Chapter 5: Annuities

In which annuity can it be said that it has 'upside potential, but no downside risk' when it comes to the stock market overall?

Indexed

Which annuities is known for having the highest surrender charge percentages and the longest surrender charge time periods?

Indexed Annuities

If an annuity lifetime benefit is selected in most cases, it is a(n) _________ election.

Irrevocable

What is the Annuity Period?

The period of time of which funds are liquidated over time to guarantee a lifetime string of income

Deposits into a Variable Annuity go to:

The separate account

Which of the following annuities offers the best opportunity to offset the effects of purchasing power loss over the long-run?

variable

What is the Bailout Provision (Escape Clause) in an annuity? (Nonforfeiture Provisions)

If the interest rate drops by below a specific amount, the annuity may be surrendered without surrender charges being applied.

What is the purpose of an annuity?

In theory, an annuity is designed to protect against outliving an individual's retirement income by providing lifetime income.

What is different in regards to taxes about a corporate owned nonqualified annuity compared to an individually owned nonqualified annuity?

Interest or gains are taxable as income in the year earned

Which annuities are directly affected by a 'bullish' stock market?

Equity-Indexed and Variable

If an annuity policyowner stops putting money into their periodic or flexible premium annuity, what can the policy values be used for?

Just like with life insurance any policy values contained in the contract are nonforfeitable for nonpayment of premium. They can be used for surrender or buying a paid up annuity.

The annuity benefit or payment option requiring the greatest amount of capital per $1,000 of benefit is:

Life Income Joint and Survivor 100%

The annuity settlement option that pays out the highest monthly income for as long as the annuitant lives, and leaves no residual value upon the annuitant's death, is the:

Life Income Option

Describe the Annuity payout option of Life Income Period Certain.

Life income with a specified period Beneficiary receives benefits only if annuitant dies in specified period Annuitant will continue to receive income if live beyond period certain

What is the Annuitization in an Annuity?

Point in time when the accumulation period ends and benefits can be dispersed

What are Systematic Withdrawals?

This allows a way to access the annuity policies values without having to elect a settlement option while still maintaining the policy in force

How can annuities be used to offset the cost of education?

Using a systematic withdrawal or settlement option provides an income stream to help meet or offset some of the expenses incurred.

If a corporation purchases a Group Deferred Annuity, what do the employees get?

A certificate

What happens to the accumulation units when a Variable Annuity begins annuitization?

Accumulation units become annuity units and these are fixed

How do annuities differ from life insurance?

Annuities are generally written for the annuitant to receive benefits while still alive while life insurance is written to benefit the beneficiary once the insured dies.

Describe the Annuity payout option of Joint Life.

Annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.

Who bears the investment risk of a Variable Annuity?

Contact Owner

Variable Annuities do not have a guaranteed:

Death Benefit

X does not know what cash flow will look like over the next 10 years, but wants to fund an annuity for retirement. Which premium funding method would be best for X to consider?

Flexible

What are the classifications of annuities? (What options must be selected when setting up an annuity?)

Premium funding (mode of payment) Investment Options (Fixed vs. Variable) When payout is available (immediate vs. deferred) Payout option selected (Life Only vs. Annuity Certain)

Only a(n) __________ can guarantee to provide an income benefit payment for as long as the annuitant is alive.

insurer

One of the benefits of an annuity in regards to taxes is:

Earnings are tax deferred during the accumulation phase

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

If Alan owns a market value adjustment annuity (MVA) and interest rates have fallen since he has taken out the policy, what impact will this have on the policy values?

In effect, the policy values would have increased

Fixed Annuities have a guaranteed:

Minimum interest rate

What is a Single Premium Deferred Annuity?

Paid for with a single premium, but annuitization begins in the future, typically after 1 year

Gloria needs to use her annuity as a long-term savings plan rather than as a short-term tax shelter, otherwise she will incur a ____% penalty tax against any taxable withdrawals prior to age ____.

10% 59 1/2

A Fixed Annuity is fixed because it has a:

Fixed level income stream

Instead of electing to annuitize the annuity, what is another common option chosen?

Lump sum distribution

What is Tax-Deferred Growth in an annuity?

Since an annuity is an insurance contract, the accumulation value grows tax deferred.

