annuity

A prospectus

A Variable Annuity is different from a Fixed Annuity because it must be sold with which of the following documents?

Retirement fund accumulation

A deferred annuity that is held outside an IRA allows for the accumulation of earnings on a tax-deferred basis.

Payments to the annuitant beginning within one month of the issuance of the contract

A flexible premium deferred annuity permits all of the following EXCEPT:

Education Funding

An annuity can provide funds to help offset the costs of a college education. Using a systematic withdrawal or a settlement option will provide for an income stream to help meet or offset some of the expenses incurred.

Nonforfeiture Provisions

An annuity contract owner who stops making premium payments during the accumulation period does not lose the value accumulated in the annuity up to that point. Instead, the contract holder will have nonforfeiture options or rights to the cash value accumulation in the annuity.

Purchase other insurance

Annuities can be used as a funding vehicle for insurance premiums for which the consumer may have a need. If an annuity has a large amount of tax deferred earnings then, upon death, the beneficiary will receive the payout and be responsible for paying income taxes according to his/her tax bracket. This may force him/her into a higher tax bracket overall. Instead the annuity can be used either through systematic withdrawals or a settlement option to buy life insurance which will pay out a death benefit income tax free to the beneficiary

Life Income (Pure or Straight Life)

Annuity is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options.

Life Income Period Certain

Annuity is payable for life, or for a specified period of time, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for life of the annuitant. If the annuitant dies prior to the end of the period, certain a beneficiary receives the balance of the payments for the remaining time period.

Life Income Joint & Survivor

Annuity is payable to 2 annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. Depending on which option is selected, these options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor,

Joint Life

Annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.

Annuity Certain

Annuity that pays a specified monthly level of income for a predetermined time period, such as ten years. The annuitant is guaranteed by the insurance company to receive those payments for the agreed upon time period. If the annuitant dies before the time period expires, the annuity payments are then made to the annuitant's designated beneficiaries.

Annuity Uses

Before determining the use of an annuity, it is important to determine the suitability of the product to the intended purchaser. Suitability describes the steps that must be taken by a producer to ensure that an annuity is addressing a prospective owner's needs and financial objectives at the time of the sale. Additional factors used when determining suitability include the age, income, risk tolerance, and potential use of the annuity.

Bailout Provision (Escape Clause)

During the accumulation period, some contracts also offer a "bailout" provision that allows the owner to withdraw money from the annuity without surrender charges if the crediting rate falls by more than a specific amount. This will enable the policy owner to consider other savings and investment options.

In effect, the policy values would have increased

If Alan owns a market value adjustment annuity (MVA) and interest rates have fallen since he has taken out the policy, what impact will this have on the policy values?

Varible

If an annuity uses units instead of dollars to determine the value of the policy, then it is a(n) _________ annuity.

What is different about a corporate owned nonqualified annuity compared to an individually owned nonqualified annuity?

Interest or gains are taxable as income in the year earned

Lump sum structured settlements

Lump sum payments from lawsuits, lottery winnings, or an inheritance can be used to purchase a structured settlement in the form of an annuity. The annuity can then be used to provide guaranteed lifetime income to the annuitant.

Annuity Classifications are based on:

Method of premium payment •Funding •When income benefits are payable •The payout option selected

Annuity Payments

Once a contract is annuitized, the insurance company takes ownership of funds in the account. In return, the annuitant is entitled to a guaranteed income stream based on the terms of annuitization. Depending on the option chosen, the annuitant may be able to name a beneficiary to receive any remaining benefits available upon the annuitant's death. Annuity income is based on annuity tables which are similar to mortality tables used for life insurance. Other factors that determine the income include the accumulation amount, interest rate return, age and gender of the annuitant, and the payment option selected.

Surrender Charges

Surrender Charges - When a contract is fully surrendered, any surrender charges will lessen the contract payout. This is also referred to as a back-end load. Surrender charges diminish over a stated number of years, set by the insurer, until they disappear.

If Robert wishes to cash out his annuity at age 70 after having it for over 40 years, what should he know about prior to doing it?

The amount of tax-deferred earnings will now become taxable

Lump Sum

The annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a stream of income. There could be tax consequences and tax penalties depending upon when this occurs

The Annuity Period (Pay-Out/Liquidation)

The annuitization period begins once the policyowner elects to convert a deferred annuity into an income benefit payment. The settlement option selected can provide a temporary or lifetime payment. If a lifetime benefit is selected, in most cases it is an irrevocable election. The cash values go towards paying for the income benefit.

Annuitization

The election to receive payments from the annuity for life, or for a specified period depending on the settlement option selected

Retirement Income

The principle use for an annuity is to provide ______. The funds accumulated inside an annuity can be used to fund all or part of a consumer's retirement income. The accumulated funds can be used to purchase a settlement option which can provide for a lifetime income stream or an income stream that can end prior to the annuitant's death. The income received will be tax-free as far as the portion of the payment is counted as a return of premium while the balance would be taxable as ordinary income. If premiums were deductible, then the entire income received would be subject to tax. A Guaranteed Minimum Withdrawal Benefit (GMWB) is an optional benefit that can be purchased to help annuitants protect their retirement income from a down market. This option allows the annuitant to withdraw a maximum percentage each year until the initial investment has been paid out.

Tax Penalty

To discourage the use of annuities as short-term tax shelters, a 10% penalty tax is levied against any premature withdrawals prior to 59 ½ years of age. This discourages withdrawals. The tax penalty does not apply if premature distributions occur due to the death or disability of the contract owner.

Long-term care benefits

Today's annuities may offer riders which will help offset some of the costs associated with providing long-term care. As with most riders there is an additional cost associated with it. A few companies offer a combination deferred annuity and long-term-care policy that allows for the leverage of single premiums 3-to-1 or 2-to-1. For example, a $100,000 single premium deferred annuity could pay up to $200,000-300,000 in long-term-care benefits. Generally the annuity values must be used then if needed the long-term care benefit kicks-in. The annuity funds used for long-term-care costs are tax-free

Which of the following statements is TRUE regarding Fixed Annuities?

Upon annuitization, the annuity payments are level

the surrender charge

What is the difference between the cash value and the cash surrender value of an annuity?

Life Income with Period Certain

Which Payment Option pays an income for the life of the annuitant or for a specified period, whichever is longest?

The types of settlement options available at annuitization

Which of the following do Fixed and Variable Annuities have in common?

Waiver

annuity surrender charges are generally waived if the annuitant is hospitalized for an extended period, placed in a nursing facility for at least 30 days, becomes disabled, or dies

Nonqualified Annuities

is funded with after-tax dollars, meaning taxes on the money were paid before it goes into the annuity. Upon distribution, only the earnings are taxable as ordinary income.

Qualified Annuity

is funded with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes.

Life Income with Refund (Installment or Cash Refund)

is payable for the lifetime of annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary as a lump sum, or cash refund, or in installments, sometimes referred to as the installment refund.

An individual owns a variable annuity. Upon annuitization, the number of Annuity Units on which the benefit amount is based will __________ from month to month.

remains level/the same

are ways in which an annuity can be classified based on its premium funding method

single, flexible periodic