Annuities 7%

An agent selling variable annuities must be registered with: - The Guaranty Association. - SEC. - FINRA. - Department of Insurance.

- FINRA Because variable annuities are considered to be securities, a person must be registered with the FINRA (formerly NASD) and hold a securities license in addition to a life agent's license in order to sell variable annuities.

What type of annuity can be purchased with a single premium and provides benefit payments immediately? - Fixed - Immediate - Single premium - Deferred

- Immediate With an immediate annuity, distribution starts within 1 year of purchase.

All other factors being equal, which of the following individuals would receive the largest monthly check from a single premium straight life immediate annuity? - A 60-year-old woman - A 50-year-old man - A 50-year-old woman - A 60-year-old man

- A 60-year-old man Among other factors, the annuity income amount is based upon the annuitant's age and gender. An annuitant whose life expectancy is shorter will have the largest income installments. In this example, an older man will have the shortest life expectancy.

Which of the following is another term for the accumulation period of an annuity? - Pay-in period - Premium period - Liquidation period - Annuity period

- Pay-in period The accumulation period is also known as the pay-in period. It is the period of time over which the annuitant makes payments (premiums) into an annuity.

Which of the following best describes what the annuity period is? - The period of time during which accumulated money is converted into income payments - The period of time from the accumulation period to the annuitization period - The period of time during which money is accumulated in an annuity - The period of time from the effective date of the contract to the date of its termination

- The period of time during which accumulated money is converted into income payments The annuity period is the time during which accumulated money is converted into an income stream.

Your client uses $50,000 in inheritance money to purchase a single premium immediate annuity. How soon can he begin receiving income payments? - No sooner than 6 months from the time of purchase - At age 65 - After 2 years - No later than 1 year from the time of purchase

- No later than 1 year from the time of purchase With an immediate annuity, distribution starts within 1 year of purchase, typically, as early as 1 month after the purchase.

The minimum interest rate on an equity indexed annuity is often based on: - The annuitant's individual stock portfolio. - The insurance company's general account investments. - An index like Standard & Poor's 500. - The returns from the insurance company's separate account.

- An index like Standard & Poor's 500. Equity indexed annuities are not securities, but they invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the equity indexed annuity has a guaranteed minimum interest rate. Interest rates on equity indexed annuities are often tied to a familiar index, such as the Standard and Poor's 500.

When a fixed annuity owner pays a monthly annuity premium to the insurance company, where is this money placed? - The insurance company's general account - Forwarded to an investor - Each contract's separate account - The annuity owner's account

- The insurance company's general account Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which is part of its investment portfolio. The company makes conservative enough investments to insure a guaranteed rate to the annuity owners.

Which of the following provisions in annuity contracts allow the owner to surrender the annuity if interest rates drop to a specified level? - Annuitization - Bail-out - Surrender - Nonforfeiture

- Bail-out Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain timeframe.

What license or licenses are required to sell variable annuities? - Only a life insurance license - Only a securities license - No license is required - Both a life insurance license and a securities license

- Both a life insurance license and a securities license Agents are required to have both a life insurance license and a securities license to sell variable annuities.

In an annuity, the accumulated money is converted into a stream of income during which time period? - Payment period - Amortization period - Conversion period - Annuitization period

- Annuitization period The "annuitization period" (annuity period) is the time during which accumulated money is converted into an income stream.

Annuities can be used to fund which of the following? - Estate creation - Retirement plans - Variable life insurance - Group life insurance

- Retirement plans Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans.

The president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true? - A corporation can be an annuitant as long as the beneficiary is a natural person. - The contract can be issued without an annuitant. - The annuitant must be a natural person. - A corporation can be an annuitant as long as it is also the owner.

- The annuitant must be a natural person. Owners of annuities can be individuals or entities like corporations and trusts, but the annuitant must be a natural person, whose life expectancy is taken into consideration for the annuity.

