ADBANKER Chapter 5: Annunities
What must an insurance producer have in order to market variable annuities?
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.
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 _________________.
An annuity
All of the following are correct regarding an annuity, except:
An immediate annuity must start providing income within 3 years of the first premium payment
What is the only way an annuity can pay out income tax free benefit payments? A Choose a life only settlement option B Use the annuity funds to purchase a life insurance plan through a 1035 exchange C Fund a Roth IRA and make a qualified distribution D Delay withdrawals past age 70 1/2
Fund a Roth IRA and make a qualified distribution The only exception is if the income comes from a Roth IRA annuity whereby the income stream would be tax-free under certain qualifying situations.
What is different about a corporate owned nonqualified annuity compared to an individually owned nonqualified annuity?
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.
Life Income
Monthly income for the life of the annuitant with no payment to the beneficiary
Similar to life insurance, this party has all of the rights in the annuity contract. This party is referred to as the: A Annuitant B Insurer C Owner D Beneficiary
Owner The owner is the individual who controls the contract, is responsible for making payments into the contract, and has all of the contractual rights in the policy.
Joint Life
Payable on more than one life and payments will stop upon the first to die
Life Income Joint and Survivor
Payable on more than one life; upon death of the annuitant, payment continue to survivor
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?
To adopt the annuity as his/her own and become the annuitant or to name another annuitant
A licensed insurance producer must also have a securities registration in order to sell which annuity product? A Market Value Adjustment B Equity-indexed C Fixed D Variable
Variable A producer must have a securities registration in order to sell Variable Annuity products.
All of the following are situations in which the insurer is likely to waive any annuity surrender charges, except: A Disability B Nursing facility stay for at least 30 days C 1035 exchange into a life insurance policy D Death
1035 exchange into a life insurance policy Annuity surrender charges are generally waived if the annuitant is hospitalized for an extended period, placed in a nursing facility for at least 30 days, becomes disabled, or dies
Unless an exception applies, a tax penalty is assessed for withdrawals from annuities of tax-deferred earnings prior to age ______. A 65 B 59 1/2 C 62 D 55
59 1/2 A penalty of 10% is levied on withdrawals of tax-deferred earnings in order to discourage the use of annuities as short-term tax shelters.
An individual purchased a fixed annuity with flexible premiums. When they annuitized the policy, they chose the Life Income 10-Year Certain option. What would the beneficiary receive if the annuitant dies 4 years after the annuity payout begins? A Nothing B The undistributed balance C 10 more years of payments D 6 more years of payments
6 more years of payments In any life annuitization option, distributions are made for as long as the annuitant lives. The period certain defines the minimum number of payments that will be made if the annuitant does not live as long as the guarantee period. Since the annuitant died 4 years following annuitization, 6 years of payments remain.
While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a nonqualified annuity, which is ________________.
A stream of income the annuitant cannot outlive
Which product, offered by insurers is specifically designed to allow an individual's savings to be distributed to him/her periodically over his/her entire life, regardless of how long he/she lives? A Annuities B Universal Life Insurance C Variable Life Insurance D Participating Whole Life
Annuities Annuities are the only products in this list of choices that provide lifetime income to the policyowner as stated in the question.
Which product, offered by insurers is specifically designed to allow an individual's savings to be distributed to him/her periodically over his/her entire life, regardless of how long he/she lives? A Participating Whole Life B Variable Life Insurance C Annuities D Universal Life Insurance
Annuities Annuities are the only products in this list of choices that provide lifetime income to the policyowner as stated in the question.
K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 5%, the effect on this month's income benefit check will be such that it:
Becomes Higher If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month.
Primarily, the _________ is the person who will receive any residual contract benefits after the annuitant has died.
Beneficiary
What is the name of the person named in the annuity contract to potentially receive any residual benefits?
Beneficiary The beneficiary is the individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization or if the settlement option selected offers any residual benefit after the annuitant's death.
Annuities and life insurance are similar in all of the following ways, except:
Both use the same term to identify the person whose life is the subject of the contract Annuities have annuitants, life insurance policies have insureds.
Annuities and life insurance are similar in all of the following ways, except: A Both provide some form of death benefit B Both provide owners with all of the contractual rights C Both use the same term to identify the person whose life is the subject of the contract D Both may have a named beneficiary Nice try!
Both use the same term to identify the person whose life is the subject of the contract Annuities have annuitants, life insurance policies have insureds.
Surrender charges typically ____________ over time. A Remain the same B Vary C Decrease D Increase
Decrease Surrender charges decrease over time until they disappear at which time the cash value and the cash surrender value are the same amount.
