FIN 3310 Chapter 7 Questions
Harry purchased a life insurance policy with a face value of $100,000. Unfortunately for Harry, and his wife, Barbara, he died racing "import cars." At the time of death, the life insurance policy had a cash value of $40,000. The beneficiary was his wife. Barbara, who has a life expectancy of 40 years, decided to take the single life annuity option with the life insurance proceeds. This option will pay her $500 per month for the rest of her life. How much of the monthly payment is taxable?
$292
Perry, who is 50 years old, was building a new home for his family. However, he was running out of money and could not afford the pool they fell in love with. Since his family was upset, he decided to take a withdrawal from his annuity. He had contributed $100,000 to the annuity, and the value of the annuity today is $300,000. He decided to take a withdrawal of $60,000 from the annuity. Which of the following is correct?
$60,000 is taxable as ordinary income and subject to the early withdrawal penalty
Parker, who is now 70 years old, was a diligent saver during his working years and accumulated $100,000 at age 60. He used his savings to purchase a single premium annuity, which pays him $1,000 per month. If his life expectancy was 25 years when he purchased it, how much of each payment is subject to tax
$667
Hugh purchased a single premium annuity for $200,000. The annuity pays him $1,000 per month. If his life expectancy was 20 years when he purchased it, how much of each payment is not subject to tax?
$833
Clara purchases an annuity with after-tax dollars and wants payments to begin next month. What type of annuity did Clara purchase? 1. Immediate Annuity. 2. Deferred Annuity. 3. Qualified Annuity. 4. Nonqualified Annuity
1 and 4
Scott is a drug rep and planning on retiring next month. He is using his accumulated $200,000 to purchase an annuity. Which of the following options will give him the largest monthly annuity payment assuming his life expectancy is 20 years and his wife's life expectancy is 22 years
10 year term certain
Which of the following parties to an annuity contract serves as the measuring life? 1. Owner. 2. Annuitant. 3. Beneficiary.
2 only.
Which of the following is true? A fixed annuity mitigates the risk of superannuation. B) A fixed annuity mitigates the risk of superannuation and inflation. C) A fixed annuity is always a deferred annuity. D) A fixed annuity is always for a single life expectancy.
A fixed annuity mitigates the risk of superannuation
Claire is retiring in the next month. She was the bread winner in the family while John was the stay-at-home dad. They have limited assets but will receive Social Security. Which of the following is the best type of annuity for her to select?
A joint-life annuity on the lives of Claire and John.
Harry, age 63 purchased an immediate annuity. The annuity will provide monthly payments to Harry for as long as he lives. If he dies before receiving payments for 20 years, the remaining payments will go to his beneficiary. What type of annuity did Harry purchase?
A life annuity with a term-certain guarantee
Patrick is age 67 and receives Social Security retirement income that covers 60 percent of his monthly expenses. He has no dependents. He would like to invest $200,000 in an annuity that will mitigate inflation and provide him with the highest monthly income. Although he has a 20-year table life expectancy, he thinks he has a much longer life expectancy. Which annuity is most suitable for Patrick?
A single-life, variable annuity with a term certain of 20 years
Which of the following statements about annuities is not correct?
All annuities are subject to minimum distribution rules
Harold wants to participate in the stock market by purchasing a deferred annuity but wants protection against the loss of his principal. What annuity is best suited for Harold?
An equity-indexed annuity
Kim, a single 40-year-old, would like to invest in the stock market but wants her principal guaranteed against losses. What type of annuity is most suitable for Kim?
An equity-indexed annuity
There are many options regarding the type of annuity one can purchase. Which of the following is correct?
An equity-indexed annuity generally has less risk than a variable annuity
Arline is a 70-year-old widow with no dependents. She wants to invest in an annuity that will produce income now. She has $100,000 to invest and wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Arline based on her objectives?
An immediate, single-premium life annuity
Annuities provide many benefits and have many advantages over other alternative investments. Which of the following is not an advantage of a single life annuity?
Distributions receive favorable capital gain treatment.
There are several types of annuities. Which of the following orders the investment options from least risky to most risky
Fixed, equity-indexed, variable
Bill, age 33, plans to retire at age 67. Bill is a consultant and his income varies widely on a monthly basis. Bill wants to invest in an annuity over his work life expectancy. Which of the following annuities is most suitable for Bill?
Flexible premium, deferred annuity
Jason owns a life insurance policy. He decided that he no longer has a need for life insurance and wants to exchange it for an annuity. To get the annuity he wants, he will have to exchange the life policy and add additional money. Which of the following is correct?
He can make the exchange, which will not be taxable.
Cody decided to purchase a variable annuity and invested $50,000. He made a few poor investment decisions and the market dropped. Like many investors, he decided to sell when the value was low. He surrendered the annuity and received $27,000, after the $3,000 surrender fee. Which of the following is true?
He can take an ordinary loss of $20,000
Mig purchased a straight life annuity from Confident Results Annuity Provider using funds from his 401(k) plan. Which of the following is correct
His annuity will have no return of basis.
At the age of 40, Kennedy deposited $50,000 in a nonqualified, single-premium deferred annuity. Ten years later, she surrenders the contract for a lump-sum distribution of its $100,000 value. Which of the following statements is correct?
Kennedy will owe taxes and a 10% penalty on $50,000
Ted just retired and has several sources of income. He has Social Security and a pension from his employer, HTD Enterprises. Social Security is adjusted for inflation, but his pension is not. Ted is concerned about outliving his funds. What might he purchase to provide protection against running out of money late in retirement?
Longevity annuity.
With an equity-indexed annuity, there are several indexing methods. Which of the following is not one of them?
Oscillation neutrality method.
Meg has money in a 401(k) plan with her employer. She has no dependents or heirs and wants to maximize her monthly income. She is retiring and wants to move the money into an annuity contract. Which would be the best option for Meg?
Single-premium life annuity
Which of the following risks can an annuity mitigate?
Superannuation and purchasing power
When Art was 45 years old, he invested $60,000 in an annuity. Ten years later, the value of the annuity was $180,000. He took a withdrawal from the annuity in the amount of $10,000. How is the withdrawal taxed?
The $10,000 is taxable as ordinary income and is subject to the 10 percent early withdrawal penalty
When determining the percentage of an annuity income that is not taxable, the investment in the annuity is divided by the total of the expected payments to be received. What is this quotient is called
The exclusion ratio
Patrick is age 67 and receives Social Security retirement income that covers 60 percent of his monthly expenses. He has no dependents. He would like to invest $200,000 in an annuity that will mitigate inflation and provide him with the highest monthly income. Although he has a 20-year table life expectancy, he thinks he has a much longer life expectancy. Which annuity is most suitable for Patrick?
a single-premium, variable annuity
