Unit 9 - Annuities
The owner fo an annuity contract possesses all of the following rights EXCEPT
TO CANCEL A DEFERRED ANNUITY AT ANY TIME AND RECEIVE ITS FULL CASH VALUE While the owner of an annuity contract enjoys many rights of ownership, including the right to move up (but not push back) the annuity starting date in a deferred annuity, most deferred annuities have a surrender or withdrawal charge that reduces distributions made in the early years of the contract.
For which of the following types of policies would premiums be invested in an insurer's separate account?
VARIABLE ANNUITIES Life insurers are not allowed to bear the risk of variable annuities or life insurance, so they set up separate accounts where the values are held and the investment risk is borne by the contract owner. The owner makes various investments in subaccounts inside the separate account.
The owner of an annuity contract possess all of the following rights EXCEPT
TO CANCEL A DEFERRED ANNUITY AT ANY TIME AND RECEIVE ITS FULL CASH VALUE While the owner of an annuity contract enjoys may rights of ownership, including the right to move up (but not push back) the annuity starting date in a deferred annuity, most deferred annuities have a surrender or withdrawal charge that reduces distributions made in the early years of the contract.
Which of the following statements about immediate annuities is NOT correct?
THE INCOME FLOW MUST BE FIXED RATHER THAN VARIABLE The income flow from immediate annuities can be either fixed or variable. With a fixed immediate annuity, the annuitant is guaranteed an income flow without risk of market fluctuations affecting the amount of income. With a variable immediate annuity, the investment risk is transferred to the annuitant. This means that once an income stream is created, the payments can increase or decrease depending on the performance of the underlying investments.
James died after receiving $180 per month for 6 years from a $25,000 life with refund annuity. His spouse, Lucy, as his beneficiary, will now receive the same monthly income until her payments total
$12,040 Under the life with refund annuity, also known as an installment annuity, the beneficiary receives the same monthly income (minus payments previously paid to the original annuitant) until the face amount is exhausted. In this case, the original $25,000 annuity fund has paid $12,960, leaving $12,040 for Lucy.
What type of annuity payment option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity is depleted, a lump-sum cash payment to the annuitant's beneficiary?
CASH REFUND OPTION A period certain option guarantees payments for a certain amount of time, whether or not the annuitant is alive. The payments stop when the specified period is over. A straight life option pays the annuitant a guaranteed income for her lifetime; no further payments are made after the annuitant dies. An installment refund option pays out what is left to the beneficiary in the form of continued annuity payments.
Matteo owns a nonqualified deferred annuity that has a current value of $50,000. He has 2 children, ages 11 an d17. If he decides to devote this annuity solely to help pay for their college educations and his goal is to maximize the annuity income payments, which of the following is the best option?
CONVERT TO AN IMMEDIATE ANNUITY USING A 10-YEAR PERIOD CERTAIN ANNUITY OPTION Distributing a lump sum of money over a specified period of time with a period certain annuity only will generate a higher annuity payment amount than any option that includes a life contingency.
Which of the following statements regarding the tax treatment of distributions form an individually owned, nonqualified, deferred annuity is NOT correct?
IF THE DISTRIBUTION IS THE RESULT OF THE ANNUITY CONTRACT OWNER'S DEATH, THE CASH VALUE PAYABLE TO THE BENEFICIARY IS INCOME TAX-FREE There are no tax-free death benefits associated with annuities, as there are with life insurance. The portion of the cash value death benefit that constitutes gain is subject to income taxation whenever distributed.
George and Virginia have an annuity that twill provide benefits for George's life and then continue to provide teh same amount of benefits to Virginia as his survivor. What type of annuity did George set up?
JOINT LIFE AND SURVIVORSHIP ANNUITY The joint and survivor annuity is often purchased by married couples who want to guarantee the the surviving spouse will receive regular income for life. Other annuity products have the possibility of the surviving spouse outliving the income payments.
