Primerica - Unit 5 Annuities

10%

1. Annuities are not a short-term savings plan. 2. There is a ____penalty on gains if they are withdrawn before the annuity owner is 59.5 years old.

variable annuity

1. For investors willing to hedge against inflation, a ______is recommended. 2. The investor carries an investment risk. 3. dual license is required to sell this product.

Annuity

1. Principal function: liquidation of an estate 2. basic function: systematically liquidate a principal sum over a specified period of time 3. purchased as a means to save for retirement 4. cash accumulated in the account grow tax deferred until taken at retirement, when individual is taxed at lower bracket

fixed-interest

1. To ensure that the full premium is available in the event of a cancellation, variable annuities sold to seniors must be invested in a _______account during the 30-day free look period. 2. After 30 days, the insurer can direct funds into the sub-accounts selected by the senior. 3. Senior can waive this requirement

equity-indexed annuity (EIA)

1. ______is a fixed annuity (meaning the principal and interest are both guaranteed) with an equity-linked rate of return. 2. interest earned is tied to an equity index such as the S&P 500; adjusted yearly to reflex any index increases

Non-qualified annuities

1. _____are funded with after-tax dollars on a cost basis. 2. only gains are taxed upon withdrawal

Qualified annuities

1. _____are funded with pretax dollars as part of a qualified tax-deferred retirement plan. 2. Contributions and gains are taxed upon withdrawal

joint and survivor

1. _____payout option pays income to 2 or more annuitants. 2. Payment stop when the last annuitant dies

annuity period

1. ____is the "taking out" time of annuity 2. period following the accumulation of the annuitant's payments (principal and interest) during which annuity benefits are received

joint life annuity option

1. covers 2 or more annuitants 2. provides monthly income only until the first annuitant dies 3. after the first annuitant's death, all income benefits cease

1. annuitant's AGE 2. annuitant's GENDER 3. assumed interest RATE 4. INCOME amount and payment guarantee 5. loading for company EXPENSES

5 factors used to determine annuity premiums

deferred annuity

A customer funds an annuity with a lump sum and wants to receive income 3 years from now. She funded a __________

+ The insurance company assumes the risk of the investment - Does not protect against inflation and could reduce the annuitant's purchasing power in the future

Advantage and disadvantage of Fixed Annuity

+ provides protection against inflation - annuity owner assumes risk of the investment

Advantage and disadvantage of Variable Annuity

A

All of the following are true about an annuity EXCEPT a. the annuitant shows proof of insurability b. earnings grow tax-deferred c. premiums for a fixed annuity are invested in the general account d. 10% penalty for distributions prior to age 59.5

annuity

An _____is a retirement plan, not an insurance policy.

1. insurance 2. annuity

An ____policy creates an estate, and an _____liquidates an estate through income payments.

FINRA Financial Industry Regulatory Authority

An agent who wants to sell variable annuities must pass a test and be registered with the _______, and must also be licensed to sell life insurance by the state.

accumulation period

An annuity can only be surrendered DURING the _______

1. does not lose 2. nonforfeiture options

An annuity contract owner who stops making premium payments during the accumulation period ______the value accumulated in the annuity up to that point. Instead, the contract holder will have _______, or rights to the cash value accumulation in the annuity.

single

An immediate annuity must be purchased with what type of premium?

1. individual basis 2. group basis

Annuities may be purchased on an _____or ____

tax-deferred growth

Annuities offer the advantage of a ________

1. life only (straight life) 2. refund annuity 3. life with period certain 4. joint and survivor 5. annuity certain

Annuity Settlement options

individual nonqualified plans are not subject to contributions limits in a given year

Difference between Individual nonqualified plans vs. Group qualified plan:

accumulation period

During the ______, interest earnings on the premium contributions grow and accumulate on a tax-deferred basis. The interest portion of the annuity account will not be taxed until the annuitant begins to receive the benefit payments.

accumulation units

During the accumulation period, an owner's units are identified as _______.

insurance company

During the annuitization period, the _______controls the funds in the annuity and disburses them according to the contract terms

fixed annuity

For conservative investors, a ______is recommended because it presents no risk for investors.

