Chapter 5 - Annuities

D (*When one of the joint annuitants dies, the survivor's continuing payments will be one-half of the total payment both were receiving* A Joint and ½ Survivor annuity pays half of the total payment two or more annuitants were receiving when the contract was first annuitized. Payments continue until the last surviving annuitant has died. )

A "Joint and ½ Survivor" distribution option means which of the following statements is correct? A. The annuitant receives a full share of the annuity payment each month, and the beneficiary receives a one-half share of the payment B. The annuitant receives a full share of the annuity payment and the spouse receives an additional one-half of that C. There are two annuitants named in the policy and each contributes one-half of the monthly premium or the lump sum that establishes the annuity D. When one of the joint annuitants dies, the survivor's continuing payments will be one-half of the total payment both were receiving

non-qualified

A ____________ annuity is 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.

qualified

A ____________ annuity is funded with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a ___________ annuity (contributions and earnings) is subject to ordinary income taxes.

deferred

A ____________ annuity will pay periodic benefits starting at some specified time in the future; income benefits begin more than 1 year from the issue date.

Guaranteed Minimum Withdrawal Benefit (GMWB)

A ___________________ is an optional benefit that can be purchased to help annuitants protect their retirement income from a down market. This option allows the annuitant to withdraw a maximum percentage each year until the initial investment has been paid out.

D (*An annuity* Annuities are designed to liquidate accumulated assets rather than to create a sum of money as a direct benefit for another person. When an annuity is not already annuitized, it is subject to state insurance nonforfeiture laws, and the contract value must be paid to a beneficiary, to the owner, or to the owner's estate following the death of the annuitant.)

A contract that is designed to accumulate value over time with the intent to distribute the funds over the lifetime of an individual is called _________________. A. Whole life insurance B. Variable life insurance C. An endowment D. An annuity

A (*Payments to the annuitant beginning within one month of the issuance of the contract* By definition, a flexible premium annuity allows the addition of more principal value at any time prior to annuitization of the contract. An annuity that begins payments to the annuitant within one month of policy issue is a Single Premium Immediate Annuity ("SPIA"). )

A flexible premium deferred annuity permits all of the following EXCEPT: A. Payments to the annuitant beginning within one month of the issuance of the contract B. Scheduled and unscheduled additions of principal at any time prior to annuitization C. Limited partial surrenders each year not subject to a surrender charge D. Annuitization at any time. A deferred annuity may not be annuitized as long as there is a surrender charge applicable to the principal value

C (*An immediate annuity must start providing income within 3 years of the first premium payment* An immediate annuity must start providing income within a year of the first premium payment.)

All of the following are correct regarding an annuity, EXCEPT: A. An annuity can be immediate or deferred B. An annuity can be paid with a single premium or periodic premium C. An immediate annuity must start providing income within 3 years of the first premium payment D. The accumulation in an annuity grows tax-deferred

tax-deferral

Corporate owned annuities lose the ____________ aspect of the policy and interest or gains are taxable as income in the year earned.

bailout (ESCAPE CLAUSE)

During the accumulation period, some contracts also offer a "____________" provision that allows the owner to withdraw money from the annuity without surrender charges if the crediting rate falls by more than a specific amount. This will enable the policy owner to consider other savings and investment options.

annuity

In direct comparison to life insurance, an ____________ could be referred to as 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.

tax deferred 10

Since an annuity is an insurance contract, the accumulation value grows ___________. 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 ___% tax penalty as well. Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option.

back-end load

Surrender Charges - When a contract is fully surrendered, any surrender charges will lessen the contract payout. This is also referred to as a ______________. Surrender charges diminish over a stated number of years, set by the insurer, until they disappear.

immediate

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

B (*The interest crediting rate* The "fixed" portion of a fixed annuity is the interest crediting rate, which may change at the discretion of the insurance company, but not less than the guaranteed minimum. A fixed annuity also promises a fixed payment to the annuitant when the contract is annuitized.)

