RMI Final Exam- Chapter 14 Annuities & Individual Retirement Accounts (IRAs)

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive 500$ per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

$3000

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive 500$ per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6000 received during the year is taxable?

$6000

Which is true regarding IRA's?

(BOTH I & II) Contribution limits are higher for workers aged 50 and older A spouse who does not work outside of the home may make a fully deductible contribution to a traditional IRA even if his or her spouse is covered by a retirement plan at work

Which are true with regard to the inflation indexed annuity option?

(BOTH I & II) The initial monthly payment id lower than the initial payment a fixed annuity would have provided if purchased at the same age Periodic payments to the annuitant are adjusted for inflation

Which statements are true with respect to the cash (lump sum) annuity settlement option?

(BOTH I & II) the taxable portion of the distribution is subject to federal and state income taxes The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds

Which of the following statements are true with respect to variable annuities?

(BOTH I & II) The price at which accumulation units can be purchased fluctuates during the funding period The value of the annuity units fluctuates over time

Which of the following statements is true with regard to the adequacy of IRA funds during retirement?

(BOTH I & II) To assure lifetime income, the IRA funds can be used to purchase a life annuity The duration of IRA benefit payments depends on the rate of return earned on the invested assets after retirement and the withdrawal rate

Which statements regarding individual retirement accounts (IRA) are true?

(I ONLY) If an individual's only income during the year is from investments, he or she cannot make an IRA contribution

Which of the following statements are true about longevity insurance?

(I ONLY) If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited

WHich are true with respect to an equity indexed annuity?

(I ONLY) The maximum percentage gain is usually capped

Which statements are true with respect to a join-and-survivor annuity?

(I ONLY) Some joint-and-survivor annuities reduce the income payments after the first annuitant dies

Which of the following statements is true with respect to annuities?

(I ONLY)- Annuities are the opposite of life insurance

Which of the following persons can establish a traditional IRA?

(II ONLY) Employed persons under age 70.5 who are not active participants in an employer-sponsored retirement plan

Which are true regarding the taxation of distributions from individual annuities?

(II ONLY) Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable

Which statements about converting a traditional IRA to a Roth IRA are true?

(II ONLY) Qualified distributions from a Roth IRA after a conversion are received tax-free

Which of the following statements is true regarding the Roth IRA?

(II ONLY) Roth IRA investment income accumulates income-tax free

Which statements regarding Roth IRA's is true?

(II ONLY) There is a maximum income level above which Roth IRA contributions are not allowed

Which of the following statements are true concerning the joint and survivor annuity settlement option?

(II ONLY) Under this option, payments begin after the first annuitant dies

Which of the statements regarding the taxation of individual annuities are true?

(II ONLY) after the net cost of teh annuity has been paid to the annuitant, the total annuity payment is taxable

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive 500$ per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ration in this case?

50%

During the funding period, the premiums paid for a variable annuity are used to purchase?

Accumulation units

Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover teh cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the?

Administrative charge

Traditionally, tables have been prepared showing how long IRA funds will last based on rates of return and annual withdrawal rates. These tables assume constant returns over the projection period. Many financial planners are now using a technique that allows for fluctuations in market returns. A computer is programmed to estimate how long funds will last under many different return scenarios and to determine the probability that funds will last until a specified age. This is called?

Computer simulation

Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a?

Deferred annuity

When selling life annuities, what risk is the insurer pooling?

Excessive longevity

Which of the following is a characteristic of longevity insurance?

Forfeiture of the purchase price if the annuitant dies during the deferral period

Donna is single and earns $30,00 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $3,000 per year. Which describes her ability to establish a traditional IRA and tax treatment of her contribution?

Her contribution is fully tax deductible

An immediate life annuity offers all of the following except?

Immediate annuity payments are entirely exempt from federal income tax

Insurer offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the?

Investment management charge

Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following life income options will provide Brad with the highest monthly income?

Life annuity (no refund)

Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving the 120 payments, no additional ones will be made by the insurer. Cassie purchased?

Life annuity with guaranteed payments

Some insurers offer a single premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called?

Longevity insurance

Which of the following is an advantage of longevity insurance?

Monthly benefits begin at an advanced age when other assets are likely to have been depleted

Which of the following is permissible IRA investment alternative?

Mutual finds

The fundamental purpose of a variable annuity is to?

Provide a hedge against inflation

Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified gross income was $28,000. Rita is considering making a $3,000 contribution to he traditional IRA. Which is true regarding this distribution?

Rita ca make a $3,000 contribution to her traditional IRA, and it is fully tax deductible

Bridget started to find a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4% of the account balance. The 4% kept by the insurer is an?

Surrender charge

With an equity indexed annuity, what name is given to the method of crediting excess interest to the annuity?

The indexing method

Under an equity indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?

The participation rate

All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT?

The withdrawal is used to pay living expenses after unemployment insurance benefits cease

Which of the following statements is true concerning traditional and Roth IRAs?

There are minimum distribution requirements for traditional IRAs

All of the following statements about traditional and Roth IRA's are true except?

Traditional IRA's are exempt from the penalty tax on premature distributions

LIfe annuity payments are made up of all of the following except?

Unliquidated principal of annuitants who live too long

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in his account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by?

Using an IRA rollover account

Which of the statements about variable annuities is true?

Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement

Which statements about the withdrawal of funds from a traditional IRA is true?

Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.