Annuities 12%

What happens to interest earned if annuitant dies before the pay out start date?

It is TAXABLE

N was the beneficiary of a life insurance policy that she purchased on the life of her son and paid the premiums until he died. Which of the following must be paid? Select one: a. Neither estate nor income tax is owed b. Estate Tax c. Income Tax d. Death Benefit Tax

a

What is the tax penalty for withdrawal from a MEC prior to age 59 1/2? Select one: a. 10% b. 12% c. 8% d. 13%

a

B owns a $200,000 whole life policy on the life of her husband, C. The policy has $100,000 cash value. If C dies, how much money will B, the beneficiary, receive from the death benefit after taxes? Select one: a. $200,000 b. $180,000 c. $100,000 d. $300,000

a A beneficiary receives the death benefit of a life insurance policy with no income tax liability. Because the policy is owned by B and not by C there will also not be an estate tax liability. Cash value is only of concern while the insured is alive; as soon as the insured dies the cash value is just part of the death benefit.

F has decided to purchase an SPDA. What payments will he/she make to the insurer? Select one: a. F will make periodic premium payments. b. F will pay the entire premium amount at the start of the contract. c. F will make one large payment and several smaller ones until she reaches the policy limit. d. F can defer the one single premium until the end of the contract.

a An SPDA is a Single Premium Deferred Annuity. There is only one premium payment made by the owner, and it is at the beginning of the contract. The correct answer is: F will pay the entire premium amount at the start of the contract.

Which of the following is not a reason someone would purchase an annuity? Select one: a. Tax-free growth b. Retirement funding c. Life insurance d. Education Funding

a Annuity interest grows on a tax-deferred, not tax-free, basis, with the exception of Roth IRAs. Money is put into a Roth IRA on an after-tax basis, and neither the principal nor the interest is taxed when withdrawn.

The type of retirement plan in which the employer does not guarantee any certain payment upon retirement is called a(n): Select one: a. Defined Contribution Plan. b. AESOP. c. Defined Benefit Plan. d. 1035 Exchange.

a Defined Contribution Plans detail how much money the employer will contribute to the retirement plan, but do not guarantee how much money will be available upon retirement. The retirement amount will be determined by the performance of the plan. ESOPs (Employee Stock Ownership Plans) are one type of Defined Contribution Plan.

For a life insurance policy to continue to be considered a pure life insurance policy and not a modified endowment contract, IRS guidelines maintain which of the following? Select one: a. Cash value accumulations cannot exceed a specified amount of the cost of future pure insurance benefits. b. A minimum amount of pure life insurance, called the "entry amount," must be maintained in the policy over and above the amount of cash accumulated. c. Cash value accumulations must exceed a specified amount of the cost of future pure insurance benefits. d. A maximum amount of pure life insurance, called the "entry amount," must be maintained in the policy over and above the amount of cash accumulated.

a In order to limit the Universal Life policy from becoming too strong a tax haven, the IRS established guidelines that the pure life insurance amount cannot be less than a certain specified amount, called the "corridor." If the cash value increases over this amount in relation to the insurance value, the policy becomes a Modified Endowment Contract (MEC) and there are tax penalties if the cash is withdrawn before age 59 1/2.

What is a characteristic of a lifetime annuity with a guaranteed minimum payment that a pure life annuity does not have? Select one: a. Payments may continue after the annuitant's death. b. The full cash value of the annuity is always paid. c. Premiums can be paid in a single payment or over a period of time. d. Payments are paid for the duration of the annuitant's life. The Lifetime Annuity, Period Certain, which guarantees that at least a minimum payout has lower periodic payment than a straight lifetime annuity. If the annuitant dies before the end of the guaranteed period, payment will continue to the beneficiary. Payments stop altogether as soon as a pure life annuitant dies.

a The Lifetime Annuity, Period Certain, which guarantees that at least a minimum payout has lower periodic payment than a straight lifetime annuity. If the annuitant dies before the end of the guaranteed period, payment will continue to the beneficiary. Payments stop altogether as soon as a pure life annuitant dies.

