A.D. Banker: Chapter 5 Annuities

Long-Term Care (LTC)

A Long-Term Care rider will permit the owner of the policy to use all or a substantial portion of the annuity cash accumulation value to pay for the expenses of LTC under the same requirements to trigger and pay benefits as a traditional LTC policy.

Single Premium Deferred Annuity (SPDA)

A single premium (lump sum) is put into an annuity from which the annuitant will draw the benefits at some specified time in the future, more than 1 year from the issue date.

All of the following are correct regarding an annuity, EXCEPT: a) An annuity can be paid with a single premium or periodic premium b) An annuity can be immediate or deferred c) The accumulation in an annuity grows tax-deferred d) An immediate annuity must start providing income within 3 years of the first premium payment

D) An immediate annuity must start providing income within a year of the first premium payment.

The period of time over which a single sum or periodic deposits grow within an annuity is referred to as the: a) Accumulation Period b) Growth Period c) Benefit Period d) Savings Period

a) Accumulation Period: The pay-in phase of an annuity is called the Accumulation Period or Phase. The pay-out phase is the Annuity Period or Phase.

Which of the following annuities uses unit values rather than dollars to account for its value? a) Indexed b) Market Value Adjustment c) Variable d) Fixed

c) Variable: Deposits buy accumulation units, distributions are from liquidation of annuity units. Units are like shares of a mutual fund.

As adopted into California law, the NAIC's '2010 Model Suitability in Annuity Transactions Model Regulations' require all producers to document that an annuity sold to a senior is: a) Without surrender charges b) With the knowledge and consent of the senior's adult children c) Through an insurer in the highest three credit ratings of a nationally recognized credit rating service d) Suitable for that person's needs and objectives

d) As adopted into California law, the NAIC's '2010 Model Suitability in Annuity Transactions Model Regulations' require all producers to document that an annuity sold to a senior is suitable for that person's needs and objectives.

The insurer generally assumes the investment risk in all of the following annuities, except: a) Equity-Indexed b) Fixed c) Market Value Adjustment d) Variable

d) Variable: The insurer's general account assets guarantee fixed-dollar annuity contracts, and the insurer bears any investment risk.

Single Premium Immediate Annuity (SPIA)

A single premium (lump sum) is put into an annuity from which the annuitant may immediately begin drawing benefits (within a year of the issue date). A retirement plan rollover, savings account balances or CDs, mutual funds, deferred annuity values, or the death proceeds of a life insurance policy might be used to purchase a SPIA.

A contract that is designed to accumulate value over time with the intent to distribute the funds over the lifetime of an individual is called _________. a) An annuity b) Variable life insurance c) An endowment d) Whole life insurance

An annuity: Annuities are designed to liquidate accumulated assets rather than to create a sum of money as a direct benefit for another person. When an annuity is not already annuitized, it is subject to state insurance nonforfeiture laws, and the contract value must be paid to a beneficiary, to the owner, or to the owner's estate following the death of the annuitant.

Cost of Living

An inherent risk in a fixed annuity is the loss of purchasing power due to inflation. A Cost of Living rider will increase the annuity payments according to changes in the Consumer Price Index (CPI).

Accelerated or Living Benefit

As in life insurance, this rider permits the policyowner to withdraw funds without a surrender charge prior to annuitization in the event of the annuitant's terminal illness diagnosis. Death must be expected within 2 years. Some terminal illness riders also permit withdrawals due to permanent total disability.

Flexible Premium Deferred Annuity (FPDA)

Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum amount for contributions. Benefits begin more than 1 year from the issue date.

Z chooses a life income with 10 year period certain settlement option for the annuity Z owns. Z dies after 15 years of receiving income benefit payments. What does Z's beneficiary receive?

Nothing: Since Z outlived the period certain, the beneficiary designated receives nothing.

What is "fixed" in a fixed annuity?

The "fixed" portion of a fixed annuity is the interest crediting rate, which may change at the discretion of the insurance company, but not less than the guaranteed minimum. A fixed annuity also promises a fixed payment to the annuitant when the contract is annuitized.

A "Joint and ½ Survivor" distribution option means which of the following statements is correct? a) When one of the joint annuitants dies, the survivor's continuing payments will be half of the total payment both were receiving b) The annuitant receives a full share of the annuity payment, and the spouse receives an additional half c) The annuitant receives a full share of the annuity payment each month, and the beneficiary receives a one-half share of the payment d) There are two annuitants named in the policy, and each contributes half of the monthly premium or the lump sum that establishes the annuity

a) A joint and ½ annuity pays half of the total payment two or more annuitants were receiving when the contract was first annuitized. Payments continue until the last surviving annuitant has died.

