7 - Annuities

Premium paid for a variable annuity less expenses equal which of the following? A) Annuity units. B) Annuity value. C) Taxable gain. D) Accumulations units.

D) Accumulations units. During the accumulation period of a variable annuity, contributions made by the annuitant, less a deduction for expenses, are converted to accumulation units and credited to the individual's account. The value of each accumulation unit varies depending on the value of the underlying stock investment.

In a straight life income option, if the annuitant dies before the annuity fund is depleted, where does the balance go? A) Estate. B) Taxes. C) Beneficiary. D) Insurer.

D) Insurer. When an annuitant dies in a straight life income option, no further payments are made. The balance is forfeited to the insurer.

Classification of Variable Annuities include? A) guaranteed and single premium. B) guaranteed and immediate. C) monthly and annual. D) immediate and deferred.

D) immediate and deferred. Immediate and deferred annuities are types of variable annuities.

During the payout period of an annuity, the interest portion of the payment is? A) taxed at the applicable capital gains tax rate. B) taxed as ordinary income. C) not taxed unless the recipient is over 59 1/2 years old. D) taxed at one half of the applicable capital gains tax rae.

B) taxed as ordinary income. During the payout period of an annuity, the interest portion of the payment is taxed as ordinary income.

Variable annuity sales are subject to which of the following regulations? A) SEC and state regulation. B) Insurer self-regulation. C) IRS and state regulation. D) SEC and FINRA regulation.

A) SEC and state regulation. Insurers that deal with variable annuities are subject to dual regulation by the SEC and the state's Office of Insurance Regulation.

The dollar value of an annuity unit is based on? A) the total number of annuity units in circulation. B) the gross domestic product. C) the return on the equity portfolio supporting the annuity. D) a formula formed by the Securities and Exchange Commission (SEC).

A) the total number of annuity units in circulation. An annuity's investment configuration will determine the amount of income the benefits pay.

Logan accumulated $60,000 in his annuity. He is receiving $600/month, each unit is worth $3. How many units does he receive each month? A) 20,000 units. B) 200 units. C) 2,000 units. D) 20 units.

B) 200 units. The calculation for this involves taking the monthly payment amount ($600) and dividing it by the value of each unit ($3.00).

What annuity payout option provides for lifetime payments to the annuitant but guarantees a certain minimum term of payments, whether or not the annuitant is living? A) Installment refund option. B) Joint and survivor. C) Straight life income. D) Life with period certain.

D) Life with period certain. The life with period certain option is designed to pay the annuitant an income for life, but guarantees a minimum period of payments whether the individual is alive or not.

All of the following statements regarding annuities are correct EXCEPT? A) An annuity is a periodic payment. B) Generally, annuity contracts issued today require fixed, level funding payments. C) Annuities are sold by life insurance agents. D) Annuitants can pay the annuity premiums in lump sums.

B) Generally, annuity contracts issued today require fixed, level funding payments. In addition to being funded by fixed, level premiums, annuities can also be funded by flexible periodic premiums or with a single, lump sum premium.

The purpose of the exclusion ratio is to? A) allocate principal and interest, so to properly determine taxable and non-taxable amounts that are paid to annuitants. B) allocate principal and interest, so to properly determine federal estate tax. C) allocate principal and interest, so to properly determine death benefits amounts. D) allocate principal and interest, so to properly determine cash value amounts.

A) allocate principal and interest, so to properly determine taxable and non-taxable amounts that are paid to annuitants. The exclusion ratio is used to determine the portion of each annuity payment that represents a return of the investment, and is therefore not taxable.

Which of the following is a fair comparison between life insurance and annuities? A) Annuities serve the same function as life insurance. B) Neither life insurance nor annuities are ever subject to income taxes. C) Both life insurance and annuities use mortality tables. D) Both always provide a lifetime of income.

C) Both life insurance and annuities use mortality tables. Because of their experience with mortality tables, life insurance companies are uniquely qualified to combine an extra factor into the standard annuity calculation, called a survivorship factor. This provides insurers with the means to guarantee annuity payments for life.

An insured bought an annuity for $80,000. The insured died after receiving only $50,000. The balance is paid in a lump sum to the insured's beneficiary. This is known as the? A) Installment Refund option. B) Life Income option. C) Cash Refund option. D) Survivor option.

C) Cash Refund option. The Cash Refund option provides a guaranteed income to the annuitant for life. if the annuitant dies before the annuity is depleted, a lump sum cash payment of the remaining amount will be paid to the beneficiary.

The monthly amount of benefit an annuitant receives is based on all of the following factors EXCEPT the? A) principal amount. B) length of payout period. C) exclusion ratio applied. D) rate of interest the annuity earns.

C) exclusion ratio applied. The monthly amount of benefit an annuitant receives is based on the following factors: principal amount, rate of interest, and the length of the payout period.

Before he died, Gary received a total of $9,200 in monthly income payments from his $15,000 straight life annuity. He also was the insured under a $25,000 life insurance policy that named his wife, Darlene, as primary beneficiary. Considering the two contracts, Darlene would receive death benefits totaling. A) $40,000. B) $15,000. C) $25,000. D) $30,800.

C) $25,000. A straight life annuity pays the annuitant a guaranteed income for life. When the annuitant dies, no further payments are made to anyone. The beneficiary of the $25,000 life insurance policy will receive the full face value.

In a cash refund option, if the annuitant dies before the annuity fund is depleted, where does the balance go? A) Taxes. B) Estate. C) Insurer. D) Beneficiary.

D) Beneficiary. A cash refund option provides payments to the annuitant for life. If the annuitant dies before the principal fund is depleted, the remainder is paid in a single cash payment to the annuitant's beneficiary.