Which of the following is TRUE regarding the accumulation period of an annuity? - It is limited to 10 years. - It is a period during which the payments into the annuity grow tax deferred. - It is also referred to as the annuity period. - It is a period of time during which the beneficiary receives income

- It is a period during which the payments into the annuity grow tax deferred. The "accumulation period" is the period of time over which the annuitant makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred.

An individual buys a flexible premium deferred life annuity with 20 year period certain. What would his beneficiary receive if he died 5 years after beginning the annuity phase? - Payments for 20 years - Payments for life - Nothing - Payments for 15 years

- Payments for 15 years With any period certain, death of the annuitant within the stated period will provide payments to the beneficiary only for the remainder of the period certain.

If a person purchases a Flexible Premium Deferred Annuity, when is the soonest that income payouts will begin? - After 1 year - No sooner than 3 years after the purchase - Immediately - Within the first year

- After 1 year The Flexible Premium Deferred Annuity (FPDA) is purchased with multiple payments. The benefit payments begin sometime after one year from the date of purchase.

When an annuity is written, whose life expectancy is taken into account? - Life expectancy is not a factor when writing an annuity. - Owner - Annuitant - Beneficiary

- Annuitant The annuitant receives payments from an annuity and is the person whose life expectancy is considered when writing the contract. The annuitant and annuity owner are often the same person but do not have to be.

Which of the following will NOT be an appropriate use of a deferred annuity? - Accumulating funds in an IRA - Funding a child's college education - Creating an estate - Accumulating retirement funds

- Creating an estate Deferred annuities grow tax deferred, and are best suitable for accumulating retirement income or funds for children's college education. Unlike life insurance, annuities do not create an estate, but liquidate it.

If the annuitant dies during the accumulation period, who will receive the annuity benefits? - The annuitant's estate - The beneficiary - The annuity owner - The insurance company

- The beneficiary If the annuitant dies during the accumulation period, the beneficiary receives benefits from the annuity: either the amount paid into the plan or the cash value - whichever is greater.

Which of the following products requires a securities license? - Equity Indexed annuity - Deferred annuity - Variable annuity - Fixed annuity

- Variable annuity A variable annuity is considered to be a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. For that reason, a person must hold a securities license in addition to a life agent's license in order to sell variable annuities.

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n): - Flexible Annuity. - Immediate Annuity. - Equity Indexed Annuity. - Variable Annuity.

- Equity Indexed Annuity The interest rates of Equity Indexed Annuities are tied to the Standard and Poor's Index.

In a fixed annuity, which of the following is true regarding the guaranteed interest rate on the investment? - The annuitant will receive the higher of either the guaranteed minimum rate or current rate. - The annuitant will always receive the current interest rate. - The annuitant will receive the lower of either the guaranteed minimum rate or current rate. - The annuitant will only receive the guaranteed minimum specified in the contract.

- The annuitant will receive the higher of either the guaranteed minimum rate or current rate. With a fixed annuity, the insurer invests the principal and gives the annuitant a guaranteed interest rate based on a minimum rate specified in the annuity, or current interest rate, whichever is higher.

All of the following statements are true regarding installments for a fixed amount EXCEPT: - This option pays a specific amount until the funds are exhausted. - The annuitant may select how big the payments will be. - The payments will stop when the annuitant dies. - Value of the account and future earnings will determine the time period for the benefits.

- The payments will stop when the annuitant dies. Installments for a fixed amount option has no life contingencies. A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.

How long will a life annuity with an installment refund pay? - Until the balance of the initial premium is paid out in a lump sum to the beneficiary after the annuitant dies. - Until the balance of the initial premium is paid out in continued payments to the beneficiary after the annuitant dies. - For guaranteed 20 years. - Only until the annuitant dies.

- Until the balance of the initial premium is paid out in continued payments to the beneficiary after the annuitant dies. A life annuity with an installment refund will pay for the life of the annuitant or if the annuitant dies before the full initial premium has been paid out, guaranteed payments will continue to the beneficiary until the entire premium amount is paid.

