Annuities

Which annuity product offers interest rates linked to the positive performance of the S&P 500?

An equity-indexed annuity offers interest rates that are linked to the positive performance of a stock market-related (equity) index, typically Standard & Poor's 500 Index.

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 3%, the effect on this month's income benefit check will be such that it:

If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month.

Under an annuity with a Joint Life Payment Option, what will the survivor receive upon the death of the first annuitant?

The Joint Life Payment Option ceases all distributions at the first death of any of the annuitants. This would not be the case if a Life Income Joint and Survivor Option were chosen.

Deferred annuities

normally purchased to defer taxes on any contract earnings. They are ideal for accumulating a retirement fund. During the accumulation period, only the contract owner can sign the request for surrender of a deferred annuity. During the early part of the accumulation period, the insurer normally assesses a surrender charge.

accumulation period

the contract owner and the annuitant are the same person and the designated beneficiary is the annuitant's spouse, the IRS code allows the spouse to assume ownership of the annuity upon the death of the annuitant. All rights of ownership are assumed to include tax deferment.

The __________ is the person on whose life the annuity contract's income benefit is based.

Just like a life insurance policy is based on the life of the insured, an annuity is based on the life of the annuitant.

What is an annuitant, in regard to an annuity policy?

An annuitant is the individual whose life the contract is based upon.

G is concerned about the future and living a comfortable retirement. Which of the products listed below is ideally suited to help G prepare for his retirement goal?

An annuity is designed to provide a steady stream of income to an individual, typically upon retirement. It protects against outliving one's retirement income by providing an income for life.

Which product should you recommend for a client who wishes to keep pace with inflation while protecting capital?

An indexed (or equity-indexed) annuity can be thought of as a combination of fixed and variable annuities. The guaranteed minimum interest rate protects against the loss of capital, and the potential gain allows for the offset of inflation. The difference between a variable annuity and an equity-indexed annuity is the guaranteed minimum rate--a variable annuity does not offer this.

A characteristic of a fixed annuity is that the:

Monthly income benefits are fixed and level. A fixed annuity provides for a fixed level benefit payment to the annuitant when the contract is annuitized.

_____________ are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract.

Systematic withdrawals are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract.

Ralph has selected an annuity benefit or payment option where, upon annuitization, the annuity will pay a benefit for as long as either Ralph or a co-annuitant are alive. Ralph has elected which of the following benefit or payment options?

Under Life Income Joint and Survivor, payments would continue until the death of the second person to die.

non-qualified annuity

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.

Mr. & Mrs. Smith received monthly benefits from their annuity, and upon Mr. Smith's death, Mrs. Smith receives a reduced amount. What annuity payment option did they choose?

The Payment Option that would continue to pay a reduced amount to Mrs. Smith is Joint and Survivor.

Owner

The individual who controls the contract and is responsible for making payments into the contract, as well as having all of the contractual rights in the policy, is the owner.

Deferred Annuity

A deferred annuity will pay periodic benefits starting at some specified time in the future. Annuitization can occur at any time, but benefits from a deferred annuity are not payable for at least 1 year from the issue date.

Indexed Annuity

An annuity product with interest rates that are linked to the positive performance of a related index, such as the Standard & Poor's 500 Index. The contract offers safety of principal with guaranteed minimum returns. The safety of principal and previously locked-in interest is backed by the insurer's general account. The minimum guarantee can be as low as 0%, reflecting that the policy will not be adversely affected by negative stock market index performance. An indexed annuity is not a securities product and does not require an additional securities license to sell it.

Periodic Premium

Continuous premiums are paid into the contract. While annuities can certainly offer fixed level premiums, the most common example of a periodic premium is a flexible premium.

Flexible Premium

Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum dollar amount they will accept.

prospectus

detailed information on the separate account available in the annuity. This information provides the contract owner the opportunity to make a better decision based on the historical performance of the separate account. The prospectus must be provided at or before the time of the sale.

qualified annuity

funded with pre-tax dollars. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes.

Variable Annuity

regulated by the SEC and State insurance departments. Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation. The contract owner bears the investment risk and receives the return earned on invested assets, less any charges assessed by the insurer and investment managers. There is no guaranteed return. The premium paid during the accumulation period is invested in a separate account; the underlying investment in the separate account is similar to a mutual fund.

Fixed (Guaranteed) Annuity

the insurer guarantees a minimum fixed interest rate. At annuitization, benefits are paid as a minimum level fixed amount. The fixed amount purchasing power decreases as the cost of living increases. The actual rate of interest created at any one time is based on the earnings rate of the insurer's general account and the insurer bears any investment risk. A life-only insurance license is required in order to sell fixed annuities in most states. Some fixed annuities offer a base interest rate plus a bonus interest rate which becomes the current rate credited into the annuity. The current rate is set by the insurance company at the time the contract is issued and is guaranteed for a specific time period.

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

A prospectus is a disclosure document that provides the prospective buyer with information about all fees, charges, expenses, and risks. It must be provided by the producer prior to sale of the variable annuity.