Which of the following statements regarding annuity payout options is NOT correct? A) Under a straight life annuity option, all annuity payments stop when the annuitant dies. B) A period certain annuity guarantees a definite number of payments. C) Joint and survivor annuities guarantee payments for the duration of two lives. D) In a cash refund annuity, the annuitant's beneficiary always receives an amount equal to the beginning annuity fund plus all interest.

D) In a cash refund annuity, the annuitant's beneficiary always receives an amount equal to the beginning annuity fund plus all interest. A cash refund option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity fund is depleted, a lump-sum cash payment of the REMAINING BALANCE is made to the beneficiary.

The interest credited to an equity indexed annuity is tied to increases in? A) a specific equity or stock index. B) a specific stock. C) home equity. D) debt ratio.

A) a specific equity or stock index. Equity indexed annuities (EIA's) are tied to increases in a specific equity or stock index. Most EIAs are tied to the Standard & Poor's 500 Composite Stock Price Index.

Albert has purchased an annuity that will pay him a monthly income for the rest of his life. If Albert dies before the annuity has paid back as much as he put into it, the insurance company has agreed to pay the difference to Albert's daughter. What annuity payout option did Albert select? A) A fixed period. B) A cash refund. C) A straight-life income. D) A life income with period certain.

B) A cash refund. A cash refund option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity fund is depleted, a lump-sum cash payment of the reamaining balance is made to the beneficiary.

What period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate regular benefit payments? A) Conversion period. B) Annuity period. C) Rebate period. D) Refund period.

B) Annuity period. The annuity (payout) period is the period of time, usually at retirement, when the annuitant begins to receive annuity payments or benefits.

When a cash value life insurance policy is converted into an annuity in a nontaxable transaction, that event is generally known as? A) a pension enhancement. B) a 1035 exchange. C) a modified endowment. D) a rollover.

B) a 1035 exchange. A 1035 Exchange is an IRS approved transaction that allows for a tax free exchange of certain financial products. For example, an annuity can be exchanged for another annuity or a life insurance contract can be exchanged for an annuity contract without tax consequences. However, an annuity contract CANNOT be exchanged tax free for a life insurance contract.

An immediate annuity contract provides for? A) the accumulation of a principal sum. B) liquidation of a principal sum. C) premature death. D) protection against unemployment.

B) liquidation of a principal sum. Purchased with a single lump sum payment and will start providing income payments within the first year. Usually starting 30 days from the purchase date.

Which one of the following is not characteristic of an annuity? A) Designed to lessen the depletion of the retirement fund. B) To provide an income stream. C) Annuities are concerned with how soon one will die. D) To provide against the risk of living too long.

C) Annuities are concerned with how soon one will die. Life insurance is concerned with how soon one will die, while life annuities are concerned with how long one will live.

All of the following are true of an accumulation period of an annuity EXCEPT? A) Payments are made by the contract holder. B) It is the period of time which annuity payments accumulate interest. C) It does not occur in a deferred annuity. D) It is the period over which the annuitant makes payments into an annuity.

C) It does not occur in a deferred annuity. This is incorrect. The accumulation period is the time over which payments are made by an annuitant into an annuity. The payments in a deferred annuity earn interest and grow tax deferred during the accumulation period.

Which forms of payment can be used to purchase an annuity? A) Series of payments only. B) Deferred single payment only. C) Single payment or a series of payments. D) Single payment only.

C) Single payment or a series of payments. The funding methods of an annuity are either a single payment or an installment payment over a period of time

The benefit paying period of an annuity is called? A) The accumulation period. B) The circumvention period. C) The annuity period. D) The retroactive period.

C) The annuity period. The payout or annuity period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate regular benefit payments. Typically, benefits are paid out monthly, though a quarterly, semiannual, or annual payment arrangement can be structured.

Variable annuity payouts are adjusted based upon which of the following? A) Exclusion ratio. B) Accumulation units. C) LIFO. D) Annuity units.

D) Annuity units. Once variable annuity benefits are paid out to the annuitant, the accumulation units in the participant's individual account are converted into annuity units. At the time of initial payout, the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant. The value of one annuity unit, however, can and does vary from month to month depending on investment results.

Which of the following statements regarding equity index contract factors is most CORRECT? A) Equity index contracts usually follow all stock market changes exactly. B) Most equity index contracts are backed by separate accounts and are variable products. C) All equity index contracts guarantee quarterly dividends. D) Cash values of equity index contracts typically grow at a minimum interest rate.

D) Cash values of equity index contracts typically grow at a minimum interest rate. Equity index contracts typically grow at a minimum guaranteed interest rate of 3 or 4%.

All of the following under a 1035 Exchange are allowable EXCEPT? A) Fixed annuity exchanged for a variable annuity. B) Endowment exchanged for a variable annuity. C) Deferred annuity exchanged for an immediate annuity. D) Fixed annuity exchanged for a whole life policy.

D) Fixed annuity exchanged for a whole life policy. An annuity contract cannot be exchanged tax-free for a life insurance contract under a 1035 Exchange. However, you can exchange any life policy or endowment for an annuity.

Joanna and her husband, Tom, have a $40,000 annuity that pays them $200 a month. Tom dies and Joanna continues receiving the $200 monthly check as long as she lives. When Joanna dies, the annuity payments cease. This is an example of? A) an installment refund annuity. B) a life annuity. C) a cash refund annuity. D) a joint and full survivor annuity.

D) a joint and full survivor annuity. The joint and full survivor annuity provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. No further payments are made after the surviving annuitant dies.