FIN 381 test 3 (FINAL) ch.14

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

$3,000

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

$6,000

Which of the following statements regarding individual retirement accounts (IRAs) is (are) true? 1.If an individual's only income during the year is from investments, he or she cannot make an IRA contribution. 2.The funds in the IRA can be used to purchase life insurance on the owner.

I only

All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT

The withdrawal is used to pay living expenses after unemployment insurance benefits cease.

Which of the following statements is true concerning traditional and Roth IRAs?

There are minimum distribution requirements for traditional IRAs.

Which of the following statements about variable annuities is true?

Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement.

Which of the following statements about the withdrawal of funds from a traditional IRA is true?

Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.

During the funding period, the premiums paid for a variable annuity are used to purchase

accumulation units.

Which of the following statements is (are) true with regard to IRAs? 1.Contribution limits are higher for workers aged 50 and older. 2.The minimum distribution rules after attainment of age 70.5 do not apply to Roth IRAs.

both I and II

Which of the following statements is (are) true with regard to the adequacy of IRA funds during retirement? 1.To assure lifetime income, the IRA funds can be used to purchase a life annuity. 2.The duration of IRA benefit payments depends on the rate of return earned on the invested assets after retirement and the withdrawal rate.

both I and II

When selling life annuities, what risk is the insurer pooling?

excessive longevity

Which of the following is a characteristic of a longevity annuity (longevity insurance)?

forfeiture of the purchase price if the annuitant dies during the deferral period

Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

investment management charge.

Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following annuity payout options will provide Brad with the highest monthly income?

life annuity (no refund)

Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called

longevity insurance.

Life annuity payments are made up of all of the following EXCEPT

unliquidated principal of annuitants who live too long.

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case?

50.00 percent

Donna, age 50, is single and earns $40,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $4,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution?

Her contribution is fully tax deductible.

Which of the following statements is (are) true about a longevity annuity (longevity insurance)? 1.If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited. 2.Longevity insurance is an example of an immediate annuity.

I only

Which of the following statements is (are) true with respect to a joint-and-survivor annuity? 1.Some joint-and-survivor annuities reduce the income payment after the first annuitant dies. 2.No payments are made after the first annuitant dies

I only

Which of the following statements is (are) true with respect to an equity-indexed annuity? 1.The maximum percentage gain is usually capped. 2.There is no downside protection against loss of principal if the annuity is held to term.

I only

Which of the following statements is (are) true with respect to annuities? 1. Annuities are the opposite of life insurance. 2. The fundamental purpose of annuities is to replace lost income in case of premature death.

I only

Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true? 1.Such conversions can be done with no income tax consequences. 2.Qualified distributions from a Roth IRA after a conversion are received tax-free.

II only

Which of the following statements is (are) true concerning the joint and survivor annuity settlement option? 1.Under this option, payments begin after the first annuitant dies. 2.This settlement option is often selected by married couples.

II only

Which of the following statements is (are) true regarding the Roth IRA? 1.Roth IRA contributions are tax deductible. 2.Roth IRA investment income accumulates income-tax free.

II only

Which of the following statements is (are) true regarding the taxation of distributions from individual annuities? 1.Individual annuity distributions are never taxable. 2.Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable.

II only

Which of the following statements is (are) true with regard to Roth IRAs? 1.The portion of a Roth IRA distribution that is attributable to investment income is taxable. 2.There is a maximum income level above which Roth IRA contributions are not allowed.

II only

Which of the following statements regarding the taxation of individual annuities is (are) true? 1.The exclusion ratio is the percentage of the annuity income that is taxable. 2.After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable.

II only

An immediate life annuity offers all of the following benefits EXCEPT

Immediate annuity payments are entirely exempt from federal income tax.

Which of the following is an advantage of a longevity annuity (longevity insurance)?

Monthly benefits begin at an advanced age when other assets are likely to have been depleted.

Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?

Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.

All of the following statements about traditional and Roth IRAs are true EXCEPT

Traditional IRAs are exempt from the penalty tax on premature distributions.

Which statement is true regarding IRA distributions?

Unless a life annuity is issued, a retiree may still be alive when the IRA account is exhausted.

Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the

administrative charge.

Which of the following statements is (are) true with regard to the inflation annuity option? 1.The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age. 2.Periodic payments to the annuitant are adjusted for inflation.

both I and II

Which of the following statements is (are) true with respect to the cash annuity settlement option? 1.The taxable portion of the distribution is subject to federal and state income taxes. 2.The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds.

both I and II

Which of the following statements is (are) true with respect to variable annuities? 1.The price at which accumulation units can be purchased fluctuates during the funding period. 2.The value of annuity units fluctuates over time.

both I and II

Traditionally, tables have been prepared showing how long IRA funds will last based on rates of return and annual withdrawal rates. These tables, however, assume constant returns over the projection period. Many financial planners are now using a technique that allows for fluctuations in market returns. A computer is programmed to estimate how long funds will last under many different return scenarios and to determine the probability that funds will last until a specified age. This technique is called

computer simulation.

Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)

deferred annuity.

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

joint life annuity.

Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it

life annuity with period certain.

Which of the following is a permissible IRA investment alternative?

mutual funds

Which of the following persons can establish a traditional IRA? 1.A person whose only income received is from investments. 2.A 75 year-old man who has earned taxable income.

neither I nor II

James is concerned that if he purchases a fixed immediate annuity his funds will be tied-up and not accessible if an emergency arises. His insurance agent said that a rider could be attached to his annuity to address this concern. The rider is a(n)

partial cash withdrawal rider.

The fundamental purpose of a variable annuity is to

provide a hedge against inflation.

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

surrender charge.

Carl is concerned that if he purchases an equity indexed annuity, he will lose money long-term if the stock index declines. Which equity indexed annuity provision assures Carl that he will not lose money if he holds the equity indexed annuity to term?

the guaranteed minimum value

With an equity-indexed annuity, what name is given to the method of crediting excess interest to the annuity?

the indexing method

Under an equity-indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?

the participation rate

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

using an IRA rollover account.