T and K receive monthly payments from an annuity they annuitized 2 years ago. If K dies and T continues to receive monthly payments, what type of payment option had they chosen? Select one: a. Life Income Joint and Survivor b. Joint Life c. Survivorship Life d. Life Annuity

a With a Life Income Joint and Survivor option, payments are guaranteed for the lifetime of two or more annuitants, continuing to the survivor after the death of the first to die. Survivorship Life is a life insurance policy on two or more individuals that pays the death benefit after the death of the last to die.

U decided to rollover an IRA from PDQ Life to RIP Life. When she received the 100,000 in funds from PDQ, she immediately deposited them in a bank and two months later wrote a check for the full amount, after any required income tax payments, to PDQ. For how much was the check written? Select one: a. $80,000 b. $85,000 c. $90,000 d. $100,000

a rollover =20% tax For no tax to be payable on an IRA rollover, the funds must pass directly from one trustee to another. As U received and deposited the funds in her account, they are subject to a 20% tax. $100,000-20%($20,000)= $80,000.

If an annuitant dies before receiving benefits equal to the purchase price of a refund life annuity: Select one: a. The excess amount in the life annuity is lost. b. The annuity beneficiary receives the difference. c. The excess amount is distributed among family members. d. The annuity payments stop.

b A full cash refund for a life annuity pays back the full purchase price as a guaranteed minimum benefit. If the annuitant dies before the full purchase price has been paid the beneficiary will receive the balance. Once the full premium amount has been paid out, the contract has been fulfilled and the beneficiary will receive nothing more.

Which of the following is not true concerning the taxation of non-qualified annuities? Select one: a. Premiums paid into non-qualified annuities are not tax deductible. b. Cash value within the annuity does not accumulate on a tax-deferred basis. c. There isn't a 10% tax penalty if the funds are withdrawn after age 65. d. Non-qualified annuities are not subject to a 10% penalty tax if funds are withdrawn before age 59 ?.

b Cash value within any annuity accumulates on a tax-deferred basis. Be careful of double negatives in questions. For instance, it's true that there is not a tax penalty if funds are withdrawn after age 65. The question is asking which is not true.

M and N want to establish an Education IRA for their daughter and contribute the maximum amount. If the daughter is five years old and allowed contributions stay at the current level, how much will her parents end up investing in her IRA if she starts college when she is 19? Select one: a. $10,000 b. $26,000 c. $7,000 d. $6,500

b Contributions to an Education IRA (Coverdell Education Savings Account) must be made in cash, before the beneficiary is 18, and cannot exceed $2,000 in any one year. If the daughter is currently five years old, it will be 13 years until she is 18. 13 x $2,000 = $26,000 as the maximum amount that could be invested.

S is 40 years old and has a $500,000 annuity with PB&J Insurance. She has chosen the lifetime payment option as her payout choice when she annuitizes the annuity, which she plans to do when she reaches age 55. What will happen to the annuity proceeds if S dies next year? Select one: a. The annuity beneficiary will receive monthly payments from the annuity for 14 years. b. The money in the annuity will immediately pass to the annuity beneficiary. c. The annuity beneficiary will receive monthly payments from the annuity for his/her entire life. d. PB&J Insurance will keep all the money because the lifetime option was chosen and S has died.

b If S had annuitized the annuity with the lifetime payment option before she died, PB&J would have won the lottery and kept all the proceeds that had not been paid out. However, S had not yet annuitized the annuity when she died, so the annuity acts as a life insurance policy and the policy amount will go as a death benefit to the beneficiary. Nothing is said about the money being transferred into another annuity or some other arrangement being made, so the full amount will be paid to the beneficiary.

