QBank Questions: Course 102 Ch.2
The type of annuity that provides the maximum income per dollar of premium is referred to as: A) a straight life annuity. B) a cash-refund annuity. C) an installment annuity. D) a life annuity with guaranteed term.
A. A straight life annuity provides the maximum income per dollar of premium. All of the other annuities provide some sort of guarantee, so the actual annuity payment will be reduced. QB.102.U2
Under a Section 1035 exchange, which of the following policies may be exchanged on a tax-free basis? 1. An endowment policy exchanged for another endowment policy, qualified long-term care contract, or annuity contract. 2. One annuity contract exchanged for another annuity contract. 3. A life insurance policy exchanged for another life insurance policy, annuity, or endowment contract. 4. An annuity contract exchanged for a life insurance policy. A) 1, 2, and 3. B) 1 and 4. C) 1 and 2. D) 2 and 3.
A. Statement 4 is not an eligible tax-free exchange under Section 1035. A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract. QB.102.U2
Gene, age 57, purchased a variable annuity in 1981. His basis in the annuity is $100,000. This year, he withdraws $40,000 from the annuity when the annuity had a contract value of $750,000. Up to this point, he had not taken any distributions or withdrawals from the contract. Which of the following statements regarding the tax consequences of this withdrawal is CORRECT? A) Gene must include $40,000 in gross income and pay a penalty of $4,000. B) The withdrawal is both tax and penalty free. C) Gene must include $40,000 in gross income, but is not required to pay a penalty. D) Gene is not required to include the amount of the withdrawal in gross income, but must pay a penalty of $4,000.
B. Because Gene purchased the annuity before August 14, 1982, the withdrawal is subject to the FIFO (first in, first out) method of taxation. Under FIFO, withdrawals that do not exceed the owner's tax basis are not included in taxable income and are not subject to the 10% penalty for premature distributions. QB.102.U2
When comparing variable annuities with mutual funds, which of the following statements are CORRECT? 1. Mutual funds are generally more liquid than annuities. 2. Mutual funds are subject to capital gains upon the sale. 3. Step-up in basis tax rules generally apply to annuities. 4. Step-up in basis tax rules do not apply to mutual funds. A) 1, 2, and 3 B) 1, 2, 3, and 4 C) 1, 2, and 4 D) 1 and 2
D. Step-up in basis tax rules apply to mutual funds; not annuities. QB.102.U2
Which of the following statements concerning federal income tax and annuities is (are) CORRECT? 1. The contributed amount invested in the annuity accumulates on a tax-deferred basis. 2. Generally, amounts received as withdrawals during an annuity's accumulation period are taxable to the extent of income earned on the contract. A) Both I and II. B) Neither I nor II. C) II only. D) I only.
A. Both statements I and II are correct. When contributions are left to accumulate, the earnings credited to the contract are not taxable until received by the annuitant. QB.102.U2
Thomas named his wife, Kim, the beneficiary of a $120,000 (face amount) insurance policy on his life. The policy provided that upon his death, the proceeds would be paid to Kim with interest over her remaining life expectancy. Thomas died during the current year, and Kim received her first regular annual payment of $15,000 from the insurance company. At the time of his death, she had a life expectancy of 20 years. What amount must Kim include in her gross income for the current year? A) $9,000. B) $6,000. C) $0. D) $3,000.
A. The $120,000 principal amount is spread over Kim's remaining life expectancy of 20 years, so $6,000 of the $15,000 annual payment is considered a return of principal. The remaining $9,000 must be included in her gross income for the current year. (Note: If Kim survives the 20th year, the entire $15,000 annual payment must be included in her gross income for years 21 and beyond.) Expected proceeds over life = $15,000 × 20 years = $300,000 Excluded amount = Basis ÷ Expected Proceeds =$120,000 ÷ $300,000 = 40% Current year payment: $15,000 × 40% for exclusion = $6,000 Taxable amount: = Total Payment − Excluded Amount = $15,000 − $6,000 = $9,000 QB.102.U2
Which of the following statements concerning variable universal life insurance is (are) CORRECT? 1. Variable universal life insurance incorporates all of the premium flexibility features of the universal life policy with the policyowner-directed investment aspects of variable life insurance. 2. An agent selling variable universal life insurance must have both a state insurance license and a securities license. A) Neither I nor II. B) II only. C) Both I and II. D) I only.