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

From a tax standpoint, what is the benefit of receiving income benefit payments as opposed to cashing out an annuity after it has been held for several decades?

Taxes are only due on the amount of tax-deferred earnings in each payment

How can annuities be used for retirement income?

The funds accumulated inside an annuity can be used to fund all or part of a consumer's retirement income for life or can end prior to annuitant's death.

What is the relationship between an interest rate and the monthly income benefit payments of an annuity?

The higher the interest rate credited translates into the higher monthly income benefit payment.

What is an Indexed (or Equity Indexed) Annuity?

These are fixed annuities and the interest is credited based on a stock index

What is a Market-Value Adjustment (Adjusted) Annuity (MVA)?

These are fixed annuities that adjusts interest rates based on bond returns

What is a Nonqualified Annuity?

They are funded with after-tax dollars meaning it would not qualify for tax deductions. Only the earnings are taxable as ordinary income.

What is a Qualified Annuity?

They are funded with pre-tax dollars meaning the contribution could qualify for a tax deduction, lowering taxable income. The entire annuity is subject to ordinary income taxes.

How can annuities be used for long-term care benefits?

Today's annuities may offer riders which help offset some of the costs associated with providing long-term care. Some companies offer a combination deferred annuity and long-term-care policy that allows for single premiums 3-to-1 or 2-to-1. (Ex. A $100,000 single premium deferred annuity could pay up to $200,000-300,000 in long-term-care benefits.) Annuity funds used for long-term care are tax-free.

Which of the following death benefits is paid out to the beneficiary income tax free? A. An annuity whose annuitant dies when used for retirement income planning B. Life insurance when the insured dies while the policy is in force C. An annuity whose annuitant dies during the distribution phase D. An annuity whose annuitant dies during the accumulation phase

B. Life insurance when the insured dies while the policy is in force Only life insurance pays out an income tax free death benefit. While an annuity does allow for a beneficiary to be named, any tax deferred earnings are subject to income tax when paid out.

How can annuities be used by beneficiaries to purchase other insurance?

If an annuity has a large amount of tax deferred dollars then, upon death, the beneficiary receives benefits and has to pay income tax. To avoid this, the annuity can be used either through systematic withdrawals or a settlement option to buy life insurance which will pay out a death benefit income tax free to the beneficiary.

Describe the Annuity payout option Life Income with Refund (Installment or Cash Refund).

Lifetime Income to annuitant If annuitant dies, balance is refunded in installments or a lump sum to beneficiary

Which type annuities are directly impacted by rising and falling interest rates?

Market Value Adjustment

What happens if Interest Rates are higher than when the MVA was purchased?

The MVA will likely be negative, meaning an additional amount may be deducted from either the annuity or the withdrawal amount.

Describe the Annuity payout option of Life Income Joint & Survivor.

The annuity is payable to 2 annuitants in one check. If one dies, the survivor continues to receive benefits either in full or partial.

What is a Single Premium Immediate Annuity?

This does not have an accumulation period and is used to generate immediate income within a year of the issue date and is paid for with a single premium.

What benefit does the Guaranteed minimum withdrawal benefit offer to the owner?

This gives the owner of a variable annuity the ability to withdraw a maximum percentage of the annuity value until the initial investment amount has been recouped.

What is a group annuity?

This is a contract between the insurer and the employer and is set up for eligible employees.

What is a Deferred Variable Annuity?

This type of annuity is designed to start benefit payments many years from now and subjects the owner to investment risk

Describe the Annuity payout option of Annuity Certain.

This will continue a stream of payments to the annuitant's beneficiary or estate if the annuitant dies before the payment term ends.

Which annuity is the only one regulated by the SEC, FINRA, and State insurance departments?

Variable

What is a Waiver in an annuity? (Nonforfeiture Provisions)

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.

What is the Surrender Charge like in an annuity? (Nonforfeiture Provisions)

When a contract is fully surrendered, any surrender charges will lessen the contract payout.

The ________ bears all investment risk in a fixed annuity.

insurer

What is a Flexible Premium Deferred Annuity?

Funded with periodic payments and annuitization will begin in the future, typically after 1 year

What must an insurance producer have in order to market variable annuities?