All of the following are true of Individual Tax Shelter Pensions except: Select one: a. Tax penalties will be assessed if the individual begins making withdrawals prior to age 59?. b. Tax penalties will be assessed if the individual fails to begin making withdrawals before age 75 ?. c. Both the principal and interest are taxed when money is withdrawn from these funds. d. Interest accumulates on a tax-deferred basis.

b In an Individual Tax Shelter Plan, tax penalties are assessed for withdrawal prior to age 59 1/2 or if disbursements do not begin prior to age 70 1/2.

R wants to purchase an annuity. Which of the following is not an option? Select one: a. FPDA b. MEWA c. SPIA d. TSA

b Multiple Employer Welfare Association (MEWA) is not a type of annuity. The Single Premium Immediate Annuity (SPIA), Fixed Premium Deferred Annuity (FPDA), and Tax Sheltered Annuity (TSA) are all types of annuities, through Rupert could only purchase a TSA if he works for a school or for certain tax-exempt, usually religious or medical organizations .

Y wants to invest money in an annuity so that he can benefit from the tax-deferred growth they enjoy. He does not need a tax deduction of the annuity premium amount. Which type of annuity should Y's agent recommend? Select one: a. Two-tiered Annuity b. Roth IRA c. Fixed Annuity d. Variable Annuity

b Premiums deposited into a Roth IRA are not tax deductible. Neither the principal nor the interest is taxed upon withdrawal from the Roth IRA- as long as the money is not withdrawn for at least 5 years and until after the owner is age 59 1/2 or older.

S is 53 years old and wants to invest a large sum of money in an annuity. This money is the main investment S has for retirement. Which annuity should S's agent encourage her to use? Select one: a. Market value adjusted annuity b. Fixed annuity c. Two-tiered annuity d. Variable annuity

b S cannot afford to lose any of her investment. A variable annuity will fluctuate with the market and S could lose a substantial part of her investment if the market is low when she needs to withdraw the money. A fixed annuity will give S safety of funds with a guaranteed minimum interest rate and she cannot lose any of her principal sum.

Which of the following retirement plans has only the interest taxed when withdrawn? Select one: a. Qualified plans b. Non-qualified plans c. Personal investments d. Stock gains

b Since money (principal) going into a non-qualified plan is taxed before being put into the non-qualified plan, only the interest (that grew on a tax-deferred basis) is taxed when withdrawn. The term "personal investments" is broad and may contain investments that do not apply.

T is a self-employed individual. Which of the following is not a policy she may purchase? Select one: a. IRA b. TDA c. Universal Life d. HR 10 Plan

b TDAs are for employees of public education organizations and certain tax-exempt, usually religious or medical, organizations. HR 10 plans are more commonly known as KEOGH Plans and are specifically designed for self employed individuals.

Which of the following is not true concerning income tax on life insurance policies? Select one: a. Insurance proceeds paid as a lump sum are exempt from federal income tax. b. Income tax on the death benefit is unavoidable. c. The death benefit is not taxable if premiums were paid with after tax dollars. d. Income tax is payable when a policy is cancelled and the cash value is paid.

b Taxation of death benefit proceeds varies depending on how premiums are paid (after tax vs. pre-tax) and whether the insurance proceeds are paid as a lump sum. Policies where the premium is paid with after-tax dollars are exempt from federal income tax. If the benefit is paid as a lump sum, the benefit is income-tax free. If the policy proceeds are paid out over a period of time, the interest portion of each payment will be subject to income tax.

What are the phases of an annuity? Select one: a. Collection and Reimbursement b. Accumulation and Annuity c. Collection and Payout d. Accumulation and Reimbursement

b The phases of an annuity are accumulation (when principal and interest are accumulating in the plan) and annuity (when the policy is annuitized and money is paid out to the annuitant or the beneficiary)

When D died, his wife B decided to receive the death benefit of his life insurance policy over her lifetime, rather than as a lump sum. What income taxes will B need to pay on these benefit payments? Select one: a. B must pay a 10% fee on the entire amount of the death benefit, along with income tax on each payment received. b. B must pay income tax on any interest on the payments she receives. c. B must pay income tax on the full amount of each payment she receives. d. B does not need to pay any income tax, as there is none due on the death benefit of a life

b There is no income tax on the death benefit of a life insurance policy if it is received as a lump sum. However, if the funds are converted to an annuity, as in this case, and the funds are paid out over time, each payment has 2 parts-the death benefit and the interest. B only needs to pay income tax on the interest portion of the payments she receives.