A principal function of annuities is to
LIQUIDATE AN ESTATE The principal function of life insurance is to create an estate. The principal function of annuities is to liquidate an estate.
The annuitant of an annuity can be compared to which of the following with respect to a life insurance policy?
THE INSURED The annuitant can be compared to an insured in a life insurance policy. The annuitant is the person by whose life the contract is measured. Just as life insurance policy owners are often the insureds, annuity owners are often the annuitants.
The annuitant of an annuity can be compared to which of the following with respect to a life insurance policy?
THE INSURED The annuitant can be compared to an insured in a life insurance policy. The annuitant is the person by whose life the contract is measured. Just as life insurance policyowners are often the insureds, annuity owners are often the annuitants.
Norma and Luis are considering the purchase of an annuity for retirement. Which payout option would be the least suitable for them?
THE JOINT LIFE ANNUITY OPTION The joint life annuity option would be the least suitable because income payments stop at the death of the first annuitant, which leaves the survivor without the income.
Which fo the following statements regarding deferred annuities is NOT correct?
THEY GENERALLY PERMIT CONTRACT OWNERS TO WITHDRAW A SPECIFIED PERCENTAGE ANNUALLY, TAX-FREE AND WITHOUT A SURRENDER CHARGE Surrender charge-free withdrawals are generally permitted up to a specified percentage. (A common percentage is 10%). Although these free withdrawals may escape the contract's surrender charge, they are subject to income taxation. If the contract owner is younger than age 59 1/2, the tax may include a 10% penalty.
Tony, who is 65 and in excellent health, wants to buy an annuity with $100,000 he recently gained on the sale of his home. He wants to select an income option the twill provide him the highest monthly income possible. Which annuity income option best meets Tony's objective?
A STRAIGHT LIFE ANNUITY INCOME OPTION Regardless of the annuitant's age, health, or marital status, a straight life annuity income option will provide more monthly income than any life annuity income option that includes a guarantee feature.
Larry owns a deferred annuity for which his spouse, Karen, is the designated annuitant and his son, Chris, is the designated beneficiary. If Larry were to die before the contract is annualized, to whom would the contract's death benefit be payable?
CHRIS A deferred annuity's death benefit (which is equal to the contract's accumulated value) is payable to the contract's beneficiary, not the annuitant. This can create planning problems for annuity contract owners who assume contract proceeds would be payable to the designated annuitant were the owner to die before annuitization.
Which of the following statements about immediate annuities is NOT correct?
THE INCOME FLOW MSUT BE FIXED RATHER THAN VARIABLE The income flow from immediate annuities can be either fixed or variable. With a fixed immediate annuity, the annuitant is guaranteed an income flow without risk of market fluctuations affecting the amount of income. With a variable immediate annuity, the investment risk is transferred to the annuitant. This means that once an income stream is created, the payments can increase or decrease depending on the performance of the underling investments.
Matteo owns a nonqualified deferred annuity that has a current value of $50,000. He has 2 children, ages 11 and 17. If he decides to devote this annuity solely to help pay for their college education, and his goal is to maximize the annuity income payments, which of the following is the best option?
CONVERT TO AN IMMEDIATE ANUITY USING A 10-YEAR PERIOD CERTAIN ANNUITY OPTION Distributing a lump sum of money over a specified period of time with a period certain annuity only will generate a higher annuity payment amount than any option that includes a life contingency.
Which of the following statements regarding deferred annuities is NOT correct?
THEY GENERALLY PERMIT CONTRACT OWNERS TO WITHDRAW A SPECIFIED PERCENTAGE ANNUALLY, TAX-FREE AND WITHOUT A SURRENDER CHARGE Surrender charge-free withdrawals are generally permitted up to a specified percentage. (A common percentage is 10%). Although, these free withdrawals may escape the contract's surrender charge, they are subject to income taxation. If the contract owner is younger than age 59 1/2, the tax may include a 10% penalty.