What must an insurance producer have in order to market variable annuities? a) A securities license as a variable contracts and investment company representative in addition to a life agent license b) A variable contracts insurance agent license issued by his/her resident state's regulator c) A good business reputation and no convictions listed in 18 U.S.C. 1033, the Federal Violent Crime Control and Law Enforcement Act d) A copy of the current prospectus to give to a customer prior to or at the time of the first appointment

a) A securities license as a variable contracts and investment company representative in addition to a life agent license: A licensed life agent also needs a securities license to be able to transact variable life or annuity contracts. Each of the other answer choices is an accurate statement but does not answer the question appropriately.

What must insurers use to gather required information and producers must receive product-specific training for each annuity they market to seniors before they may even market the annuity? a) Suitability questionnaires b) Attending physician's statements c) IRS forms 1040s, W-2s, and 1099s d) MIB reports

a) Insurers must use suitability questionnaires to gather the required information and producers must receive product-specific training for each annuity they market to seniors before they may even market the annuity.

All of the following are true regarding annuities, except: a) They are similar to life insurance b) They are designed to protect against outliving one's income c) They are used primarily to provide a steady stream of income d) They can liquidate an estate

a) They are similar to life insurance: Annuities are used primarily to provide a steady stream of income to an individual, typically upon retirement. They are designed to protect against outliving one's retirement income by providing lifetime income. And they can liquidate an estate over the lifetime of an annuitant. Although both annuities and life insurance are mortality-based products, they have opposite purposes: annuities are designed to distribute an estate, while life insurance is designed to create an estate.

Which of the following annuities typically offers no guarantees? a) Variable b) Indexed c) Bonus Interest Rate Annuities d) Fixed

a) Variable: The variable annuity holder assumes all investment risk.

Deferred annuities are normally purchased to defer ___________. a) Withdrawals of any earnings b) Taxes on any policy earnings c) Withdrawals of any principal d) Earnings on any deposits

b) Deferred annuities are normally purchased to defer taxes on any policy earnings. They are ideal for accumulating a retirement fund.

Generally, corporations can use annuities to fund all of the following, except: a) Nonqualified deferred compensation plans b) Estate creation c) Employee pensions d) Structured settlements

b) Estate creation: Corporations may use annuities to provide pensions for employees, funding nonqualified deferred compensation plans or qualified retirement plans, and even to structure payments from liability settlements, known as structured settlements.

Jasmine has deposited $100,000 into a single premium immediate annuity. If Jasmine were to die before receiving $100,000 in payments, the balance of the $100,000 would be paid to her sister. Jasmine has selected the: a) Joint Life Option b) Life Income with Refund Option c) Life Income Period Certain Option d) Life Income Joint and Survivor Option

b) Life Income with Refund Option: If Jasmine dies prior to receiving an amount equal to the total of all payments made into the annuity and the balance of that amount is refunded to a beneficiary either in a lump sum or in installments, she has chosen Life Income with Refund.

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? a) A one-time opportunity to convert the proceeds to a Roth IRA without taxation b) To adopt the annuity as his/her own and become the annuitant or to name another annuitant c) There are no choices, when the annuitant dies, the principal value must be distributed to the beneficiary, who may choose the distribution option if none was selected in advance d) The option to withdraw all funds tax-free in the form of a §1035 exchange to life insurance

b) The spouse-beneficiary may adopt the annuity as his/her own. As the owner, he/she may name a new annuitant and/or beneficiary, or assign ownership to another person for value.

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

b) 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.

While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a non-qualified annuity, which is _________. a) Tax-free money for college education or other qualified expenses b) Tax-deferred growth of principal c) A stream of income the annuitant cannot outlive d) Tax-free payments for the lifetime of a beneficiary

c) A stream of income the annuitant cannot outlive: Although both annuities and life insurance offer tax-deferred growth of principal, the long term benefit of an annuity is the lifetime income stream available at any time to the annuitant.

W and Z are annuitants of an annuity. W dies and Z receives 1/2 of the amount coming into their household when both were alive. They must have elected which of the following settlement options? a) Joint Life b) Life with Installment Refund c) Joint and 1/2 Survivor d) Life with Period Certain

c) Joint and 1/2 Survivor: In a Joint and Survivor annuity, benefits are payable to 2 annuitants while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies.

Which of these annuity distribution options promises the largest possible payment to a single annuitant? a) Life income with period certain b) Installment refund c) Life income only d) Lump sum refund

c) Life income only: Because the insurance company has no way of knowing how long the annuitant will live, and because the contract is created for the benefit of the annuitant, a life only option provides the largest possible payment. The insurance company is at greater risk of paying more than the principal value at the time of annuitization, so it pays a larger amount based on the life expectancy of the annuitant.