Life: Chapter 7
Name three purposes of an annuity.
1)To liquidate an estate 2)For tax-free growth of principal 3)To distribute accumulated principal
What is the straight life income option?
An annuity payout option that guarantees income for annuitant's lifetime.
What is the cash refund option?
An annuity payout option which guarantees total annuity fund is paid out; paid in lump sum to beneficiary if annuitant dies.
What are immediate annuities?
Annuities designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase.
The taxable portion of each annuity payment is calculated using what method?
Exclusion ratio
What are equity indexed annuities (EIA)?
Fixed annuities that offer the potential for higher credited rates of return than their traditional counterparts but also guarantee the owner's principal.
What annuity requires premium payments that vary from year to year?
Flexible premium deferred annuity
What happens to interest earned if the annuitant dies before the payout start date?
It is taxable
Describe the Funding Method
Principal is funded either immediately with a single premium or over time with a series of periodic payments
An annuitant dies during the distribution period. What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made?
Refund annuity
What is a structured settlement?
The distribution of funds from the settlement of lawsuits or the winnings of a lottery and other contests.
How are annuitants outlives life expectancy with a straight life income option paid?
The funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy.
Who assumes the investment risk with a fixed annuity contract and why?
The insurer because they guarantee the annuitant's principal as well as a guaranteed minimum rate of return, even if the underlying assets underperform the guaranteed rate.
What is the annuitization phase?
The period when the accumulated value in an annuity is paid out.
What is the accumulation period?
The time at which the funds are being paid into the annuity, which may continue after purchase payments cease because of interest.
Life income is a settlement option that pays...
a stated amount to an annuitant, but no residual value to a beneficiary.
Simon has purchased a fixed immediate annuity. his payment amount will be dependent upon principal, interest, and the contract's ________.
income period
How soon can the benefit payments begin with a deferred annuity?
A minimum of 12 months after date of purchase.
Who can sell variable annuities?
A sales rep. who is registered with FINRA as well as one who holds a state insurance license.
What is a single premium funded by?
A single lump-sum premium which creates the principal immediately.
What is the nonforfeiture value of an annuity before annuitization?
All premiums paid, plus interest, minus any withdrawals and surrender charges.
What are deferred annuities?
Annuities that accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date.
Fixed period settlement options are considered to be a form of what?
Annuity
What are variable annuities?
Based on non-guaranteed equity investments so they shift the investment risk from the insurer to the contract owner.
What are surrender charges?
Charges made by most insurance companies to contract owners for liquidating deferred annuities in the early years of the contract which cover the costs associated with selling/issuing contracts and costs associated to insurer's need to liquidate underlying investments.
Lisa has recently bought a fixed annuity. What is considered to be a disadvantage of owning this type of annuity?
During periods of inflation, annuitants will experience a decrease in purchasing power of their payments.
What is the different between life insurance and annuities?
Life insurance builds an estate by paying money into the contract. Annuities liquidate an estate by the periodic payment of money out of the contract.
Which market index is normally associated with an indexed annuity's rate of return?
S&P 500
When is a 10% penalty tax imposed on withdrawals?
When they are made before age 59 1/2.