C. Both statements I and II are correct. QB.102.U2
Harvey recently purchased an annuity. He made a lump-sum premium payment, and income payments will begin immediately. The income payments will be $1,000 per month and are guaranteed never to decrease. The insurer bears all the investment risk under the contract. Harvey and his wife are the annuitants, and the income payments will continue until the death of the second annuitant. Which of the following best describes the annuity he purchased? A) Flexible premium deferred variable annuity; fixed period payout option. B) Single premium immediate fixed annuity; fixed amount payout option. C) Single premium immediate fixed annuity; joint and survivor payout option. D) Single premium deferred fixed annuity; life annuity with period certain payout option.
C. This is a single premium immediate annuity because the client made a lump-sum premium payment and the income payments begin immediately. The annuity is a fixed annuity because the insurer bears all the investment risk and the income payments are guaranteed never to decrease. The annuity is a joint and survivor annuity because it pays until the death of the second annuitant. QB.102.U2
Which of the following statements regarding different types of annuities is(are) correct? 1. The owner of a variable annuity contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. 2. The variable annuity prospectus contains, but is not limited to, all of the variable annuity's investment choices and the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. 3. A bonus annuity may offer a bonus in the form of a credit which may be added to the initial premium (investment). 4. An equity-indexed annuity (EIA) is a specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor's 500 Index. A) 3 and 4 B) 4 only C) 2 and 3 D) 1, 2, 3, and 4
D. All of these statements are correct. QB.102.U2
Which of the following variable annuity riders may be suitable for a client who is looking for the ability to withdraw up to a specific percentage of a protected value each year for life; even if the contract value drops to zero and the total withdrawals exceed the benefit base? A) guaranteed lifetime withdrawal benefit (GLWB) rider B) guaranteed minimum withdrawal benefit (GMWB) rider C) guaranteed minimum income benefit (GMIB) rider D) guaranteed minimum accumulation benefit (GMAB) rider
A. The guaranteed lifetime withdrawal benefit (GLWB) rider is an optional rider guaranteeing that the owner of a variable annuity can make certain systematic withdrawals for life and be assured of receiving a guaranteed amount of income, regardless of the annuity contract's investment performance. The key difference between a GMWB and a GLWB is that the GMWB is not guaranteed for the life of the contract owner. The owner can make systematic withdrawals over a specified period and be assured of receiving at least a return of premium or the benefit base, regardless of the annuity contract's investment performance. QB.102.U2
Barbara owns an equity-indexed annuity. The annuity has a floor of 4%, a participation rate of 80%, and a cap rate of 10%. This year, the index underlying Barbara's annuity increased by 6%. What interest rate will be credited to Barbara's annuity? A) 4.8%. B) 10%. C) 4%. D) 6%.
A. The participation rate determines how much of the increase in the value of the underlying index will be used to calculate the interest rate credited to the annuity. Because Barbara's participation rate is 80%, 80% of the increase in the index will be credited to her annuity (80% × 6% = 4.8%). QB.102.U2
Vicki purchased an annuity for $26,000 in the current year. Under the contract, Vicki will receive $300 each month for the rest of her life starting next month. According to actuarial estimates, Vicki will live to receive 100 payments and will receive a 3% return on her original investment. Which of the following statements regarding the taxation of Vicki's annuity income is CORRECT? A) If Vicki collects $3,000 in the current year, the $3,000 is treated as a recovery of basis and thus is not taxable. B) If Vicki lives to collect more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income. C) If Vicki dies after collecting a total of 50 payments, she has an economic loss that is not tax deductible. D) If Vicki lives to collect more than 100 payments, she must amend her prior years' tax returns to increase her taxable portion of each payment received in the past.