What is "fixed" in a fixed annuity? A. The annuitant B. The interest crediting rate C. The beneficiary D. The investment option in the separate account

B (*Interest or gains are taxable as income in the year earned* Corporate owned annuities must be associated with a qualified retirement plan for the corporation to avoid current income taxation. There are no interest rate limitations for annuities in the IRC. All annuities provide a death benefit guarantee prior to annuitization; a corporate owner of an annuity will name itself as the beneficiary)

What is different about a corporate owned nonqualified annuity compared to an individually owned nonqualified annuity? A. It earns a rate of interest limited by the IRC B. Interest or gains are taxable as income in the year earned C. It does not provide a death benefit guarantee of principal to the beneficiary D. Interest or gains are taxable as capital gains, not ordinary income

A (*A securities license as a variable contracts and investment company representative in addition to a life agent license* A licensed life agent also needs a securities license to be able to transact variable life or annuity contracts. Each of the other answer choices is an accurate statement but does not answer the question appropriately.)

What must an insurance producer have in order to market variable annuities? A. A securities license as a variable contracts and investment company representative in addition to a life agent license B. A copy of the current prospectus to give to a customer prior to or at the time of the first appointment C. A good business reputation and no convictions listed in 18 U.S.C. 1033, the Federal Violent Crime Control and Law Enforcement Act D. A variable contracts insurance agent license issued by his/her resident state's regulato

B (*To adopt the annuity as his/her own and become the annuitant or to name another annuitant* The spouse-beneficiary may adopt the annuity as his/her own. As the owner, he/she may name a new annuitant and/or beneficiary, or assign ownership to another person for value.)

When the owner and annuitant is the same person, a spouse beneficiary is permitted what choice under the Internal Revenue Code if the annuitant dies prior to annuitizing the contract? A. A one-time opportunity to convert the proceeds to a Roth IRA without taxation B. To adopt the annuity as his/her own and become the annuitant or to name another annuitant C. The option to withdraw all funds tax-free in the form of a §1035 exchange to life insurance D. There are no choices, when the annuitant dies, the principal value must be distributed to the beneficiary, who may choose the distribution option if none was selected in advance

A (*Life income only* Because the insurance company has no way of knowing how long the annuitant will live, and because the contract is created for the benefit of the annuitant, a life only option provides the largest possible payment. The insurance company is at greater risk of paying more than the principal value at the time of annuitization, so it pays a larger amount based on the life expectancy of the annuitant.)

Which of these annuity distribution options promises the largest possible payment to a single annuitant? A. Life income only B. Life income with period certain C. Installment refund D. Lump sum refund

A. (*A stream of income the annuitant cannot outlive* Although both annuities and life insurance offer tax-deferred growth of principal, the long term benefit of an annuity is the lifetime income stream available at any time to the annuitant.)

While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a non-qualified annuity, which is ________________. A. A stream of income the annuitant cannot outlive B. Tax-free payments for the lifetime of a beneficiary C. Tax-free money for college education or other qualified expenses D. Tax-deferred growth of principal

Annuities

____________ are used primarily to provide a steady stream of income to an individual typically upon retirement. In theory, an annuity is designed to protect against outliving an individual's retirement income by providing lifetime income.

Market-Value Adjustment (Adjusted)

_____________ Annuity - This is an annuity product that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the surrender value to fluctuate in response to market conditions. Upon withdrawal, the MVA will add or deduct an amount from the annuity or the withdrawal amount.

Indexed (or Equity Indexed)

______________ Annuity - An annuity product with interest rates that are linked to the positive performance of a stock market related (equity) index, such as the Standard & Poor's 500 Index.

Fixed (Guaranteed)

______________ Annuity - During the accumulation period, the insurer guarantees a minimum fixed interest rate. At annuitization benefits are paid as a minimum level fixed amount.

Accumulation (Pay-In)

_______________ 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.