Which of the following is NOT true regarding Equity Indexed Annuities? - They earn lower interest rates than fixed annuities. - The insurance company keeps a percentage of the returns. - They have guaranteed minimum interest rates. - They are less risky than variable annuities.

- They earn lower interest rates than fixed annuities. Equity Indexed Annuities invest on an aggressive basis in order to yield higher returns. Like a fixed annuity, Equity Indexed Annuities have guaranteed minimum interest rates. The insurance company often keeps a predetermined percentage of the return and pays the rest to the annuity owner. Equity Indexed Annuities are less risky than variable annuities and earn higher interest rates than fixed annuities.

Under which of the following annuity options does the annuitant select the time period for the benefits, and the insurer determines how much each payment will be? - Installments for a fixed amount - Installment refund - Cash refund - Installments for a fixed period

- Installments for a fixed period Under the "installments for a fixed period" option, the annuitant selects the time period for the benefits, and the insurer determines how much each payment will be. This option pays for a specific period of time only, and there are no life contingencies.

All of the following statements are true regarding installments for a fixed period annuity settlement option EXCEPT: -The insurer determines the amount for each payment. - It is a life contingency option. - It will pay the benefit only for a designated period of time. - The payments are not guaranteed for life.

- It is a life contingency option. Under the installments for a fixed period annuity settlement option, the annuitant selects the time period for the benefits; the insurer determines how much each payment will be. This option pays for a specific amount of time only, and there are no life contingencies.

If a deferred annuity is surrendered prematurely, a surrender charge is imposed. How is the surrender charge determined? - It is always 7% of the cash value. - It is a flat fee determined by the annuity owner when the annuity is purchased. - It will increase as the accumulation period increases. - It is a percentage of the cash value and decreases over time.

- It is a percentage of the cash value and decreases over time. If a deferred annuity is surrendered prematurely, a surrender charge is imposed. The charge is generally a percentage that reduces over time until it ends.

A married couple's retirement annuity pays them $250 per month. The husband dies and his wife continues to receive $125.50 per month for as long as she lives. When the wife dies, payments stop. What settlement option did they select? - Straight life - Joint and survivor - Joint annuity - Cash refund annuity

- Joint and survivor Under a joint settlement option, payments would stop at the first death, but under the joint and survivor, payment would continue until both recipients die. Usually, the surviving beneficiary receives 1/2 or 2/3 of the amount received when both beneficiaries were alive.

Which of the following is NOT true regarding the accumulation period of an annuity? - It is also known as the pay-in period. - It would not occur in a deferred annuity. - It is the period during which the annuity payments earn interest. - It is the period over which the owner makes payments into an annuity.

- It would not occur in a deferred annuity. The "accumulation period" is the period of time over which the annuity owner makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred (which would be the case in a deferred annuity).

If a contract provides a set amount of income for two or more persons with the income stopping upon the first death of the insured, it is called a: - Joint and survivor annuity. - Deferred annuity. - Pure annuity. - Joint life annuity.

- Joint life annuity. Joint life annuity settlement option pays benefits to two or more annuitants, but stops upon the death of the first.

Which of the following is true regarding a waiver of a surrender charge on an annuity contract? - The charge can only be waived if the annuitant needs the funds for medical expenses. - The surrender charge will be applied to all premature surrenders. - The surrender charge waiver only applies to immediate annuity. - The charge may be waived if the annuitant is confined to a long-term care facility for at least 30 days.

- The charge may be waived if the annuitant is confined to a long-term care facility for at least 30 days. Annuity contracts provide for a waiver of surrender charges if the annuitant is confined to a Long-term Care facility for at least 30 days.

Which of the following is NOT true about a joint and survivor annuity benefit option? - Payments stop after the first death among the annuitants. - A period certain option may be included. - This option guarantees income for two or more recipients. - The surviving annuitant may receive reduced payments.

- Payments stop after the first death among the annuitants. A joint and survivor annuity will pay until the last annuitant has died; however, the surviving annuitant may receive reduced payments.