Mr. Zamboni is the owner and the annuitant of an annuity. Mrs. Zamboni, the designated beneficiary, will be able to assume all ownership rights and tax-deferral if Mr. Zamboni should die ___________. A During the Accumulation Period B After age 55 C Before age 70 1/2 D During the Distribution Period
During the Accumulation Period If Mr. Zamboni's death were to occur during the Accumulation Period, then his spouse, if she were the named beneficiary, would be able to become the new owner and continue the contract in force.
Annuity income benefit payments are based on all of the following, except:
Education level
A(n) __________ annuity has its interest credit linked to the positive performance of a stock market index.
Equity-Indexed An Indexed (or Equity-Indexed) Annuity is an annuity product with interest rates that are linked to the positive performance of a stock market (equity) index, such as the Standard & Poor's 500 Index.
All else being equal, which of the following will receive the smallest income benefit payment from an annuity? A Female age 80 B Male age 70 C Female age 70 D Male age 80
Female age 70 The younger female will receive the smallest income benefit as she will have the longest remaining life expectancy.
X is 57 years old, and planning for their retirement. They do not know what their cash flow will look like over the next 10 years, but want to fund an annuity to provide retirement income. Which of the following premium funding methods would be best for X to consider? A Flexible B Single C Variable D Periodic
Flexible With a flexible premium, contributions may be made as often and in whatever amount the contract owner desires. However, most insurers do set a minimum and a maximum dollar amount they will accept.
Under what conditions would there be a limit as to how much premium can be deposited into an annuity?
If the annuity is funding a qualified retirement plan and the IRS imposes a limit on that type of plan Aside from insurers limiting the amount of premium dollars it wishes to accept from its customers qualified retirement plans funded by annuities are limited by IRS regulations as to how much can be deposited into them.
If interest rates have fallen since a market value adjustment annuity (MVA) was purchased, what impact will this have on the annuity? A The owner will be required to surrender the annuity B The annuity would lose some of its tax-deferral benefit in proportion to the dollar amount of the adjustment C There would be no impact whatsoever D In effect, the account values would have increased
In effect, the account values would have increased If a Market Value Adjustment Annuity is crediting interest at rates that are higher than those available in the open market, then upon surrender the insurer will add money to the account, in effect sharing some of the gain it is realizing on its general account bond portfolio.
The Payment Option that pays an income to two annuitants while both are living, and stops upon the death of the first annuitant, is which of the following? A Joint Life B Life Income Joint and Survivorship C Life Income Joint and Survivorship with Period Certain D Life Income with Refund
Joint Life The Payment Option described is Joint Life, which pays a benefit to two annuitants while both are living, but stops upon the death of the first annuitant rather than continuing a payment to the surviving annuitant.
Which of these annuity distribution options promises the largest possible payment to a single annuitant? A Lump sum refund B Life income only C Installment refund D Life income with period certain
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.
Life Income with Period Certain
Life income to the annuitant or specified period, whichever is longer
Life Income with Refund
Lifetime income to the annuitant, balance refunded to beneficiary upon death of the annuitant
All else being equal, which of the following will receive the largest income benefit payment from an annuity?
Male age 80 The older male will receive the largest income benefit as he will have the shortest remaining life expectancy.
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, is known as: A Market Value Adjustment B Fixed C Variable D Indexed
Market -Value Adjustment Market-Value Adjustment (Adjusted) Annuity 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.
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, is known as:
Market Value Adjustment Market-Value Adjustment (Adjusted) Annuity 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.
Z chooses a life income with 10 year period certain settlement option for the annuity Z owns. Z dies after 15 years of receiving income benefit payments. What does Z's beneficiary receive?
Nothing. Since Z outlived the period certain, the beneficiary designated receives nothing.
A(n) ________ has all of the contractual rights in an annuity contract. A Annuitant B Owner C Beneficiary D Insurer
Owner The contract owner has all of the rights within the contract.
A flexible premium deferred annuity permits all of the following, except: A Annuitization at any time after 1 year 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 Payments to the annuitant beginning within 1 month of the issuance of the contract
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. If an annuity begins payments to the annuitant within one month of policy issue it would be a Single Premium Immediate Annuity (SPIA).
Annuities are primarily designed to accumulate funds for a(n) _________ fund. A Retirement B College C Emergency D Mortgage
Retirement While the accumulation of money can be for a variety of reasons, an annuity is primarily designed to accumulate funds for retirement.
Susan, age 65, inherits a substantial sum of money and wants to have the money distributed to her over the rest of her life starting next month. Which product offered by the life insurance industry will allow her to accomplish her objective? A Single Premium Deferred Annuity B Single Premium Immediate Annuity C Flexible Premium Deferred Annuity D Flexible Premium Immediate Annuity
Single Premium Immediate Annuity A Single Premium Immediate Annuity involves payment of a single sum to the insurer with periodic payments commencing within one year of deposit of the sum.