A securities license/FINRA registration as a variable contracts and investment company representative in addition to a life agent license

All being equal, who'd receive the lowest income benefit from an annuity? A. Female age 70 B. Male age 70 C. Female age 80 D. Male age 80 *Why?*

A. Female age 70 The younger female will receive the smallest income benefit as she will have the longest remaining life expectancy.

An annuitant owns an annuity that has been in force for 4 years. The policy has a 10-year surrender charge associated with it. If the annuitant suffered a long-term disability and used the funds from the annuity as a result, what surrender charges would be assessed?

Annuity surrender charges are generally waived if the annuitant is hospitalized for an extended period, placed in a nursing facility, becomes disabled, or dies.

What is the Tax Penalty provision in an annuity? (Nonforfeiture Provisions)

To discourage the use of annuities as short-term tax shelters, a 10% penalty tax is levied against any premature withdrawals prior to 59 ½ years of age.

An individual owns a variable annuity. Upon annuitization, the number of Annuity Units on which the benefit amount is based will __________ from month to month. Why?

Remain the same Because Annuity Units in a Variable Annuity are fixed

Sam wants to know at what age he should select a settlement option in order to receive the highest monthly income benefit payment. Which of the following will meet his objective regardless of the settlement option selected? A. Age 70 B. Age 55 C. Age 65 D. Age 62

A. Age 70

What happens if Interest Rates are lower than when the Market Value Adjustment (MVA) was purchased?

The MVA will likely be positive, meaning money may be added to either the annuity or to the withdrawal amount.

What is the Accumulation Period in an Annuity?

The time period of which money is paid into an annuity until the annuitization period.

A retiree elected the Life Income with 10 Year Period Certain. He/she dies the day after receiving 119 monthly payments. The beneficiary will receive _______ more payment(s).

1 (Since the retiree died within the period certain (10 years or 120 months), the contingent payee would receive the balance of the payments. Since the retiree has received 119 monthly payments, only one guaranteed payment remains.)

Which of the following is TRUE regarding Indexed Annuities? A. Values and benefits may increase, but not decrease B. Values and benefits are determined by the performance of a separate account C. They have a level number of annuity units with a fluctuating unit value D. The premiums paid are usually invested in separate account(s)

A. Values and benefits may increase, but not decrease (Because of the way Indexed Annuities are designed, they offer a portion of the potential upside of the index selected to determine the policy's interest credits, but in no case will the policy values or benefits go down if the index chosen falls in value)

With a Life Income Payment Option, what happens at the annuitant's death?

All payments cease

What are Variable Annuities?

Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars.

All of the following are benefits an annuity can provide that other investment or savings products cannot, except: A. Guaranteed minimum death benefit B. Tax-free distributions C. Income benefit payments that cannot be outlived D. Guaranteed minimum withdrawal benefit

B. Tax-free distributions

In which of the following circumstances is an annuity's tax-deferral benefit lost? A. The annuity is held beyond age 70 1/2 B. The annuity is owned by a corporation C. The annuity has a long-term care rider D. The annuity is owned by someone other than the annuitant

B. The annuity is owned by a corporation

Surrender charges typically ____________ over time.

Decrease

What is required to sell Variable Annuity plans?

FINRA registration and an insurance license

Describe the Annuity payout option of Life Income (Pure or Straight Life).

Lifetime income to the annuitant - no beneficiary

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 3%, the affect on this month's income benefit check will be _____.

Lower

How can lump sum structured settlements be used to purchase an annuity? What are some examples of these settlements?

Lump sum payments from lawsuits, lottery winnings, or an inheritance can be used to purchase a structured settlement in the form of an annuity.

What happens to the purchasing power of a fixed annuity?

Purchasing power decreases as cost of living increases (Ex. If the fixed monthly income is $500, it will remain fixed for the duration of the payout.

Deferred annuities are normally purchased to defer ___________.

Taxes on any policy earnings

What is an annuitant?

The individual whose life the contract is based on.

What is the income paid out based on in a Variable Annuity?

The value of the annuity units which fluctuate based on the performance of the separate account

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

F has an annuity with $50,000 of cash value. F needs life insurance but does not currently have it in his budget to pay for it. What is another option for F to consider to obtain the much needed life insurance F needs?

Use some of the annuity funds either through systematic withdrawal or a settlement option to pay the life insurance premiums