Chapter 8: Annuities
An annuity is primarily used to provide A) retirement income B) disability income C) long-term care benefits D) death benefits
A) retirement income
Kathy's annuity is currently experiencing tax-deferred growth until she retires. Which phase is this annuity in? A) Payout period B) Accumulation period C) Deferred period D) Growth period
B) Accumulation period
What kind of annuity pays income to two annuitants until their deaths? A) Period certain annuity B) Joint and survivor annuity C) Straight life annuity D) Installment refund
B) Joint and survivor annuity
An immediate annuity has been purchased with a single premium. When does the annuitant typically begin receiving benefit payments? A) 1 month B) 6 months C) 12 months D) 24 months
A) 1 month
Which type of annuity guarantees a stated number of income payments, whether or not the annuitant is still alive to receive them? A) Life annuity certain B) Secure life annuity C) Irrevocable survivor annuity D) Guaranteed life annuity
A) Life annuity certain
Which of the following is an annuity that is linked to a market-related index? A) Market-related annuity B) Equity-indexed annuity C) Deferred-risk annuity D) Fixed-amount annuity
B) Equity-indexed annuity
Cindy buys a 10-year certain annuity with an installment refund. After receiving monthly payments for 5 years, Cindy dies. How many remaining payments will the insurer make to her beneficiary? A) No payments B) 30 payments C) 60 payments D) 120 payments
C) 60 payments
Which of these is NOT considered to be a purpose of an annuity? A) Annuities are intended to create an estate B) Annuities are intended to liquidate an estate C) Annuities are intended for the tax-free growth of principal D) Annuities are intended to distribute accumulated principal
A) Annuities are intended to create an estate
Which of the following is considered to be the period when the accumulated value in an annuity is paid out? A) Annuitization phase B) Accumulation phase C) Principal phase D) Period certain phase
A) Annuitization phase
The taxable portion of each annuity payment is calculated using which method? A)Exclusion Ratio B) Taxable Ratio C) Cost Basis D) Tax Basis
A) Exclusion Ratio
An annuitant would like to determine the current value of her annuity. To do this, she multiplies the number of "accumulation units" she owns times the unit value of the "separate account". What kind of annuity BEST matches this description? A) Variable annuity B) Fixed annuity C) Immediate annuity D) Life annuity
A) Variable annuity
The systematic liquidation of a sum of money is provided by a(n) A) annuity B) endowment contract C) life insurance policy D) 1035 contract exchange
A) annuity
When does an immediate annuity begin making payments? A) After multiple premiums have been paid B) After the first premium has been paid C) After policy has been active for one year D) After the incontestable period
B) After the first premium has been paid
An annuitant would like to determine the amount of an annuity distribution that is exempt from taxation. What is used to calculate this? A) Mortality rate B) Exclusion ratio C) Morbidity rate D) Debt-to-Equity ratio
B) Exclusion ratio
Which of these annuities require premium payments that vary from year to year? A) Flexible premium immediate annuity B) Flexible premium deferred annuity C) Fixed premium deferred annuity D) Fixed premium immediate annuity
B) Flexible premium deferred annuity
An annuitant dies during the distribution period. What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made? A) Variable annuity B) Refund annuity C) Rebate annuity D) Return annuity
B) Refund annuity
A savings vehicle designed to first accumulate funds and then systematically liquidates the funds is called a(n) A) immediate annuity B) deferred annuity C) endowment D) whole life policy
B) deferred annuity
An annuity which is backed by a life insurer's separate account is called a(n) A) equity indexed annuity B) variable annuity C) immediate annuity D) 403(b) plan
B) variable annuity
Lisa has recently bought a fixed annuity. Which of these is considered to be a disadvantage of owning this type of annuity? A) Payments cease 5 years after the annuitant's death B) During periods of inflation, annuitants will experience an increase in purchasing power of their payments C) During periods of inflation, annuitants will experience a decrease in purchasing power of their payments D) Payment amounts can be unpredictable from month to month
C) During periods of inflation, annuitants will experience a decrease in purchasing power of their payments
How are annuities given favorable tax treatment? A) Gains are tax deductible B) Gains are tax exempt at distribution C) Gains are taxed at distribution D) Gains are converted to tax credits
C) Gains are taxed at distribution
Fixed annuities provide each of the following EXCEPT A) Guaranteed interest B) Retirement funds C) Hedge against inflation D) Tax advantage
C) Hedge against inflation
Which market index is normally associated with an indexed annuity's rate of return? A) NAIC B) SEC C) S & P 500 D) A & P 300
C) S & P 500
How soon can the benefit payments begin with a deferred annuity? A) Anytime after date of purchase B) Anytime within 12 months after date of purchase C) A minimum of 6 months after date of purchase D) A minimum of 12 months after date of purchase
D) A minimum of 12 months after date of purchase
What is the nonforfeiture value of an annuity before annuitization? A) All premiums paid B) All premiums paid plus interest C) All premiums paid minus any withdrawals and surrender charges D) All premiums paid, plus interest, minus any withdrawals and surrender charges
D) All premiums paid, plus interest, minus any withdrawals and surrender charges
Which settlement option pays a stated amount to an annuitant, but no residual value to a beneficiary? A) Fixed period B) Interest only C) Installment refund D) Life income
D) Life Income
During the accumulation period, who can surrender an annuity? A) Payor B) Annuitant C) Beneficiary D) Policyowner
