SLS Chapter 7

N, age 50, recently bought an annuity that will pay a guaranteed $2,000/month at age 70 for life. What type of annuity did N purchase? a. fixed period b. fixed deferred c. fixed immediate d. fixed variable

b. fixed deferred

Principal

the original sum of money paid in to an annuity through premiums

Deferred annuities

- Can be funded through either the single premium payment or through periodic premium payments - Begin payout at sometime in the future Deferred annuities accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date (normally within a minimum of 12 months after date of purchase). Unlike immediate annuities, deferred annuities can be funded with periodic payments over time. Periodic payment annuities are commonly called flexible premium deferred annuities (FPDAs). The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals. Benefit payments are initiated after the contract becomes annuitized. The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals. Benefit payments are initiated after the contract becomes annuitized.

An IRA owner can start making withdrawals and NOT be subjected to a tax penalty beginning at what age?

59 1/2

Single Premium Annuity

An annuity for which the entire premium is paid in one sum at the beginning of the contract period. This can be deferred or immediate

Straight Life Annuity

An annuity income option that pays a guaranteed income for the annuitant's lifetime, after which time payments stop

Annuities vs Life Insurance

An annuity is a cash contract with an insurance company. Unlike life insurance products where policy issue and pricing are based largely on mortality risk, annuities are primarily investment products. anyone can set up an annuity and pay income for a stated period of time, only life insurance companies can guarantee income for the life of the annuitant. Annuities and life insurance look alike but are actually exact opposites. Whereas the principal function of a life insurance contract is to create an estate (an "estate" being a sum of money) by the periodic payment of money into the contract, an annuity's principal function is to liquidate an estate through the periodic payment of money from a contract. Life insurance is concerned with how soon one will die, while life annuities are concerned with how long one will live

P is a forty year old woman and would like to purchase an annuity that will provide a lifetime income stream beginning at age sixty. Which of the following did she NOT buy? A straight life annuity A variable annuity An immediate annuity A deferred annuity

An immediate annuity

Which type of contract liquidates an estate through recurrent payments? Universal life insurance Whole life insurance Annuity 401(k)

Annuity

Survivorship Factor

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, it is conceptually very similar to the mortality factor in a life insurance premium calculation. Thus, it provides insurers with the means to guarantee annuity payments for life, regardless of how long that life lasts.

T is the policy owner for a Life Insurance policy with an Irrevocable beneficiary designation. If T wishes to change the beneficiary

Beneficiary

A producer that only sells insurance to family members is said to be engaging in

Controlled business

D the agent met with a prospect and ended up selling an insurance policy. While filling out the insurance application, D makes a mistake. In this situation, D MUST

Correct the information and have the prospect initial the change

A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, cost of insurance, and the

Expense Charges

Exclusion Ratio

Fraction used to determine amount of annual annuity income exempt from federal income tax. Exclusion ratio is the total contribution or investment in the annuity divided by the expected ratio

The type of annuity that can be purchased with one monetary deposit is called a(n) Single Deposit annuity Single Premium annuity Fixed annuity Immediate annuity

Immediate annuity

W is a 39-year old female who just purchased an annuity to provide income for life starting at age 60. All of these would be acceptable annuity choices EXCEPT a(n) Flexible Premium Deferred annuity Variable annuity Immediate annuity Straight Life annuity

Immediate annuity Immediate annuities start providing income payments usually starting within 30 days from the purchase date. Deferred annuities start providing income payments after the first year.

K is looking to purchase Renewable Term insurance. Which of these types of Term insurance may be renewable?

Level

Which of these is an element of a Single Premium annuity? Deferred payment Lump-sum payment Fixed income Tax-deductible

Lump-sum payment

Consumer reports requested by an underwriter during the application process of a life insurance policy can be used to determine:

Probability of making timely premium payments

Cash Refund Option

Provides that, upon the death of an annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries

Which of these provisions require proof of insurability after a policy has lapsed?

Reinstatement

S recently received a $500,000 lump sum retirement buyout from her employer. She would like to buy an annuity that will immediately furnish her with a guaranteed income for life. What type of annuity is best suited for her situation?

Single Premium

Funding Methods

Single lump-sum payment or periodic payments over time

The annuity that represents the largest possible monthly payment to an individual annuitant is a(n) Cash Refund Installment Refund Straight Life annuity Life Annuity with Period Certain

Straight Life annuity

Purpose of Annuities

The main reason for purchasing an annuity is to provide future economic security. An annuity is a mathematical concept that is quite simple in its most basic application. Start with a lump sum of money, pay it out in equal installments over a period of time until the original fund is exhausted, and you have an annuity. An annuity is simply a vehicle for liquidating a sum of money. Of course, in practice the concept is more complex. An important factor not mentioned above is interest. The sum of money that has not yet been paid out is earning interest, and that interest is also passed on to the income recipient (the annuitant)

Annuitant

The person that buys an annuity and the annuity is payable or a person upon continuance of whose life further payment depends; may or may not be an annuity's policyowner

Non taxable annuities

The portion that is nontaxable is the anticipated return of the principal paid in. this is known as Cost Base

Taxable annuity

The portion that is taxable is the interest earned on the principal. This is known as Tax Base

403(b) plan

a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers

What is considered to be a characteristic of an immediate annuity? a. benefit payments start within one payment period of purchase b. benefit payments start within 5 years of initial purchase c. normally tied to a specific equity or stock index d. periodical contributions begin immediately

a. Benefit payments start within one payment period of purchase. (An immediate annuity is designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase)

T purchased a $100,000 single premium, Straight Life annuity 5 years ago. He has received monthly payments since the inception of the annuity. If T dies, the insurance company... a. does NOT have to make any further payments b. MUST make full payments to beneficiary c. MUST make half-payments to the beneficiary d. has the option to continue making payments based on what has already been paid out

a. does NOT have to make any further payments (straight life annuity does not need to continue payments)