If L wants to be able to vary the premium amounts and payments of the annuity he is going to purchase, which annuity should he buy? Select one: a. Single Premium Deferred b. Single Premium Immediate c. Flexible Premium d. Single Premium Variable

c

M is a self-employed dentist. She makes $360,000 a year. Which of the following percentages is the maximum M may invest in a SEP? Select one: a. 20% b. None of these. c. 25% d. 15%

c

When S was born her parents started investing money in a Coverdell Education Savings Account for her. Which of the following expenses will not be covered by it? Select one: a. Tuition and fees b. Room and board c. Study abroad d. Books Coverdell Education Savings Accounts or Education IRAs are created solely for the purpose of paying the qualified higher education expenses of the designated beneficiary, such as tuition and fees, books, supplies, and equipment, amounts contributed to a qualified state tuition program, and in some cases room and board. Study abroad is not a covered expense.

c

What change(s) must be made to a market value adjusted annuity if withdrawals are made before the end of the guaranteed period? Select one: a. Only the cash value of the contract remains unchanged. b. The cash value of the contract remains the same as does the interest rate. c. A market value adjustment is applied to the cash value of the contract. d. No adjustment needs to be applied.

c A market value adjusted annuity, also known as a modified guaranteed annuity, provides a guaranteed interest rate for a specific period of time. An adjustment needs to be applied when either withdrawals are made or the contract is surrendered before the end of the guaranteed period. This adjustment affects the cash value of the contract.

An annuity is: Select one: a. One of many yearly payments. b. A group life insurance plan that is arranged for a set number of years. c. A contract that arranges multiple payments to liquidate a principal amount of money. d. A yearly amount of interest owed to a beneficiary.

c An annuity is a written contract used to liquidate a certain amount of money over a period of years or even over the life of the annuitant or beneficiary. This is done by taking the principal sum, the expected years of life of the annuitant and the amount of interest the sum would generate, and then spreading payments over the desired period.

A percentage taken from an annuity's cash value if the owner terminates the annuity after owning it for only a short time is called a(n): Select one: a. Commission. b. Indemnity charge c. Surrender charge. d. Assignment tax.

c An insured may be subject to surrender charges if the policy is terminated earlier than a certain period of time. The insurer charges a percentage of the contract's value, of the premiums that have been paid, or of the amount withdrawn.

B has a Roth IRA. Contributions are: Select one: a. partially tax deductible for B. b. completely tax deductible for B. c. not tax deductible. d. partially tax deductible for B's employer

c Contributions to Roth IRAs are not tax deductible, but when funds are taken from the Roth, neither the principal nor the earned interest is income taxable.

When are estate taxes payable on a life insurance policy? Select one: a. When the policy is assigned to another owner b. When an insurance policy is surrendered for its cash value c. When proceeds are payable to the insured's estate d. When the policy is owned by a third party with no insurable interest in the insured.

c Estate taxes are payable when the death benefit proceeds are payable to the insured's estate, or if there are any "incidents of ownership" on the part of the insured at the time of death. Estate taxes are not payable on a policy's cash value, as the insured is still alive and estate taxes are payable upon an individual's death.

Which of the following is a characteristic of a fixed annuity? Select one: a. An NASD license is required to sell the policies. b. Payments are guaranteed for the life of the annuitant. c. Interest rates are set periodically and have a guaranteed minimum. d. Change value only when the product is annuitized instead of transferred to another account.

c Fixed annuities have a guaranteed minimum interest rate, but has a set rate that may be changed periodically - usually on an annual basis. NASD securities licenses are required to sell any variable products, but not for fixed annuities. Life annuities are guarantees for the life of the annuitant, but the annuity must be annuitized first.