Which of the following is NOT true regarding the annuitant? -The annuitant's life expectancy is taken into consideration for the annuity. - The annuitant receives the annuity benefits. - The annuitant must be a natural person. - The annuitant cannot be the same person as the annuity owner.

- The annuitant cannot be the same person as the annuity owner. While they don't have to be, the annuitant and annuity owner are often the same person. The annuitant is the person who receives benefits or payments from the annuity and for whom the annuity is written. Since the annuitant's life expectancy is taken into consideration, the annuitant must be a natural person.

All of the following statements about equity index annuities are correct EXCEPT: - They invest on a more aggressive basis aiming for higher returns. - The annuitant receives a fixed amount of return. - They have a guaranteed minimum interest rate. - The interest rate is tied to an index such as the Standard & Poor's 500.

- The annuitant receives a fixed amount of return. Equity indexed annuities have a guaranteed minimum interest rate, so while they are aggressive in nature, the annuitant will not have to worry about receiving less than what the minimum interest rate would yield.

After three years of making payments into a flexible premium deferred annuity, the owner decides to surrender the annuity. The insurer returns all the premium payments to the owner, except for a predetermined percentage. What is this percentage called? - Inflation adjustment - Surrender charge - Termination penalty - Bail-out charge

- Surrender charge If a deferred annuity is surrendered prematurely, a surrender charge is imposed. The charge is generally a percentage that reduces over time until it ends.

Which of the following would most directly affect the purchasing power of benefits paid on a fixed annuity? - Economic inflation - Interest rates - Company investment performance - Guaranteed minimum payout

- Economic inflation In times of inflation, benefits have less purchasing power. Since costs increase as a result of inflation, more money is required to purchase something that had previously cost less. Likewise, in the event of deflation, the purchasing power of benefits increases. The other options listed would affect the amount of money available to the annuity owner, but they would not actually affect the purchasing power of benefits paid.

The annuity owner dies during the accumulation period without naming a beneficiary. Annuity's cash value exceeds premiums paid. Which of the following is TRUE? - The cash value will be paid to the state government. - The cash value will be paid to the annuitant's estate. - The premium value will be paid to the annuitant's estate. - All benefits will be forfeited.

- The cash value will be paid to the annuitant's estate. If an annuitant dies during the accumulation period, the beneficiary is paid either the cash value of the policy or the amount of premiums paid, whichever is the larger amount. In this case, a beneficiary is not named, so the cash value will be paid to the annuitant's estate.

Why is an equity indexed annuity considered to be a fixed annuity? - It has a fixed rate of return. - It is not tied to an index like the S&P 500. - It has a guaranteed minimum interest rate. - It has modest investment potential.

- It has a guaranteed minimum interest rate. While equity indexed annuities earn higher interest rates than fixed annuities, both types of annuities guarantee a specific minimum interest rate.

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policyholders? - 2% - 2.5% - 3% - Whatever interest rate the company deems appropriate

- 2.5% Insurance companies promise guaranteed minimums on the fixed annuities (2.5% in this scenario). This means that if the investments draw less than that, the company will have to pay 2.5% anyway. If the investments earn over 2.5%, the company will pay that excess.

What type of annuity promises to pay to a beneficiary, in a lump sum, the difference between the amount paid into the contract and the benefits received prior to the annuitant's death? - Cash refund annuity - Installment refund annuity - Joint and survivor annuity - Pure life annuity

- Cash refund annuity A cash refund annuity will pay to a beneficiary or the estate of the annuitant, the difference between the amount paid into the annuity and the benefits received prior to the annuitant's death. Payment is made in a lump sum.

Which of the following is NOT fundable by annuities? - A person's retirement - Estate liquidation - Death benefits - Cash accumulation for any reason

- Death benefits Annuities are most commonly used to fund a person's retirement, but they can technically be used to accumulate cash for any reason. Annuities can also be used to liquidate an estate. Annuities do not provide death benefits; those are provided by life insurance.