B. Payments beyond projected life expectancy are fully taxable, unless the annuity payments began on or before December 31, 1986. In this instance, the exclusion ratio applies for the entire payment period. This allows the taxpayer to exclude more than his basis if he lives past life expectancy. If the annuitant dies before life expectancy and has not completely recovered his basis, the unrecovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor. For contracts where annuity payments began after December 31, 1986, the exclusion ratio is only used to the extent of recovering the basis; therefore, the taxpayer will not use the exclusion ratio for payments made after life expectancy and will be taxed on the entire amount received. QB.102.U2
Which of the following are features of a straight life, immediate fixed annuity? 1. Payments do not increase with inflation. 2. Payments stop when the annuitant dies. 3. The annuitant may die before a return of the principal is realized. 4. The income level may drop if the underlying investments go down in value. A) 1, 2, 3, and 4. B) 1, 2, and 3. C) 1 and 3. D) 2, 3, and 4.
B. Statement 4 does not describe a fixed annuity. With a fixed annuity, the annuity payments do not increase with inflation or decrease because of poor investment performance by the general account of the insurance company. QB.102.U2
Marcellus just annuitized his variable annuity and selected a life income with a 10-year period certain payout option. His first monthly income payment from the annuity is $1,500. If Marcellus dies after receiving income payments for 12 years, which of the following statements is CORRECT? A) Income payments will continue to Marcellus's designee for 10 years; the amount of each monthly income payment will depend on the investment returns of the underlying subaccounts. B) Income payments will stop. C) Income payments will continue to Marcellus's designee for life; the income payments are guaranteed to be at least $1,500 per month for 10 years. D) Income payments will continue to Marcellus's designee for 10 years; each monthly payment is guaranteed to be at least $1,500.
B. Under a life annuity with period certain payout option, income payments are guaranteed to continue for the annuitant's life. Payments continue beyond the annuitant's life only if the annuitant dies before the end of the guaranteed period. QB.102.U2
A client, age 30, wants to purchase an annuity by making monthly premium payments until she retires at age 60. She wants to be able to vary the amount of the premium payments depending on her disposable income. She wants to attain a guaranteed minimum return on her investment, but also wants to be able to earn returns linked to the stock market. Which of the following annuities best meets her needs? A) Flexible premium deferred variable annuity B) Single premium deferred equity-indexed annuity. C) Flexible premium deferred equity-indexed annuity. D) Flexible premium deferred fixed annuity.
C. Because the client wants to make varying premium payments over a period of years, she needs a flexible premium deferred annuity. An equity-indexed annuity will provide her with both a guaranteed minimum return and the opportunity to earn returns linked to the stock market. QB.102.U2
Jamie, age 54, just inherited $500,000. She currently manages the local grocery store and has a salary of $75,000 per year. She is looking for a tax-deferred investment vehicle that will help supplement her retirement income in 11 years and wants to have the opportunity to keep up with inflation. Jamie considers herself a moderate risk taker. She has a portfolio of individual stocks at her local brokerage office. Assuming she has adequate emergency funds outside of the $500,000, which of the following would be most suitable for Jamie to invest these funds? A) Term life insurance. B) Universal life insurance. C) Fixed annuity. D) Variable annuity.
D. Generally, a fixed annuity is not designed to keep up with inflation. Universal life insurance could provide tax-deferred growth for Amy's funds but the primary goal of universal life is to provide a life insurance benefit. Likewise, term life insurance is designed to provide life insurance protection and does not provide a cash value. One of the goals of a variable annuity is to provide tax-deferred growth. The subaccounts within the variable annuity will allow Amy to have the opportunity for these inherited funds to appreciate and keep up with inflation. QB.102.U2
A client recently annuitized his fixed annuity and selected a life annuity with 15-year period certain payout option. The income payments from the annuity are currently $2,000 per month. If the client dies after receiving income payments for 10 years, which of the following statements is CORRECT? A) Income payments will continue to the client's designee for 5 years; the amount of the payments will vary depending on the investment returns of the underlying subaccounts. B) Income payments of $2,000 per month will continue to the client's designee for 15 years. C) Income payments will stop. D) Income payments of $2,000 per month will continue to the client's designee for 5 years.
