Chapter 2: Annuities
Life Annuity
pays a specific amount for the remainder of the annuitants life
If a beneficiary is not named where will the death benefit go?
it will be paid to the annuitant's estate
Annuitant
person who receives benefits or payments from an annuity, whose life expectancy is taken into consideration and for whom the annuity is written; must be a natural person
Immediate Annuity (Single Premium Immediate Annuity)
purchased with a single lump-sum payment and provides income payments that start within 1 year from the fate of purchase
Single Premium (annuity payment method)
one-time lump sum payment
Period Payments (annuity payment method)
paid installments over time; can either be *level premium* (annuitant pays fixed installments) or *flexible premium* amount and frequency of installments vary
What is the accumulation period of an annuity?
the period of time which the annuitant makes payments (premiums) into an annuity
Guaranteed Minimum Interest Rate of Interest
3% (future IR based on the performance of the company's general account but may not drop below 3%)
Which of the following types of annuities generally provide the highest monthly income? A) Joint and survivor B) installment refund C) like with a 10-year period certain D) Straight life
D) Straight life
Which of the following is TRUE regarding the annuity period? A) During this period of time the annuity payments grow interest tax deferred B) it is also referred to as the accumulation period C) it is the period of time during which the annuitant makes premium payments into the annuity D) it may last for the lifetime of the annuitant
D) it may last for the lifetime of the annuitant
The annuity owner dies during the accumulation period without naming a beneficiary. Annuity's cash value exceeds premiums paid. Which of the following is TRUE? A) the premium value will be paid to annuitants estate B) all benefits will be forfeited C) the cash value will be paid to the state government D) the cash value will be paid to the annuitant's estate
D) the cash value will be paid to the annuitant's estate (because the cash value is higher than the premiums paid)
Education Funds
annuities can be used to accumulated funds for college education and can provide savings on a tax-deferred basis for educational expenses
Pure life (life only, straight life)
payments cease at annuitants's death providing the *highest monthly benefits* for an individual annuitant but does not guarantee that the principal amount will be paid out
If annuitant dies during the accumulation period, what happens to the account?
beneficiary receives amount paid into the plan or the cash value - whatever is greater
What are accumulation units?
they represent ownership interest in the separate account. Instead of buying "shares" the annuity holder purchases units
Before he died, an annuitant had received $12,500 in monthly benefits from his $25,000 straight life annuity. He was also the insured under a $50,000 paid-up whole life policy that named his wife as primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits? A) $50,000 B) $62,500 C) $75,000 D) nothing
A) $50,000 (the policy would pay the face amount but bc of the settlement option selected on the annuity, payments would cease upon annuitant's death. Straight life annuity payments stop at death of annuitant regardless of principal left in the account)
Annuity
a contract that provides income for a specified period of years or for life; protects you from outliving your $; vehicle for accumulation of $ and liquidation of an estate
What is the annuity income amount based on?
- the amount of premium paid or the cash value accumulated - the frequency of the payment - the interest rate - the annuitants age and gender
Who would have a smaller income installment, a 65 year old male or a 65 year old female?
65 year old female because she has a longer life expectancy (women live longer than men and the longer the life expectancy the smaller the income installments)
When a fixed annuity owner pays a monthly annuity premium to the insurance company, where is the money placed? A) each contract's separate account B) the annuity owner's account C) the insurance company's general account D) forwarded to an investor
C) the insurance company's general account
Joint Life Annuity
payout agreement where 2 or more annuitants receive payments until the first death among annuitants then payments stop
How does inflation affect the purchasing power of a fixed annuity?
inflation can erode the purchasing power of income payments
General Account
where the life insurance company deposits fixed annuity payments (premiums); guaranteed specified interest rate
Retirement income
annuities are often used to fund qualified retirement plans: can be individual (such as individual accounts- IRA's) and group (tax sheltered annuities- TSA's)
In an annuity, the accumulated money is converted into a stream of income during which time period? A) conversion period B) annuitization period C) payment period D) amortization period
B
Joint & Survivor Annuity
modification of life income option that guarantees an income for two recipients that neither can outlive; most contracts provide that the surviving recipients will receive reduced payments after the 1st recipient dies - most commonly written as "joint & 1/2 survivor" or "joint & 2/3 survivor" in which the beneficiary receives 1/2 or 2/3 of what was received when both beneficiaries were alive
What is the *purpose* of Surrender Charges?
to help compensate the company for loss of the investment value due to early surrender of a deferred annuity
Beneficiary
the person who receives an annuity assets (either the amount paid into the annuity or the cash value, whichever is higher) if the annuitant dies during the accumulation period or to whom the balance of the annuity is paid out
Fixed annuities provide all of the following EXCEPT: A) hedge against inflation B) equal monthly payments for life C) minimum guaranteed rate of interest D) future income payments
A) hedge against inflation
Which of the following is TRUE regarding the accumulation period of annuity? A) it is limited to 10 years B) it is a period during which the payments into the annuity grow tax deferred C) it is also referred to as the annuity period D) it is a period of time during which the beneficiary receives income
B) it is a period during which the payments into the annuity grow tax deferred
How long will a life annuity with a 15 year certain pay?
