Chapter 7: Annuities

Before he died, an annuitant received $12,500 in monthly benefits from his $25,000 straight life annuity. He was also insured under a $50,000 paid-up whole life policy that named his wife the primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits?

$50,000

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An insurance company forwards fixed annuity premiums to their general account, where the money is invested, The guaranteed minimum interest is set at 3%. During an economic downswing, the investments only drew 2.5%. What interest rate will the insurer pay to its policy0holders?

3%

Periodic payments of accumulated funds best describes...

An annuity

The equity in an equity index is linked to...

An index like Standard & Poor's 500

Who can make a fully deductible contribution to a traditional IRA?

An individual who has earned income

When an annuity is written, whose life expectancy is taken into account?

Annuitant

An agent selling variable annuities must be registered with

FINRA

Which of the following is NOT true about a group annuity?

It can be owned by individual employees.

Why is an equity indexed annuity considered to be a fixed annuity?

It has a guaranteed minimum interest rate.

All of the following statements are true regarding installments for a fixed period annuity settlement option EXCEPT...

It is a life contingency option

Which of the following is TRUE regarding the annuity period?

It may last for the lifetime of the annuitant

A couple near retirement is planning for their golden years. They want to make sure that their retirement annuity provides monthly benefits for the rest of their lives. Should one of them die, the other would still like to continue receiving benefits. Which settlement option should they choose?

Joint and Survivor

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?

Joint and survivor

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 life annuity

Which of the following best describes a pure life annuity settlement option?

Pure life provides payments for as long as the annuitant is alive.

Equity indexed annuities...

Seek higher returns

Which two terms are associated directly with the way an annuity is funded?

Single payment or periodic payments

All other factors being equal, which of the following types of annuities will generally provide the highest monthly income?

Straight Life

Your client is planing to retire. She has accumulated $100,000 in a retirement annuity, and now wants to select the benefit option that will pay the largest monthly amount for as long as she lives. As her agent, you should recommend...

Straight life

If the owner prematurely surrenders his deferred annuity before the annuitization period begins, which of the following is most likely to occur?

The owner will receive the premium payments that have been paid into the annuity, plus and interest, minus a surrender charge.

All of the following statements are true regarding installments for a fixed amount EXCEPT...

The payments will stop when the annuitant dies.

The main difference between immediate and deferred annuities is...

When the income payments begin

An internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a(n)...

403(b) Plans (TSA)

What is the penalty for excessive contributions to an IRA?

6%

Who would be eligible to contribute to an IRA?

A 50-year old school teacher

All of the following are true regarding a qualified annuity EXCEPT...

A distribution, all amounts received by the employee are tax free.

In an annuity, the accumulated money is converted into a stream of income during which timer period?

Annuitization period

Which of the following is NOT true regarding an annuity certain?

Benefits stop at the annuitant's death

What license or licenses are required to sell variable annuities?

Both a life insurance license and a securities license

A tax-sheltered annuity is a special tax-favored retirement plan available to...

Certain groups of employees only

Which of the following is NOT a term for the period of time during which the annuitant or the beneficiary receives income?

Depreciation period

What is the advantage of having a qualified annuity?

Favorable tax treatment

Fixe annuities provide all of the following EXCEPT...

Hedge against inflation

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?

Surrender charge

The advantage of qualified plans to employers is...

Tax deductible contributions

A 403(b) plan, commonly referred to as a TSA, is available to be used by...

Teachers and not-for-profit organizations

All of the following employees may use a 403(b) plan for their retirement EXCEPT...

The CEO of a private corporation

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan of the cash value of the plan, whichever is the greater amount

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 life a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n)...

Equity Indexed Annuity

Under which installments option does the annuitant select the amount of each payment, and the insurer determines how long they will pay benefits?

Fixed amount

K purchased a $90,000 annuity with a single premium, and began receiving payments 2 months after that. What type of annuity is it?

Immediate

A luck individual won the state lottery, so the state will be sending him a check each month for the next 25 years. What type of annuity products are they likely to use to provide these benefits?

Immediate annuity

An individual works for a manufacturing company. If he decides to fund a retirement plan for himself, for which of the following plans could he qualify?

Individual Retirement Account

If an annuitant selects the straight life annuity settlement option, in order to receive all of the money out of the contract, it would be necessary to...

Live at least to his life expectancy.

Which of the following statements is INCORRECT regarding IRAs?

Married couples are required to purchase a jointly owned IRA.

Under a straight life annuity, if the annuitant dies before the principal amount is paid out, the beneficiary will receive...

Nothing; the payments will cease

Which of the following can surrender a deferred annuity contract?

Only the annuity owner

Which of the following is another term for the accumulation period of an annuity?

