Chapter 18/2: Annuities Review
A fixed annuity may offer any of the following income options, EXCEPT:
A joint annuity is for two people, not three. A joint income is primarily a plan for a couple. Life income with no refund is standard and most annuities are factored as a function of a life annuity. A year certain annuity is an annuity that will pay for the life of the annuitant, but if the annuitant dies before the period certain expires, the beneficiary will receive payments for the balance of that certain period. For example, an annuitant dies after 5 years' payments on a 10 year certain plan. The beneficiary will receive an additional 5 years' payment. An installment refund contract will guarantee that all principle deposited will be paid out. The correct answer is: A joint income for three individuals
Mrs. Kupchock, who is 78 years old, has received the benefits of her husband's life insurance policy. Although she is quite frail, her agent has recommended that she invest the proceeds in an immediate annuity. Her grandson does not think it is her best option. Why?
An immediate annuity would be suitable if she was healthy and stood a good chance of living for many years. The fact that she is frail, makes it her least suitable choice. Annuities can be a good choice if the chances of outliving the actuarial predictions are good. Because they guarantee income for life, annuities primary concern is longevity. The correct answer is: Both of the above
As with all investments, there are risks and rewards, advantages and disadvantages. All of the following are disadvantages of immediate annuities, EXCEPT:
If there is a downturn in the market, the fact that the benefit payments do not go down is an advantage, not a disadvantage. All of the other items are considered disadvantages of immediate annuities. The correct answer is: In the event of a downturn in the market, the benefit payments remain level.
A qualified retirement plan differs from a non-qualified retirement plan in all of the following ways, EXCEPT:
One of the primary features of a non-qualified plan is that contributions are not deductible on a current basis. There is a specific set of rules concerning eligibility, participation, contributions and discrimination that must be followed on a qualified plan for it to maintain its status. There is considerable latitude with non-qualified plans that does not exist with qualified plans. The correct answer is: Contributions to a non-qualified plan are deductible on a current basis.
Margaret began receiving monthly benefits from her annuity in November of 2011. In May of 2012, her aunt passed away and she received an inheritance. She would like to provide a guaranteed income stream for twenty years. What are her options?
She cannot add to her current annuity. She can, however, purchase another annuity. A life annuity certain provides income for a guaranteed period of time, without regard to whether or not the annuitant is alive. A refund life annuity pays the annuitant for life. If the annuitant dies soon after the annuity period begins, the undistributed principal is refunded to the beneficiaries. A life annuity,no refund pays benefits for the life of the annuitant with no obligation following the death of the annuitant. This option pays the highest monthly income because it is based only on life expectancy. If the annuitant dies early, much of the value is surrendered to the insurance company. The correct answer is: She can purchase a life annuity certain.
When considering a variable annuity, the prospect should review all of the following, EXCEPT:
The mortality, expense and investment fees will have a bearing on the account results. Returns are net of expenses. A higher expense ratio will cause lower net return or create a situation where the money manager must accept a higher risk. Since the accounts are not guaranteed, there is assurance what the future return might be on any given sub-account. The correct answer is: The expected return for each separate account
Mary has reached age 65 and she wants to begin a monthly income on her fixed annuity. She has funded her plan with after-tax contributions, and she wants to know what her tax liability will be going forward. Her agent explains that her tax will be calculated using:
When a person annuitizes a non-qualified annuity, part of the money returned is considered principal and part is considered earnings. The exclusion ratio is used to determine which part of the payment will be excluded from income tax liability. Once that number is calculated, it remains constant. The correct answer is: The exclusion ratio
A variable annuity has each of the following features, EXCEPT:
When a variable annuity is in the accumulation phase, the investment units are referred to as accumulation units. When the owner wishes to begin taking income they become annuity units. Neither has a guaranteed value. While the newer versions of variable annuities have riders that will provide a guaranteed income, that is not a standard feature. Generally, it is better to assume that variable annuities do not have guarantees. The correct answer is: A minimum guaranteed income benefit
Earl has deposited a large lump sum with an insurance company and he will begin receiving monthly payments next month. Earl has purchased:
A single premium immediate annuity allows the annuitant to receive an income immediately. Flexible premium and deferred annuities will allow annuitization some time in the future. There may be an age when annuitization is required. The income options with a single premium immediate annuity are the same as any other type of income annuity. The correct answer is: A single premium immediate annuity
For those considering an immediate annuity, which of the following is not an advantage of this type of investment?