1. by stating the purpose of the meeting - insurance 2. that they'll gather information for a follow-up visit to possibly sell insurance

How does an agent or broker begin when the meeting is conducted in the senior's home?

1. cost base 2. tax base

How does the IRS calculate taxation for annuity?

LIFO Last in, First Out

If a nonqualified annuity is surrendered or withdrawn during the accumulation period, the cash withdrawals are made on a ________. First monies withdrawn from the nonqualified annuity are considered to be from the interest earned on the principal, and are taxed accordingly

59.5

If the policy is surrendered for a lump sum prior to the age ____, a 10% tax penalty will apply, in addition to the surrender charge.

owner

In an annuity, only the ______can: 1. change the beneficiary, make withdrawals, or surrender the annuity 2. pay the premium 3. make changes to the contract during the accumulation period

equity-indexed annuity (EIA)

In which type of annuity contract is the interest rate tied to an index (i.e. S&P 500)?

joint life

Mr. and Mrs. Jones are receiving a monthly annuity distribution of $1,000. If Mr. Jones dies and Mrs. Jones continues to receive the same amount, which payout option was selected?

advertisement

No ______may use the name of a state or political subdivision in a policy name or description.

Administrative penalty: $1,000 - first violation $5K - 50K - second or subsequent violations *Commissioner may suspend the agent or broker's license

Penalty for selling annuities for Medi-Cal eligibility: Brokers and Agents

Administrative penalty: $30K - 300 - for each violation *Commissioner may rescind the contracts found to have been marketed, offered, or issued in violation

Penalty for selling annuities for Medi-Cal eligibility: Insurance Company

1. have other persons present at the meeting, including family members, financial advisers or attorneys 2. end the meeting at any time 3. contact the CA Dept. of Insurance for information or to file a complaint

Senior's rights highlighted in the Notice must contain the following:

immediate

Single premium annuities may be single premium ____annuities.

deferred

Single premium deferred annuities, under which a single premium is paid but benefits are ______

commissions

The California Insurance Code, to prevent conflicts of interest, prohibits insurance agents and brokers who are not attorneys from sharing ______or other compensation with attorneys.

surrender charge

The ______discourages surrender of the annuity and it compensates the company for loss of investment value.

exclusion ratio

The taxation of annuity contracts is based on an ______, which reflects the relationship between the 1. total investment in the contract (cost base) to the 2. total expected return (cost base + tax base) under the contract based on average life expectancy

1. fixed 2. variable

Types of annuities

deferred annuity

Under a ______, the benefit payments are postponed until a later date (> 12 months), such as planned retirement age.

immediate annuity

Under an ______, the benefit payments begin within 12 months of purchase.

1. SEC Securities and Exchange Commission 2. State insurance departments

Variable annuities are regulated by 1.____ 2.____

60 or older

What age qualifies under the CA insurance annuity contract provision?

expected return of the principal paid in

What part of annuity is NOT taxable?

actual amount of payment (-) expected return of the principal paid in

What part of annuity is taxable?

units

When an investor purchases a variable annuity, what does she receive in the separate account?

back-end load

When the annuity is surrendered for its cash value, most companies will level some kind of surrender charge, which is higher in the early years of the contract and then scales downward as time goes on, called a _______

annuity units

When the annuity period begins, the accumulation units are converted to ______.

24 hours

When visiting a senior's home, agents and brokers must provide a written notice, at least _____before the schedule appointment.

variable annuities

Which of the following types of annuities provides guaranteed unit amounts rather than guaranteed dollar amounts?

annuitant

Who receives the benefit from an annuity?

single premium annuity

____is annuity purchased by making one lump sum payment.

take in (cost in) 200 / take out (tax) 400 = 0.50

exclusion ratio

annuity certain option

1. does NOT guarantee a lifetime income to the annuitant 2. provides an income for a guaranteed period (or for a fixed amount) regardless of whether the annuitant is alive or not 3. benefits continue upon the annuitant's death for the balance of the guaranteed period

fixed annuity

1. fully guaranteed contract, which is backed by funds invested in the insurer's general account 2. Principal, interest, and the amount of the benefit payments are guaranteed 3. levels of guaranteed interest - current rate >guaranteed at the beginning of each calendar year - minimum guaranteed rate > paid if the current rate falls below this level

life only (straight life) option

1. guaranteed payment for life to the annuitant; no further payment after death of the annuitant; none to survivor 2. pay the highest amount of monthly income to the annuitant because it is based only on life expectancy, but it creates a risk that the annuitant may die early and forfeit much of the value of the annuity to the insurance company.