An SPDA is a contract that: Select one: a. provides the systematic liquidation of a principal sum of money over a specified number of years. b. has its first payout start upon the initial payment of funds to purchase the annuity, or at least within one year of the payment. c. has its first payout start more than one year after the initial payment of funds to purchase the annuity. d. is a stock-protected deferred annuity.

c Single Premium Deferred Annuities (SPDAs) begin paying out benefits more than one year after the initial payment of funds to purchase the annuity. The systematic liquidation of money is the general definition for annuities. The correct answer is the better choice.

An SPIA is a contract that: Select one: a. provides the systematic liquidation of a principal sum of money over a specified number of years. b. is a stock-protected indexed annuity. c. has its first payout start upon the initial payment of funds to purchase the annuity, or at least within one year of the payment. d. has its first payout start more than one year after the initial payment of funds to purchase the annuity.

c Single Premium Immediate Annuities (SPIAs) begin paying out benefits immediately after the initial payment of funds into the annuity, or at least within one year of the payment. The systematic liquidation of money is the general definition for annuities. The correct answer is the better choice

An annuity that Peter bought from agent Paul has its interest rate tied to the S&P 500. One of the things that Peter's wife, Mary liked about the annuity is that there is a minimum interest rate. Which type of annuity did Peter buy? Select one: a. MCR Annuity b. Market Value Adjusted Annuity c. Equity Indexed Annuity d. Variable Annuity

c The equity-indexed annuity has its interest rates linked to an index such as the S&P 500. Both the principal and the interest in these annuities are typically protected against index declines- there is often a minimum interest rate. Market value adjusted annuities have a guaranteed interest rate for a specific time period and are not necessarily tied to an index rate. Modified Cash Refund (MCR) annuities are often part of contributory pension plans and are not linked to any indexes. Variable annuities are usually tied to an index, but may lose most of their value- there is no interest rate floor.

J owns a life annuity with a 15 year period certain. If J dies 3 years after annuitizing, what will happen to the remainder of the money? Select one: a. The beneficiary receives the remainder of the annuity in one lump-sum. b. The beneficiary receives payments for 15 years. c. The beneficiary receives payments for the remaining 12 years. d. The insurance company keeps whatever money is left.

c The life annuity period certain pays income for the annuitant's life but guarantees payments for a certain number of years, even if the annuitant dies. The beneficiary receives the regular payments in the place of the annuitant until the end of the guaranteed period, when payments stop. A life annuity-period certain therefore, has a beneficiary.

All of the following are characteristics of profit-sharing plans EXCEPT: Select one: a. Profit-sharing plans provide an excellent tax shelter for older business owners. b. Employers are not required to contribute to the plan in any given year. c. There is a maximum contribution of 10% of aggregate participant payroll. d. Employees participate in company profits.

c The maximum contribution is actually 15% of aggregate participant payroll.

A Variable Annuity is one that: Select one: a. Allows the beneficiary to choose the payout option when the policy is annuitized. b. Pays different interest rates during the accumulation and payout phases. c. Is designed to keep up with inflation. d. Cannot lose principal or interest in a down market.

c Variable annuities are tied to a stock market index and are designed to keep up with or in advance of inflation. The annuity value will decrease if the market index it follows drops- and it can decrease substantially.

Traditional IRAs include all of the following characteristics except: Select one: a. Interest grows income tax-deferred during the annuity phase. b. There is a 10% penalty on the amount if the money is withdrawn before age 59 1/2. c. If the annuity has not yet been annuitized upon death, values are included in the annuitant's estate for estate tax purposes. d. Tax is paid only on the interest when the IRA is annuitized.

d

Under a modified endowment contract, tax penalties apply to cash value withdrawal prior to age: Select one: a. 59 b. 65 1/2 c. 65 d. 59 1/2

d

What name is given to the plan when an employer contributes a certain amount to the plan but does not guarantee any certain payment at retirement? Select one: a. Defined Benefit Plan b. Defined Guaranteed Plan c. Defined Employee Plan d. Defined Contribution Plan

d Although the employer contributes a specified amount to the plan, the retirement amount will be determined by the plan's performance. Defined Benefit Plans, on the other hand, have a specified amount that will be paid out upon retirement.