will pay for the life of the annuitant, but if annuitant dies shortly after payment begin the payment to the beneficiary will last only 15 years
Owner
purchaser of the annuity but not necessarily the receiver of benefits; has all the rights i.e. to name the beneficiary or surrender the annuity; owner may be a corporation, trust, or other legal entity
When an annuity is written, whose life expectancy is taken into account? A) it is not a factor B) owner C) annuitant D) beneficiary
C
Fixed Annuity
guaranteed minimum rate of interest; income payments that do not vary; insurance company guarantees a specified amount for each payment determined by the settlement option chosen by the annuitant; insurer bears the investment risk
Who receives benefits or payments from an annuity?
annuitant
An annuity can have 2 distinct periods. What are they called?
Accumulation period and annuity period
Mortality Tables
annuities use this to calculate the life expectancy of a specific group of individuals (males, females, smokers, nonsmokers)
3 Characteristics of Variable Annuities
1. Underlying Investments: payments that the annuitant makes into the variable annuity invested in the insurer's separate account 2. Interest Rate: issuing insurance company does not guarantee a minimum interest rate 3. a variable annuity is considered a security and is regulated by the SEC and agent selling it must obtain securities license, life insurance license, and be registered with FINRA
All of the following statements about Equity Index Annuities are correct EXCEPT: A) they invest on a more aggressive basis aiming for higher returns B) the annuitant receives a fixed amount of return C) they have a guaranteed minimum interest rate D) the interest rate is tied to an index such as the Standard & Poor's 500
B) the annuitant receives a fixed amount of return
Level Benefit Payment Option
with fixed annuities, the annuitant knows the exact amount of each payment received during the annuity period
Variable Annuity
acts as a hedge against inflation; is "variable" because annuitant may receive different rates of return on funds paid into the annuity
Equity Indexed Annuities
fixed annuities that invest on a relatively aggressive basis to aim for higher returns; guaranteed minimum interest rate; current interest rate credited to index like the Standard & Poor (S&P) 500
Life with a Guaranteed Minimum
if the annuitant dies before the principal amount is paid out, the remainder of the principal amount is refunded to the beneficiary guaranteeing that the principal amount will be paid out
Deferred Annuity
income payments begin AFTER one year from the date of purchase; can be funded by a single lump-sum payments or through period payments that vary from year to year
Accumulation Period
period of time the owner makes payments into an annuity; *payments earn interest on a tax deferred basis*
What is the principal use of an annuity?
retirement; but also used for accumulation of $ or liquidation of an estate
Installment Refund (refund life annuity option)
when annuitant dies the beneficiary will receive guaranteed installments until the entire principal amount has been paid out
Under a pure life annuity, an income is payable by the company: A) only for the life of the annuitant B) until the principal and interest are exhausted C) for a guaranteed period of time, whether or not the annuitant survives to the end of the period D) for as long as either the annuitant or a named beneficiary is alive
A) only for the life of the annuitant
Which of the following is NOT true about a joint and survivor annuity benefit option? A) the surviving annuitant may receive reduced payments B) payments stop after the first death among annuitants C) a period certain option may be included D) this option guarantees income for two or more recipients
B) payments stop after the first death among annuitants
Who would have a smaller income installment, a 65 year old male or a 45 year old male?
45 year old male because he has a longer life expectancy (the longer the life expectancy the smaller the income installments)
annuity credits its interest based upon an index like the S&P 500?
equity indexed annuities (which they invest on a relatively aggressive basis to aim for higher returns)
Annuity Period
a time in which the sum that has been accumulated in the annuity is paid out to the annuitant; may last for a lifetime
Which of the following is TRUE regarding Variable Annuities? A) the company guarantees a minimum interest rate B) a person selling variable annuities is required to have only a life agent's license C) The annuitant assumes the risks on investment D) the funds are invested into the company's general account
C) The annuitant assumes the risks on investment
Which of the following is NOT true regarding the annuitant? A) the annuitant receives the annuity benefits B) the annuitant must be a natural person C) the annuitant cannot be the same person as the annuity owner D) the annuitant's life expectancy is taken into consideration for the annuity
C) the annuitant cannot be the same person as the annuity owner
Which of the following is NOT true regarding the accumulation period of an annuity? A) it is the period in which the annuity payment earns interest B) it is the period over which the owner makes payments into an annuity C) it is also known as the pay-in period D) it would not occur in a deferred annuity
D) it would not occur in a deferred annuity
What is the annuitization period of an annuity?
the time when money is distributed to annuitant
Cash Refund (refund life annuity option)
when annuitant dies the beneficiary receives lump-sum refund of the principal amount minus the benefit payments already made to the annuitant
What does the Nonforfeiture Law stipulate?
that deferred annuities must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (e.g. 100% of premium paid less any prior withdrawals and related surrender charges) - a 10% penalty is charged to withdrawals prior to the age of 59.5