If an annuitant dies before annuitization occurs, what will the beneficiary receive? - Cash value of the plan - Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount - Either the amount paid into the plan or the cash value of the plan, whichever is the lesser amount - Amount paid into the plan

- Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount If an annuitant dies before annuitization, the beneficiary will receive either the amount paid into the plan or the cash value of the plan, whichever is greater.

The form of life annuity which pays benefits throughout the lifetime of the annuitant and also guarantees payment for a minimum number of years is called: - Life income with refund. - Joint and survivorship. - Joint life annuity. - Life income with period certain.

- Life income with period certain. If the annuitant dies before the period certain, the payments continue to a beneficiary or the estate for the remainder of the period certain.

What would be considered a disadvantage of owning a fixed annuity? - Decrease in purchasing power of the benefit in times of inflation - Investment risks being carried by the annuity owners - Interest rate dependence on stock performance - Guaranteed minimum interest rate

- Decrease in purchasing power of the benefit in times of inflation A fixed annuity is characterized by a level benefit payment. This means that in times of inflation, benefits have less purchasing power. Since costs increase as a result of inflation, more money is required to purchase something that had previously cost less.

Which of the following is a true comparison between annuities and life insurance? - Both provide a lifetime income. - Neither annuities nor life insurance subject to income taxes. - Both annuities and life insurance use mortality tables. - Annuities serve the same function as life insurance.

- Both annuities and life insurance use mortality tables. Annuities are not life insurance; they do not pay a face amount upon the death of the annuitant. In most cases, the payment phase stops upon the death of the annuitant. Annuities use mortality tables, which reflect a longer life expectancy than the tables used in life insurance.

Twins brother and sister each purchased a retirement annuity. When they retired at the same time, each selected the life income option. Both have similar life styles and are in good health. Which of the following is true with respect to their monthly annuity payments? - The man's payments will be larger. - The woman's payments will be larger. - The payments will be based on their health at the time the payments begin. - Because they are the same age, they will receive the same payments.

- The man's payments will be larger. Annuities use mortality tables to determine the amount of money needed in retirement. Because the life expectancy of women is greater, the woman's payments in this particular example will be smaller since they need to last longer.

All of the following are true of an annuity owner EXCEPT: - The owner must be the party to receive benefits. - The owner pays the premiums on the annuity. - The owner has the right to name the beneficiary. - The owner is the party who may surrender the annuity.

- The owner must be the party to receive benefits. The "owner" is the person who purchases the contract and has all of the rights such as naming the beneficiary and surrendering the annuity. The owner, however, does not have to be the one who receives the benefits; it could be the annuitant (if different from the owner) or the beneficiary.

Which of the following is a feature of a single premium immediate annuity? - It is also referred to as a deferred annuity. - Income payments start within one year. - It is purchased through periodic payments. - Income payments start at age 65.

- Income payments start within one year. A Single Premium Immediate annuity is paid in a single lump sum. The annuity payments begin within a year of the date of purchase. A deferred annuity can be purchased with either a lump sum or through periodic payments, but the benefit is not paid until after one year or more has lapsed.

A couple receives a set amount of income from their annuity. When the wife dies, the husband no longer receives annuity payments. What type of annuity did the couple buy? - Joint limited annuity - Joint life - Joint and survivor - Life with period certain

- Joint life Joint life annuity settlement option pays benefits to two or more annuitants, but stops upon the death of the first.

Which of the following best describes a bail-out provision? - It decreases the annuity surrender value. - It allows the owner to surrender the annuity without a charge. - It waives the surrender charge for the annuitants confined to a long-term care facility. - It allows the owner to receive a higher interest rate at certain timeframe.

- It allows the owner to surrender the annuity without a charge. Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain timeframe.

What is the difference between a single premium and a flexible premium payment options in a deferred annuity? - The purpose of the annuity - The number of payments that purchase the annuity - The time of income payouts - The amount of benefit

- The number of payments that purchase the annuity The only difference between a single premium deferred annuity and a flexible premium deferred annuity payment options is the number of payments that purchase the annuity. SPDAs are purchased with a single payment; FPDAs are purchased with multiple payments.