K is an annuitant currently receiving payments. If she were to die before receiving payments equal to the correct value, a beneficiary will continue receiving payments until an amount equal to the contract value has been paid. This is called a(n)... a. installment refund annuity b. joint refund annuity c. straight refund annuity d. equal value annuity

a. installment refund annuity (this promises that if the annuitant dies before receiving payments equal to the correct value, the payments will be continued to the beneficiary until an amount equal to the contract value has been paid)

1035 Contract Exchange

applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes

Annuity Units

are the converted accumulation units once variable annuity benefits are to be paid out to the annuitant. At the time of the initial payout the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant

How does an indexed annuity differ from a fixed annuity? a. Fixed annuity owners receive credited interest tied to the fluctuations of the linked index b. Indexed annuity owners receive credited interest tied to the fluctuations of the linked index c. Fixed annuity owners have a separate investment account d. Indexed annuity owners receive annual dividends

b. Indexed annuity owners receive credited interest tied to the fluctuations of the linked index

P, age 50, purchased an annuity that P will fund with $500/ month for 15 years. The annuity will then pay P retirement payments after the 15 years. Which type of annuity did P purchase? a. immediate b. retroactive c. deferred d. universal

c. deferred

A 45 year-old woman won $100,000 in a scratch-off ticket. She purchased an annuity that will pay her $1,500 per month beginning at age 60. Which of these annuities did this woman purchase? a. immediate variable annuity b. immediate annuity c. deferred fixed annuity d. variable annuity

c. deferred fixed annuity (the annuity will pay a fixed amount beginning at a future date)

T has an annuity that guarantees an income payment for the rest of his life. The contract also guarantees that if T dies before receiving payments for 20 years, the remaining payments will be paid to his son for the balance of the 20 years. What type of annuity is this? a. fixed certain b. joint and full survivor c. life annuity with period certain d. installment refund

c. life annuity with period certain

What type of annuity has a cash value that is based upon the performance of it's underlying investment funds? a. deferred b. flexible c. variable d. fixed

c. variable

Which of the following are Equity Indexed annuities typically invested in? a. corporate bond b. money market accounts c. municipal bonds d. S&P 500

d. S&P 500 (an indexed annuity is a type of tax-deferred annuity whose credited interest is linked to an equity index-typically the S&P 500)

K has inherited a large sum of money. K purchases an annuity with this sum on July 1, and starts receiving payments August 1. These payments will continue for as long as she and her spouse lives. Which type of annuity did K purchase? a. single premium deferred annuity with period certain b. flexible premium with survivor annuity c. flexible premium with period certain d. single premium immediate joint with survivor annuity

d. single premium immediate joint with survivor annuity (this annuity was purchased with one payment and begins immediately. it also covers K and her spouse for the rest of their lives)

Periodic Payments (Flexible Premium)

describes an annuity owner making multiple premium payments to accumulate principle. Typically, after the initial premium, these payments are flexible with frequency and amount

Surrender charges are used to

discourage withdrawals and exchanges in an annuity

When Income payments begin

immediate vs. deferred

Period Certain

is an annuity income option that guarantees a definite minimum period of payments. IE: 10 years.

The accumulation period

is that time during which funds are being paid into the annuity. The payout or annuity period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments on a regular basis.

Accumulation Units

make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is credit to the individual's account and varies depending on the value of the underlying stock investment

Fixed Annuities

provide a guaranteed rate of return. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. With fixed annuities, the investment risk is on the insurer

Immediate Annuities

provide for payment of annuity benefit at one payment interval from date of purchase. Can only be purchased with a single payment. Immediate annuities typically begin paying income within one month of purchase

Deferred Annuities

provides for postponement of the commencement of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased either on single-premium or flexible premium basis. Deferred annuities typically do not begin making income payments for at least one year after the date of purchase

An agent selling variable annuities must also have a

securities license in addition to their Life Insurance License

Suitability of Annuities for Senior Customers

senior residents age 65 or older. when making recommendations to a senior consumer regarding the purchase or exchange of an annuity, an agent must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. this recommendation should be based on the facts disclosed by the senior consumer. it should include an evaluation of his investments and other insurance products along with his financial situation and needs

Variable Annuities

shift the investment risk from the insurer to the contract owner. are similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks. Variable annuities invest deferred annuity payments in an insurer's separate accounts, as opposed to an insurer's general accounts (which allow the insurer to guarantee interest in a fixed annuity). Because variable annuities are based on non-guaranteed equity investments (such as common stock), a sales representative who wants to sell such contracts must be registered with the Financial Industry Regulatory Authority (FINRA) as well as hold a state insurance license

With any annuity, there are two distinct time periods involved:

the accumulation period and the payout or annuity period

An individual who purchases a Life annuity is given protection against -inflation -the risk of dying prematurely -the risk of living longer than expected -the risk of not having enough retirement income

the risk of living longer than expected

All of these are considered to be a benefit under Social Security, EXCEPT for:

unemployment

Accumulation Period

when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased but payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units

Function of Annuities

while life insurance protects against the death of premature death, annuities protect against the risk of living too long

Life with Period Certain (life income)

with term-certain option is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. the life with period certain option provides income to the annuitant for life but guarantees a minimum period of payment. this, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period

Structure and Design of Annuities

► Funding method- Single lump-sum payment or periodic payments over time ► Date annuity benefit payments begins- Immediately or deferred until a future date ► Investment configuration- A fixed (guaranteed) rate of return or a variable (non-guaranteed) rate of return ► Payout period- A specified number of years, or for life, or a combination of both