Pay-in period

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 15 years

Which of the following is NOT true about a joint and survivor annuity benefit option?

Payments stop after the first death among annuitants

What form of the annuity settlement options provides payments to an annuitant for the rest of the annuitant's life and ceases at the annuitant's death?

Pure life

Which of the following is TRUE regarding variable annuities?

The annuitant assumes the risks on investments

How are contributions to a tax-sheltered annuity treated with regards to taxation?

They are not included as income for the employee, but are taxable upon distribution

Which of the following is NOT true regarding Equity Indexed Annuities?

They earn lower interest rates than fixed annuities

Which of the following is TRUE for both equity indexed annuities and fixed annuities?

They have a guaranteed minimum interest rate

Which of the following would NOT be considered earned income?

Unemployment benefits

In general terms IRA contributions...

Are tax deductible

Under a pure life annuity, an income is payable by the company...

Only for the life of the annuitant

Which of the following statements is INCORRECT concerning and IRA?

Married individuals must contribute into one account for both spouses, up to a specified amount for each person.

In reference to fixed annuities, what comprises most of a life insurance company's general account?

Conservative investments like bonds

All of the following statements are true of a non-qualified retirement plan EXCEPT...

Contributions are tax exempt

Which of the following is NOT a legitimate use of annuities by businesses?

Creating a tax shelter

Which of the following will NOT be an appropriate use of a deferred annuity?

Creating an estate

The term "fixed" on a fixed annuity refers to all of the following EXCEPT...

Death Benefit

Which of the following are NOT fundable by annuities?

Death benefits

An individual has been making periodic payments on an annuity. The annuity income payments are scheduled to begin 2 years after the annuity what purchased. What type of annuity is it?

Deferred

What qualifies an individual to contribute to an IRA?

Earned income

A prospective deferred annuity owner is concerned about what would happen if he surrendered the annuity before the annuitization period. The agent most likely explained which of the following?

Nonforfeiture options guarantees that the owner will receive a surrender value of the contract

Which of the following is NOT true regarding the Life Guaranteed Minimum annuity settlement option?

It provides a higher monthly benefit than a pure life annuity.

Which of the following is NOT true regarding the accumulation period of an annuity?

It would not occur in a deferred annuity

The annuity owner dies while the annuity is still in the accumulation stage. Which of the following is TRUE?

The beneficiary will receive the greater of the money paid into the annuity or the cash value.

The annuity owner dies during the accumulation period of his annuity. The cash value of his annuity exceeds the premiums he paid. There is no named beneficiary. Which of the following is true?

The cash value will be paid to the annuitant's estate

Which of the following is a feature of a variable annuity?

Benefit payment amounts are not guaranteed

Which of the following products will protect an individual from outliving his or her money?

Annuity

Your client plans to retire at age 50. He would like to purchase an annuity that would provide income from the time he retires to the age when social security and other pension funds become available. What settlement option should he consider?

Annuity certain

Who is eligible to purchase and IRA?

Anyone under the age of 70 1/2 who has earned income

If the annuitant dies during the accumulation period, who will receive the annuity benefits?

Beneficiary

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 period

Which of the following is TRUE regarding the accumulation period of an annuity?

It is a period during which the payments into the annuity grow tax deferred

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 Life

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 period certain

Which of the following best describes the difference between Pure Life and Life with Guaranteed Minimum settlement options?

Life with Guaranteed Minimum will pay the remaining principal to the beneficiary

Which of the following is NOT true regarding the annuitant?

The annuitant cannot be the same person as the annuity owner

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?

The annuitant must be a neutral person.

All of the following statements about equity index annuities are correct EXCEPT...

The annuitant receives a fixed amount of return

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 guaranteed minimum rate or current rate.

If a beneficiary is NOT named for annuity benefits, to which entity will the benefit be paid?

The annuitant's estate

The market value adjustment in modified guaranteed annuities refers to which of the following?

The difference between the contracted interest rate and the rate at surrender

Who bears all the risk of the investment in a fixed annuity?

The insurance company

When a fixed annuity owner pays hid/her insurance company a monthly annuity premium, where is this money placed?

The insurance company's general account

Which of the following is true regarding a modified guaranteed annuity?

The owner is guaranteed a fixed interest rate for a specific period of time.

All of the following are true of an annuity owner EXCEPT...

The owner must be the party to receive benefits

Which of the following best describes what the annuity period is?

The period of time during which accumulated money is converted into income payments

If a deferred annuity is surrendered prematurely, a surrender charge is imposed. How is the surrender charge determined?

The surrender charge is a percentage of the cash value and decreases over time.

A deferred annuity is surrendered prior to annuitization. Which of the following best describes the nonforfetiure value of the annuity?

The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges.

Which of the following products requires a securities license?

Variable annuity