If an annuity is purchased in December and monthly benefits begin in January of the following year, what type of annuity is it?
Single Premium Immediate Annuity The question addresses when the actual receipt of benefits from an annuity begins. When benefits begin within a year of the issue date, this is referred to as 'immediate'.
Upon annuitizing an annuity, all of the following factors help in determining the amount of the income benefit payment, except: A State of residence B Age C Annuity option D Gender
State of Residence Upon a lifetime annuitization, payments will be made to the annuitant based upon the annuitant's age, gender, annuity option selected, and dollar amount used to fund the income benefit payments.
To encourage annuity holders to leave funds in the policy until retirement, insurance companies can assess a(n) __________ for withdrawals. A Surrender charge B Fine C Interest penalty D Tax penalty
Surrender Charge If a deferred annuity is surrendered during the early part of the accumulation period, the insurer normally assesses a surrender charge.
_____________ are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract.
Systematic withdrawals
All of the following are benefits an annuity can provide that other investment or savings products cannot, except:
Tax-free distributions Annuities can be used simply as funding vehicles or can be used to provide benefits that other investments cannot, such as a guaranteed minimum death benefit, a guaranteed minimum interest rate, an income benefit payment that cannot be outlived, or other various benefits and riders. But annuity distributions are not tax-free.
All of the following are traits of a Fixed Annuity, except: A The insurer bears any investment risk B The purchasing power of a fixed dollar benefit amount decreases as the cost of living increases C The insurer's general account assets guarantee the fixed annuity contract D The actual rate of interest credited will be based on the state-published interest rate index
The actual rate of interest credited will be based on the state-published interest rate index The actual rate of interest credited is based on the insurer's general account assets.
In which of the following circumstances is an annuity's tax-deferral benefit lost? A The annuity is owned by someone other than the annuitant B The annuity is held beyond age 70 1/2 C The annuity has a long-term care rider D The annuity is owned by a corporation
The annuity is owned by a corporation If a corporation owns an annuity, the tax-deferral benefit is lost. Tax-deferral of annuity earnings is only for natural persons.
What is "fixed" in a fixed annuity?
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 an annuitant, in regard to an annuity policy? A The person who has all of the rights in the contract B The issuer of the policy C The party who receives any residual policy benefits D The party whose life the policy's benefits are based on
The party whose life the policy's benefits are based on An annuitant is the individual whose life the contract is based upon.
All of the following are true regarding annuities, except: A They can liquidate an estate B They are designed to protect against outliving one's income C They are used primarily to provide a steady stream of income D They are similar to life insurance
They are similar to life insurance Annuities are used primarily to provide a steady stream of income to an individual, typically upon retirement. They are designed to protect against outliving one's retirement income by providing lifetime income. And they can liquidate an estate over the lifetime of an annuitant. Although both annuities and life insurance are mortality-based products, they have opposite purposes: annuities are designed to distribute an estate, while life insurance is designed to create an estate.
How can an annuity help fund college for a child or grandchild in an tax-efficient and effective manner? A Through systematic withdrawals or proper settlement option selection B Choosing a life only settlement option C Use the interest only option D By cashing out the annuity and using the proceeds to pay off the college bill in one lump sum
Through systematic withdrawals or proper settlement option selection An annuity can provide funds to help offset the costs of a college education. Using a systematic withdrawal or a settlement option will provide for an income stream to help meet or offset some of the expenses incurred.
Which of the following Annuities would potentially be the most negatively impacted by the overall stock market falling in value? A Fixed B Guaranteed C Indexed D Variable
Variable In order to achieve the goal of wealth accumulation and offsetting the effects of inflation most if not all of a Variable Annuity separate account investments are based off of the stock market. None of the other annuities would lose value if the stock market 'crashed'.
Which of the following annuities offers the best opportunity to offset the effects of purchasing power loss over the long-run? A Indexed B Fixed C Market Value Adjustment D Variable
Variable Since variable annuities are directly tied to the performance of the underlying separate account(s), this annuity has the best chance of maintaining purchasing power as it has no caps, spreads, or administrative fees associated with Indexed annuities and returns include dividends.
Generally, which of the following Annuities is not designed to guarantee the principal value of the policy in stable interest rate environments? A Indexed B Market Value Adjustment C Fixed D Variable
Variable Variable annuities have no minimum guarantee of interest or gains, and may lose value in a declining market.
Which annuity has its income benefit payments related to an assumed interest rate (AIR)?
Variable. The income benefit payment is tied to AIR. If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month.
A Joint and ½ Survivor distribution option means which of the following statements is correct?
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.)