A contract that provides for the systematic liquidation of a principal sum of money over a specified period of time is known as a(n): Select one: a. Installment b. Mortgage c. Obligation d. Annuit

d An annuity is a contract that is set up to distribute an amount of money over a period of time. The correct answer is: Annuity

An equity-indexed annuity is a type of: Select one: a. MCR b. Market Value Adjusted Annuity c. Two-tiered Annuity d. Fixed Annuity

d An equity-indexed annuity is a fixed annuity with interest rates linked to a market index such as the Dow-Jones Average. There is generally a guaranteed minimum interest rate which protects the principal and accumulated interest from index declines. Market Value Adjusted Annuities provide a guaranteed interest rate for only a specific period of time. If funds are withdrawn before the guaranteed period, a market value adjustment (positive or negative) is applied to the cash value of the annuity contract.

The cash value of annuity accounts must be _______ (with/from) the general account assets of insurance companies. Select one: a. distinguished b. combined c. co-mingled d. kept separate

d Annuity cash values must be kept separate from the general account ledgers of the insurance company. The cash value of annuity accounts may vary with the market and actually belongs to the annuity contract owners. Only once the annuity is annuitized does the cash in the annuity actually belong to the insurance company.

B died before annuitizing an annuity she owned. What will be the federal income tax liability to her beneficiary? Select one: a. There is no federal income tax liability in this situation. b. The entire investment excluding interest will be taxed. c. The entire investment including interest will be taxed. d. The amount in excess of the policy owner's investment will be taxed.

d The policy owner's investment has been taxed but the interest has not been taxed, having accumulated on a tax-deferred basis. Therefore the interest/gain (amount in excess of the policy owner's investment) is included in the beneficiary's income tax.

The owner of an annuity is the person who: Select one: a. Has no privileges concerning the annuity. b. Receives the benefit. c. Receives the stream of income from an annuity. d. Has the rights of possession to the cash that is in the annuity.

d The rights of ownership to the cash belong to the owner. Once the annuity is annuitized the owner becomes the annuitant and is entitled to the stream of income from the annuity, but no longer owns the cash that was in the annuity. The cash belongs to the insurance company.

B bought an insurance policy when she graduated from college and over the next forty years the policy's cash value increased significantly. Two days before B retired and started receiving payments, the stock market dropped to half its previous value, causing B's policy to lose much of its value. What type of policy does B have? Select one: a. Term Life b. Universal Life c. Interest Sensitive Whole Life d. A variable annuity

d Variable Annuities are tied to a stock index and will increase or decrease along with that index. B will start receiving payments from this policy. Life insurance policies are designed to pay a death benefit to a beneficiary.

Estate taxes are payable on life insurance proceeds under all of the following conditions except: Select one: a. The policy was reassigned to another by the insured twenty-six months before the insured's death. b. Proceeds are payable to the insured's estate. c. The insured possessed an incident of ownership in the policy at the time of death. d. The insured owner sold his interest in the policy, transferring ownership to a third party thirteen months before he died.

d When ownership of a policy is transferred to another party within three years of the insured's death, estate tax is payable unless the owner received adequate consideration for the transfer of ownership. Because the insured sold his interest in this case, there would be no estate tax payable

With a non-qualified plan, which of the following does the government tax as income? Select one: a. Life insurance proceeds received in a lump sum b. The death benefit portion of the annuity payments given that the life insurance proceeds are converted to an annuity c. Life insurance dividends d. The interest from each annuity payment

d interest = always taxable Generally, income tax on life insurance and annuities is determined by the growth/interest gained by investing what has already been taxed-the premium.

Annuitant's life expectancy determines what?

the annuity payment