D. In a life annuity with period certain payout option, if the annuitant dies before the end of the specified period, payments continue to the annuitant's designee for the remaining term. In this case, payments continue for five years. Because the client's annuity is a fixed annuity, the payments are not based on the investment performance of subaccounts. QB.102.U2
Which of the following statements is(are) correct with regards to a fixed annuity? 1. The funds are held in the insurance company's general account and the insurance company bears all of the investment risk. 2. The funds are held in subaccounts and the owner of the fixed annuity bears all of the investment risk. 3. The fixed annuity is designed for a conservative investor who is more concerned with safety of principal than keeping up with inflation. A) 1 and 3 B) 3 only C) 1 and 2 D) 2 and 3
A. The funds are held in the insurance company's general account and the insurance company bears all of the investment risk. QB.102.U2
All of the following statements concerning categories of annuities are correct EXCEPT: A) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. B) a straight life annuity provides periodic (usually monthly) income payments that continue as long as the annuitant lives and terminate at the annuitant's death. C) an annuity may be paid periodically in a fixed amount for a period determined by the insurer. D) a joint-and-last-survivor annuity provides income that ceases only upon the last death among the covered lives.
A. An immediate annuity is one in which the first benefit payment is made one payment interval after the date of purchase. QB.102.U2
Under which of the following life insurance settlement options are installments paid while the beneficiary is alive and cease upon the beneficiary's death? A) Single life annuity. B) Life annuity with refund. C) Life annuity with period certain. D) Joint and survivor annuity .
A. This defines the single life annuity option. QB.102.U2
Which of the following definitions best describes a life annuity with period certain? A) An annuity specifying that, if the annuitant dies before receiving total benefit payments equal to the purchase price of the annuity, the difference will be refunded in the form of continuing benefit payments. B) An annuity whose benefit payments begin one payment interval after the date of purchase. C) A life annuity that provides no guaranteed minimum number of benefit payments or refund of the purchase price. D) A life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant lives or dies.
D. A life annuity with period certain is a life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant lives or dies. QB.102.U2
Which of the following definitions best describes an immediate annuity? A) An annuity whose benefit payments begin one payment interval after the date of purchase. B) An annuity specifying that, if the annuitant dies before receiving total benefit payments equal to the purchase price of the annuity, the difference will be refunded in the form of continuing benefit payments. C) An annuity whose benefit payments continue for the lifetimes of 2 or more beneficiaries. D) A life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant lives or dies.
A. An immediate annuity is an annuity whose benefit payments begin one payment interval after the date of purchase. QB.102.U2
Dawn, age 55, recently received a lump-sum settlement of $100,000 from a civil suit she filed against a drunk driver. She wants to invest the $100,000 in an annuity that will begin making monthly payments to her when she retires at age 65. She does not expect to make any additional premium payments to the annuity. Dawn has a high risk tolerance and wants to be able to invest her premium in subaccounts of her own choosing. She is not interested in receiving a guaranteed minimum return on her investment. Which of the following annuities best meets Dawn's needs? A) Single premium immediate fixed annuity. B) Single premium deferred variable annuity. C) Flexible premium deferred equity-indexed annuity. D) Flexible premium deferred variable annuity.
B. Because Dawn expects to make only one premium payment and wants income payments to begin in the future, a single premium deferred annuity best meets her needs. She needs a variable annuity because neither a fixed annuity nor an equity-indexed annuity will allow her to invest in subaccounts. QB.102.U2
A periodic annuity payment that is guaranteed to pay a set amount is a feature of a(n): A) deferred annuity. B) fixed annuity. C) variable annuity. D) immediate annuity.
B. To guarantee fixed payments to the annuitant, the insurer invests the premiums during the accumulation period in bonds, mortgages, and other fixed-income securities with a guaranteed return. QB.102.U2
Which of the following statements with regards to qualified annuities versus non-qualified annuities are CORRECT? 1. Qualified annuities are derived from a qualified plan and may or may not have a cost basis. 2. Non-qualified annuities are annuities purchased with at least some after-tax dollars that are not sourced from a qualified plan annuity. 3. If the distribution from the non-qualified annuity is not annuitized over the owner/annuitant's lifetime, the first in, first out (FIFO) tax rule applies. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3
A. If the distribution from the non-qualified annuity is not annuitized over the owner/annuitant's lifetime, the last in, first out (LIFO) tax rule applies. QB.102.U2