When comparing life insurance to an annuity, an annuity:

Annuities protect against an annuitant living too long by providing a stream of income the annuitant cannot outlive. Annuities do not provide tax-free payments or guarantee a death benefit. Annuities liquidate an estate and life insurance creates an estate.

All of the following are Payment Options available upon annuitization, except:

Annuity Payment Options are nearly identical to life insurance Settlement Options, except for Interest Only.

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.

Tax-Deferred Growth

Since an annuity is an insurance contract, the accumulation value grows tax-deferred. Deferred annuities allow for the naming of a beneficiary to receive any policy values if the annuitant dies prior to annuitizing. Withdrawals prior to age 59 ½ are subject to income tax and generally a 10% tax penalty as well. Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option.

An insurer considers all of the following when determining the fixed annuity payments, except:

Stock market value. The accumulation amount, interest rate, expenses, gender, and age of the annuitant are the important factors when computing any of the available annuitization options benefit payments.

The Annuity Period (Pay-Out)

The annuity 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, it is an irrevocable election. The cash values go towards paying for the income benefit.

Primarily, the _________ is the person who will receive any residual contract benefits after the annuitant has died.

The beneficiary of an annuity receives any residual contract benefits upon the death of the annuitant.

The period of time from the first deposit into an annuity to the selection of a settlement option is considered the ___________ period.

The period of time from the first deposit to the selection of a settlement option is considered the accumulation period, during which taxes are deferred. Accumulation periods are found within deferred annuities.

Accumulation (Pay-In) Period

The period of time from the first deposit to the start of the annuity payout is considered the accumulation period, during which taxes are deferred. Accumulation periods are only found within deferred annuities, not immediate annuities. The accumulation period ends when the owner elects to annuitize, or begin to receive income payments.

A Single Premium Immediate Annuity (SPIA) begins paying out its benefit:

Under an SPIA, the idea is to have income begin immediately. There is essentially no accumulation period, and benefits begin within 1 year of the issue date.

Which of the following annuities would potentially be the most negatively impacted by the overall stock market falling in value?

In order to achieve the goal of wealth accumulation while offsetting the effects of inflation, most if not all of a Variable Annuity separate account investments are based off the stock market. None of the other annuities would lose value if the stock market 'crashed'.

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.

Life Income Period Certain

The annuity benefit 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 with Refund (Installment or Cash Refund)

The annuity benefit is payable in one payment to 2 or more annuitants until the last surviving annuitant dies. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or a reduced benefit, such as 2/3 or 1/2 of the original amount, 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.

At the time of her retirement at age 62, Jolene chose a Life Income Payment Option to have her annuity distributed. Five years later, when her health declines, she needs the distribution to be increased. How is this accomplished?

The selection of a lifetime annuity payment option is critical because once chosen it typically may not be changed. An alternative to annuitization is a 'systematic withdrawal plan' that allows the amount of withdrawal to be changed in the future. It is not a lifetime income guarantee, and the payments will end when the last dollar of cash value is taken.

All of the following are characteristics of a variable annuity, except:

The separate account provides for a guaranteed minimum return. A variable annuity does not provide for any minimum guarantees.

Annuity contracts

sold through life insurance companies and are designed to pay a stream of income, typically as a retirement benefit, until the annuitant dies. There are no underwriting requirements to purchase an annuity. Annuities can be purchased to provide immediate income or income to be paid at some point in the future.

Life Insurance

Provides a benefit upon death of the insured. Creates an estate. Pays a death benefit.. Protects against premature death. Owner, insured, beneficiary. Policy

All of the following terms are the same regardless if the policy is life insurance or an annuity, except:

The annuitant in an annuity is the equivalent of the insured in a life insurance policy.

Single Premium Immediate Annuity (SPIA)

A single premium (lump sum) is put into an annuity from which the annuitant may immediately begin drawing benefits (within a year of the issue date). A retirement plan rollover, savings account balances or CDs, mutual funds, deferred annuity values, or the death proceeds of a life insurance policy might be used to purchase a SPIA.

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

A flexible premium annuity is not funded with a lump sum payment.

Annuitant

The individual whose life the contract is based upon. Upon a lifetime annuitization, payments will be made to the annuitant according to the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments.`

Single Premium Deferred Annuity (SPDA)

A single premium (lump sum) is put into an annuity from which the annuitant will draw the benefits at some specified time in the future, more than 1 year from the issue date.

All of the following are true regarding annuities, except:

Annuities are used primarily to provide a steady stream of income to an individual, typically upon retirement. They are designed to protect against outliving one's retirement income by providing lifetime income. And they can liquidate an estate over the lifetime of an annuitant. Although both annuities and life insurance are mortality-based products, they have opposite purposes: annuities are designed to distribute an estate, while life insurance is designed to create an estate.

Annuity

Provides steady income until death of the annuitant. Liquidates an estate. Pays a living benefit. Protects against living too long. Owner, annuitant, beneficiary. Contract

Life Income (Pure or Straight Life)

The annuity benefit 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.

The insurer generally assumes the investment risk in all of the following annuities, except:

The insurer's general account assets guarantee fixed-dollar annuity contracts, and the insurer bears any investment risk.