Annuities have no loan privileges. Once the money is put into an annuity, the annuitant usually has no access to it. Because of the exclusion ratio, immediate annuities have very favorable tax treatment. Annuities can be used to shelter assets. Immediate annuities allow the annuitant to remove the funds from his/her estate (for Medicaid purposes). In most states a fixed immediate annuity cash value cannot be touched by creditors. The correct answer is: Loan privileges
In order to sell variable annuities, the sales person must be qualified. What is required to qualify to sell variable annuities?
FINRA (formerly NASD) regulates variable annuity products in addition to the state. It is usual to require a minimum of a Series 6 license, a state securities registration and an insurance license to sell variable annuities. Penalties are severe for improper registration. The correct answer is: Registration with FINRA and an insurance license from the state
Nick has paid a large lump sum of cash to the insurance company for an immediate fixed annuity. That money will be invested by the insurance company in what fund?
Fixed annuity values are invested in the company's general fund. Since the annuity is an obligation of the general assets of the company, the general fund is where it is invested. The correct answer is: The company's general fund
The individual on whose life the annuity has been issued is the annuitant. Which of the following is a right and/or responsibility of the annuitant?
In most cases the annuitant is also the contract owner. The contract owner pays premiums and chooses the beneficiary. In the event that the annuitant is not the contract owner, he/she would not pay premiums nor would he/she select the beneficiary. The correct answer is: The annuitant pays the premiums, and chooses the beneficiary.
There are two basic types of annuities - immediate and deferred. Which of the following is not a true statement about deferred annuities?
It is an immediate annuity where benefit payments must begin within 12 months of purchase. With a deferred annuity the benefit payments are usually postponed to a later date, i.e., retirement. The correct answer is: A deferred annuity payout period must begin within 12 months of purchase.
Variable annuities have all of the following features, EXCEPT:
Like a fixed annuity, a variable annuity will permit tax-deferred accumulation of assets. There is generally a wide choice of sub-accounts to meet the owner's risk profile. Withdrawing money prior to age 59 and one half or before the surrender period has expired may generate both tax consequences and surrender fees. The newer versions of variable annuities do allow for riders to be attached that provide a variety of benefits, but they add extra fees to the plan. The correct answer is: Money can be withdrawn at any time without penalty.
To have an approved presentation of a variable annuity the prospect must receive which of the following documents?
Since a variable is considered a securities product, regulations require that the prospect receive a full prospectus at the time of the sale. The prospectus will have information about expenses, mortality charges, investment sub-account expenses, surrender charges and other pertinent information. An approved illustration may contain projected results, but it must also have an illustration if investment accounts perform poorly over time. The correct answer is: A prospectus and an approved illustration
For a single premium deferred annuity, the ___________________ is the time between the purchase date and the date when benefits begin.
The annuity phase is the time when the cash value of the annuity is converted to income payments. The accumulation phase is the time when the contract owner pays premiums, the time between the purchase date and the date when benefits begin. Premium determination deals with factors on how much premium is to be charged. The term benefit phase, is not used with annuities. The correct answer is: Accumulation phase
Insurance companies use 5 major factors to determine annuity premiums. All of the following are common factors used to determine premiums for annuities, EXCEPT:
The marital status of the annuitant is not a factor in premium determination. The five factors used to determine annuity premiums are: the annuitant's age and sex, the assumed interest rate, the periodic income amount and payment guarantees, and also, company expenses (or load). The correct answer is: The marital status of the annuitant
Annuities offer various premium payment options. Which of the following is not an annuity premium payment option?
