Life insurance
Which of the following gives the largest possible monthly payments?
Straight life annuity --- Straight life annuity gives no guarantee. If the annuitant dies the insurance company keeps all remaining funds. For this reason a higher monthly income is paid out to the annuitant.
A life insurance producer selling variable annuities is regulated by which of the following?
Financial Regulatory Authority and the State Insurance Department --- Producers selling variable annuities are subject to dual regulation. They are regulated by both the SEC, FINRA and the State Insurance Department. Before providing the contract of sale for a variable annuity, the agent must provide a prospectus.
Richard Meyers wants his $100,000 lifetime annuity to continue paying to his wife. Richard should select:
Survivor annuity --- Richard should purchase a joint and survivor annuity to assure that his wife continues to receive benefits. In both of these options benefits will continue as long as any of the annuitants are alive.
Which of the following is true of payments under a joint and last survivor annuity payout option?
The annuity will terminate upon death of the last of two people. --- A joint and last survivor annuity continues to pay life income for two or more lifetimes. When the last survivor dies the annuity is terminated.
A fixed or variable annuity contract which guarantees payment during the lifetime of the annuitant will charge:
A mortality charge ---Although full life charge seems to be the same as mortality charge, under the contractual provisions, the charge to cover losses incurred by the company because people live too long is called a MORTALITY CHARGE. Another charge is the Expense Risk Charge. These may also cover future increases in administrative costs. The insurance company assumes the risk for any annuity payments and expenses that exceed the amount collected as mortality or expense risk charges.
Petra has an indexed annuity. Last year the index to which the annuity is tied gained 10%. Why was the interest rate on the annuity only 7.5%?
The annuity has a 2.5% spread. --- Participation Rates: If the index gain is 10% and the participation rate is 75%, the annuity gain is 7.5%. Interest Rate Caps: If the index gain is 10% and the interest rate cap is 7.5%, the annuity gain is 7.5%. Margin/Spread/Administrative Fee: If the index gain is 10% and the spread is 2.5%, the annuity gain is 7.5%.
A person with a variable annuity dies during the accumulation period. To whom will the accumulation value or the minimum guaranteed death benefit be paid?
The minimum guaranteed death benefit will be paid to a designated beneficiary or to the owner's estate --- During the accumulation phase of an annuity the owner has control of the plan. Death benefits during the accumulation period are included in the estate of the deceased annuitant for estate tax purposes. Lump sum proceeds to the beneficiary in excess of the cost basis are taxed immediately as ordinary income to the beneficiary. Once the annuity has been annuitized, the owner loses control and the insurance company pays according to the payout option selected.
What is the tax treatment of annuity payments?
A portion of each annuity payment is earned interest and is taxed as ordinary income. --- During the annuity period the IRS does, in fact, determine the amount of principal and the amount of interest of each payment with the help of the insurance company's annuity tables. At payout the interest portion is taxed as ordinary income. The portion of the annuity payment considered the return of cost is not taxed at payout.
Margaret purchases a fixed life annuity to provide retirement income. Margaret should understand that:
Due to future inflation, purchasing power of her annuity payment may diminish. --- Fixed annuity funds are placed in the general investment account of insurance companies and appreciate at a GUARANTEED RATE of interest. A fixed life annuity provides guaranteed income for life. However, if the guaranteed interest rates are low and inflation increases, the actual purchasing power of the dollar could dwindle.
The term which describes the value of the annuitant's account during the accumulation phase of a variable contract and which fluctuates according to the investment performance of a separate account is called:
Accumulation units --- Accumulation units measure the value of the annuitant's account during the investment phase of a variable contract. Accumulation units are directly affected by the underlying portfolio of the separate account. As the value of the portfolio increases so will the value of the accumulation unit. As the value of the portfolio decreases so will the value of the accumulation unit. The following are elements of the separate account used in the calculation of the value of an accumulation unit: * Investment Income * Realized Capital Gains & Losses * Unrealized Capital Gains & Losses
Which of the following statements is always correct when explaining a separate account?
The separate account investment managers must make investments consistent with the described objectives and policies. --- Variable products must be sold with a prospectus that describes the investment objectives and policies of the separate account. Separate accounts provide professional management of the account.
Chuck purchased an annuity that will pay throughout his life and continue to pay his beneficiary if he dies before a specified date. Chuck purchased which of the following?
Period certain life annuity --- A life period certain annuity guarantees income for the life of the annuitant and also guarantees that if the annuitant dies prior to a specified date, income will be paid to the annuitant's beneficiary until that date.
All of the following statements about a straight life variable annuity are true, EXCEPT:
The monthly payout is fixed by the inflation index. --- Variable annuities have a variable rate of return dependent upon portfolio investment performance. Life annuities pay income for life. Other life payout options include: * Period certain - guarantees payments for a certain amount of time * Refund - refunds accumulation value of account to a beneficiary if annuitant dies * Joint & survivor - continues to pay income for two or more lives
Which of the following is an important difference between a fixed annuity and a variable annuity?
Variable annuity income fluctuates, while a fixed annuity income remains level. ---Fixed annuities have guaranteed incomes that remain level. Variable annuities have no guaranteed interest return. When selling a variable annuity product the agent must make this fact absolutely clear to the prospective client. The taxation of a variable and fixed annuity is the same. Interest earned is tax-deferred. Principal is after tax dollars and is not subject to additional taxes. Contract Charges Both types of contracts have contract charges that affect the payout. Charges include: * Mortality charges - this protects the insurance company from excessive payouts to annuitants that outlive the companies expectations. * Expense risk charges - this protects the insurance company from future increases in administrative expenses. * Administrative expense - this pays for the administrative costs associated with the contract.
Which of the following statements is correct about annuity indexing methods?
When using the high water mark, the insurer tracks the interest rate at each annuity anniversary date. The highest of these is the annuity interest rate. --- Indexing Methods: Annual Reset (Ratchet): Interest is calculated based on the annual index gain. High Water Mark (look-back): The interest rate is the highest value of the index at various points during the contract or term (e.g., contract anniversary dates) as compared to the value at the start of the contract. Point-to-Point (European): the interest rate is the difference in the index at the beginning of the contract and the end of the contract. Additional (not as common) indexing methods include: The Asianing method - The index rate at several points throughout the year (or term) are averaged to determine the annual annuity interest rate. The low-water-mark - Uses the lowest index rate at the anniversary dates to determining the annuity level at the issue date.