount of which depends directly upon the current interest rates at the time of surrender.

Your client plans to retire at age 50. He would like to purchase an annuity that would provide income from the time he retires to the age when social security and other pension funds become available. What settlement option should he consider?

Annuity certain Annuity Certain option allows the annuitant to select the time period or the amount for the benefits. Under the installments for a fixed period, distribution begins on a specific date and stops on a specific date.

Installments for a fixed period

The annuitant selects the time period for the benefits, and the insurer determines how much each payment will be. This option pays for a specific period of time only, and there are no life contingencies.

The advantage of qualified plans to employers is

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.