An annuity that is purchased with contributions made as often and in whatever amounts the owner wishes, subject only to the insurer's minimums and maximums, is called:

This defines a flexible premium annuity.

Joint Life

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

Annuitization

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

Annuity income benefit payments are based on all of the following, except:

Age, gender, settlement option selected, and dollar amount used to purchase the income payment benefit are all used in determining the amount of the income benefit payment.

All of the following statements are correct regarding an annuity, EXCEPT:

An immediate annuity must start providing income within one year of the first premium payment.

Deferred annuities are normally purchased to defer ___________.

Deferred annuities are normally purchased to defer taxes on any policy earnings. They are ideal for accumulating a retirement fund.

All of the following are traits of a Fixed Annuity, except:

The actual rate of interest credited will be based on the state-published interest rate index

The Payment Option that pays an income to two annuitants while both are living, and stops upon the death of the first annuitant, is which of the following?

The Payment Option described is Joint Life, which pays a benefit to two annuitants while both are living, but stops upon the death of the first annuitant rather than continuing a payment to the surviving annuitant.

Instead of electing to annuitize the annuity, what is another common option chosen?

The annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a stream of income.

When does the annuitization period begin?

The annuitization period begins once the policyowner elects to convert the deferred annuity into an income benefit payment.

Immediate Annuity

The immediate annuity does not have an accumulation period and is used to generate immediate income within a year of the issue date.

The annuity benefit or payment option requiring the greatest amount of capital per $1,000 of benefit is:

The income benefit requiring the greatest amount of capital per $1,000 of benefit is Life Income Joint and Survivor 100%. The higher the percentage of payment for the survivor (1/2, 2/3), the greater amount of capital that is needed.

Which of the following statements is TRUE regarding Fixed Annuities?

Upon annuitization, the annuity payments are level Premiums are allocated to the insurer's general account. The insurer has the investment risk, and fixed annuities pay out a fixed level income benefit payment.

The pay-out period of an annuity is also referred to as the ______ period.

`The Annuity Period (Pay-Out/Liquidation) or annuitization period begins once the contract owner elects to convert the deferred annuity into an income benefit payment. The settlement option selected can provide a temporary or lifetime payment.

Annuities

the opposite of a life insurance policy. Annuities are funded and sold through life insurance companies and require at least a life insurance license to sell. There is no evidence of insurability required to purchase an annuity.

Upon annuitizing an annuity, all of the following factors help in determining the amount of the income benefit payment, except:

Upon a lifetime annuitization, payments will be made to the annuitant based upon the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments.

Single Premium

A lump sum payment is made into an annuity.

Which of these annuity distribution options promises the largest possible payment to a single annuitant?

A life income only option provides the largest possible payment since the insurer has no risk of paying income to a beneficiary. There is a greater possibility that the insurer will pay income beyond the life of the annuitant if any of the other options are selected.

Flexible Premium Deferred Annuity (FPDA)

Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum amount for contributions. Benefits begin more than 1 year from the issue date.

Annuities may be funded with either a lump sum or a ______ premium basis.

Contributions made during the accumulation period are made with a lump sum or on either a periodic or a flexible basis depending on contract design.

Jasmine has deposited $100,000 into a single premium immediate annuity. If Jasmine were to die before receiving $100,000 in payments, the balance of the $100,000 would be paid to her sister. Jasmine has selected the:

Life Income with Refund Option. If Jasmine dies prior to receiving an amount equal to the total of all payments made into the annuity and the balance of that amount is refunded to a beneficiary either in a lump sum or in installments, she has chosen Life Income with Refund.

The annuity pay-in period is also referred to as the ________ period.

The Pay-In Period is considered the accumulation period, during which taxes are deferred. Accumulation periods are found within deferred annuities.

Beneficiary

The individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization or if the settlement option selected offers any residual benefit after the annuitant's death.

Harry, the annuitant of a non-qualified tax deferred annuity with $40,000 cash value chooses the Life Income with Refund Payment Option when he annuitizes the policy. After receiving $1,000 each month for 80 months, Harry suddenly dies. How much will his beneficiary, his wife Lucille,

A Refund Option returns the remaining unpaid principal, since Harry lived well beyond the refund (principal amount) there would be no residual values remaining on the payment option selected.

A contract that is designed to accumulate value over time with the intent to provide a stream of income over the lifetime of an individual is called _________.

Annuities are designed to provide a stream of income for the lifetime of an individual. Life insurance policies such as whole life, variable life, and term insurance are designed to provide death benefits.

All of the following factors are used to determine the monthly benefit payment of an annuity, except:

The monthly annuity payment is based on several factors, including the accumulated value, interest rate, age and gender of annuitant and the payment option selected. Since there are no insurability requirements, the annuitant's medical history is not a factor.

All of the following are TRUE regarding a Variable Annuity, except:

The number of annuity units received upon annuitization, and the unit value, remain level. With Variable Annuities, upon annuitization, the number of units remains level, but the unit values fluctuate based upon the separate account(s) selected.