D) Policyowner
If the annuitant dies before the annuity start date, A) the benefits will be given tax-free only to a stated beneficiary B) nothing is given to the beneficiary C) the premiums paid will be given to the beneficiary D) the premiums paid plus interest earned will be given to the beneficiary
D) the premiums paid plus interest earned will be given to the beneficiary
What happens to interest earned if the annuitant dies before the payout start date? A) It is taxable B) It is taxable only if no beneficiary is named C) It is not taxable D) It is only taxable if contract has been in force under one year
A) It is taxable
Which type of annuity stops all payments upon the death of the annuitant? A) Life annuity B) Period certain annuity C) Cash refund annuity D) Joint and survivor annuity
A) Life annuity
Which of the following annuity payout options makes no additional payments regardless of when the annuitant dies? A) Life only B) Life with period certain C) Cash refund D) Installment refund
A) Life only
Which annuity payout option allows the policyowner to choose a pre-determined number of benefit payments? A) Period certain B) Straight life C) Installment refund D) Amount certain
A) Period certain
What distinguishes a deferred annuity from an immediate annuity? A) The time at which benefit payments start B) The benefit payment amount C) The taxation of benefit payments D) The age at which the annuity can be purchased
A) The time at which benefit payments start
Phil is shopping for an annuity that guarantees he CANNOT outlive the benefits. Which of these benefit options would he choose? A) Accelerated lifetime benefit B) Guaranteed lifetime withdrawal benefit C) Right of income rider D) Guaranteed minimum accumulation benefit
B) Guaranteed lifetime withdrawal benefit
How do interest earnings accumulate in a deferred annuity? A) On a tax credit basis B) On a tax-deferred basis C) On a tax-free basis D) On a taxable basis
B) On a tax-deferred basis
Fixed period settlement options are considered to be a form of a(n) A) cash value loan B) variable life policy C) annuity D) endowment
C) annuity
Andy the annuitant dies before the annuity start date. Which of the following is a TRUE statement? A) Principal returned is taxable B) Benefits are still payable tax-free to the beneficiary C) Company retains entire cash value D) Premiums paid plus interest earned is returned to the beneficiary
D) Premiums paid plus interest earned is returned to the beneficiary
What is the primary reason for buying an annuity? A) Provide tax-free income B) Provide a risky, yet high return investment C) Provide an instant estate D) Provide future economic security
D) Provide future economic security
Which of these statements regarding the annuitant is CORRECT? A) The contract can only be assigned by the annuitant B) The annuitant is the only individual who can surrender the contract C) The annuitant must also be the beneficiary D) The annuitant's life expectancy determines the annuity payments
D) The annuitant's life expectancy determines the annuity payments
What is a common reason people purchase an annuity? A) To create an immediate estate B) To pay off a debt in the event of death C) To minimize their tax burden D) To protect against the risk of outliving their financial resources
D) To protect against the risk of outliving their financial resources
Maria would like an annuity that provides a guaranteed accumulation or payout. The type of annuity she is seeking is called A) variable payout B) fixed accumulation C) interest guaranteed D) annuity certain
D) annuity certain
What will the beneficiary receive if an annuitant dies during the accumulation period? A) The greater of the accumulated cash value or the total premium paid B) The lesser of the accumulated cash value or the total premium paid C) The interest earned on the accumulated cash value D) Nothing
A) The greater of the accumulated cash value or the total premium paid
An annuitant is guaranteed to NOT outlive their benefits with a(n) A) Survivorship clause B) Guaranteed lifetime withdrawal benefit C) Period certain provision D) Guaranteed minimum accumulation benefit
B) Guaranteed lifetime withdrawal benefit
Which of the following is NOT a feature of equity-indexed annuities? A) Offers long term inflation protection B) Offers a minimum guaranteed rate C) Offers a maximum interest rate that increases annually D) Offers protection during a decline in the stock market
C) Offers a maximum interest rate that increases annually
Which of these will have the highest monthly payout upon annuitization? A) Life with period certain B) Joint and survivor life C) Straight life D) Joint life
C) Straight life
Who assumes the investment risk with a fixed annuity contract? A) The owner B) The annuitant C) The insurer D) The beneficiary
C) The insurer
Under a non-qualified annuity, interest is taxed after the A) deposits have been made B) death of the annuitant C) distribution of payments D) exclusion ratio has been calculated
D) exclusion ratio has been calculated
Victoria owns a life annuity and elects to receive annuity payments monthly for the remainder of her life with "ten years certain". Her annuity will make payments A) for a period of time dependent on the performance of the annuity's underlying assets B) for a maximum of 120 months C) for the remainder of her life only D) for a minimum of 120 months and a maximum of the remainder of her life
D) for a minimum of 120 months and a maximum of the remainder of her life
Simon has purchased a fixed immediate annuity. His payment amount will be dependent upon principal, interest, and the contract's A) surrender charge B) death benefit C) cash refund D) income period
D) income period
Kristi purchases an annuity that will pay her husband an income for 15 years. If he dies, this income will become payable to their children for the remainder of the period. Kristi has what kind of annuity? Joint life with period certain Life annuity with survivorship Survivorship annuity Temporary annuity certain
Temporary annuity certain