There is no such thing as an indexed premium. The payment options for annuities are: Flexible premium -multiple premiums are paid into the annuity; both the amount and frequency of the payments are flexible, but normally must fall within certain guidelines set up by the insurer. Level premium -multiple premiums are paid into the annuity prior to the start of benefits and the premium is level (i.e., the same amount) throughout the entire accumulation phase. Single premium -a single (lump sum) payment can be used to purchase an annuity. The correct answer is: Indexed premium
All periodic premium annuities are:
All periodic premium annuities are deferred annuities. Different deferral periods can be involved. Benefits may begin after the last premium payment or they can be deferred to a later date. Level premium is an arrangement in which premiums are paid in installments - often annually. Premiums can be paid monthly, quarterly, or semiannually. Flexible premium means the purchaser has the option to vary the amount of each premium payment - within preset guidelines. A fixed annuity is a type of annuity which provides a fixed, guaranteed accumulation or payout. The correct answer is: Deferred
The Oglobo Company is starting a marketing campaign to provide prospective applicants with the information needed to make a decision on whether or not to purchase an annuity. They must determine their target audiences. Which of the following would be most likely to purchase an immediate annuity?
Immediate annuities are purchased with a single premium and they guarantee a level payment for the life of the annuitant. SPIAs (single premium immediate annuities) are often purchased when an individual comes into some money i.e., a settlement, inheritance, or life insurance proceeds. The annuity can be either single premium immediate, or single premium deferred. If the annuitant chooses the immediate option, the benefit payments begin within 12 months of purchase. If he/she selects the single premium deferred, it is purchased with a single premium, but the benefits are deferred to a later time. The correct answer is: Man who received a settlement for injuries occurring from an automobile accident
The owner of an annuity can stop making premium payments during the accumulation period without losing the value that has accumulated in the annuity. The right to the cash value that has accumulated in the annuity is called the:
Nonforfeiture options are available for deferred annuities. If the contract owner chooses to surrender the annuity before the payout phase begins or to stop making premium payments, two nonforfeiture options are available: 1. Surrender - the entire amount of premiums paid into the annuity, minus the surrender charges and prior withdrawals, will be refunded in a lump-sum; or 2. Annuitize - the contract based on the amount of cash accumulated at that point. The correct answer is: Nonforfeiture option
The payout option for an annuity is selected by the owner of the annuity. Which of the following is true?
Once selected, the payout option for an annuity cannot be changed after payments begin. The correct answer is: Once the payout option is selected, it cannot be changed after payments begin.
Frank has set up a monthly payment from his fixed annuity. He knows that he will receive $2,000 per month until his death. Frank's family has a history of living well into their 90s. What is Frank's biggest risk if he lives that long?
Since Frank will most likely live longer than average, he will collect more money than average. Inflation will most likely erode Frank's purchasing power over time, making it more difficult for him to meet monthly expenses. The bright side is that Frank will always be guaranteed his monthly check and there are guaranty associations in every state to assure he will receive his benefit. It is rare that an insurance company will allow a change in income options once one is elected. The correct answer is: Inflation
Annuities have a variety of payout options. These options provide the annuitant with choices on how the annuity settlement will occur. All of the following are annuity payout options, EXCEPT:
The flexible payment is not an annuity payout option. The most common options are: 1. Cash (lump sum) where the annuitant receives the value of the annuity in one payment. Only the interest earned on the principal is taxable upon receipt. 2. Annuity certain is income for a fixed time period as opposed to one's entire life. 3. Refund life annuity insures that the full value of the annuity will be paid to someone. The annuitant will receive income for life and then the beneficiary will receive the balance of premiums, plus interest (minus benefits already paid). 4. Life annuity is a payout option that guarantees income that the annuitant cannot outlive. The correct answer is: Flexible payment