Variable annuities

1. annuity funds are invested in equities 2. no guarantee of annuity values or benefit amounts 3. contracts are regulated securities, so the producer needs to hold a securities license as well as an insurance license in order to sell them.

insurer's separate account

1. investment portfolio consisting of common stock and other equity investments

insurer's general account

1. investment portfolio consisting of relatively safe and conservative investments 2. such as real estate and mortgages

refund annuity option

1. pays the annuitant for life, but if he dies too soon after the annuity period begins there will be a refund of any undistributed principal or cost of the annuity. 2. refund may be in installments or lump sum

a life with period certain option

1. provides a life annuity with an extra guarantee for a certain period of time. 2. if death occurs within the period certain, annuity payments will be continued to a survivor for the balance of the period certain

joint and survivor option

1. provides benefits for the life of the annuitant and the survivor 2. benefits continue upon annuitant's death for life, at 50-100% of the annuitant's benefit

balanced equity

1.______is a combination of a fixed and variable equity. 2. It incorporates some elements of each type of plan in order to provide some guarantees while also offering some protection against inflation.

accumulation period

1._____is the "putting in" time and the growth time of annuity 2. owner has the ability to make changes during this period

annuitant

1._____is the insured (the person on whose life the annuity contract has been issued) and is usually also the owner of the contract 2. _____is the intended recipient of the annuity payments and the person upon whose life expectancy the payments will be based.

joint life

1._____payout option pays income to 2 or more annuitants. 2. Payments stop when the first annuitant dies

refund life

1._____payout option, if the recipient dies before the principal is depleted 2. the beneficiary is due a lump-sum cash payment of the remaining annuity. 2. payment: beginning balance - payments to the annuitant (deceased)

equity-indexed annuities

1.____have the features of a fixed annuity except the interest credited to the account is tied to an index such as the S&P 500 2. They are not variable annuities

1. single premium annuity 2. periodic premium annuity

2 approaches to making annuity premium payments

1. accumulation period 2. annuity period

2 important periods of time associated with annuity

long-term

In some cases, surrender charges can be waived for the annuitant entering a _____ facility.

current account

If the senior WAIVES the fixed-interest requirement and later cancels the contract WITHIN the 30-day free look period, the refund will equal the ______value on the date the returned contract is received by the insurer, even if it less than the premium paid.

30 days (free look period)

In CA, every annuity contract issued to senior must include a notice that essentially gives the senior at least _____to return the contract to the insurer or agent after receiving it for full refund or monies paid.

1. when annuity is used to fund an (IRA) individual retirement account 2. premium payments may also be tax deductible subject to annual contribution limints

When group qualified plans available to purchase by individuals?

unnecessary replacement

_______is the sale of an annuity to replace an existing annuity that requires: 1. that the insured will pay a surrender charge for the annuity that is being replaced and 2. that does not confer a substantial financial benefit over the life of the policy to the purchaser so that a reasonable person would believe that the purchase is unnecessary.

group annuities

______are most often used to fund employer-sponsored retirement plans for employees

Individual annuities

______are usually purchase to provide retirement income or to fund other specific needs

1. flexible premium 2. level premium deferred annuities

_____and _____are funded with premiums over a period of time.

cost base

_____means the money that has already been taxed (after-tax dollars paid in as premium or principal)

tax base

_____means the money that is yet to be taxed (the interest and earnings on the principal)

life with period certain

_____payout option pays for a guaranteed period of time or the lifetime of the recipient

straight life

_____payout option pays the most income to the recipient, but only for a LIFETIME

periodic premium annuity

____is annuity purchased by making a series of periodic premium payments over a period of time: annually, semi-annually, quarterly, or monthly

periodic deferred annuity

____is the time between the first and last premium payments as well as any additional time before benefits begin

premium deferred annuity

____is the time between the purchase date and the date benefits begin