Am Pro Chapter 22
Money in a Qualified Annuity will be subject to taxation and a 10% penalty if the money is withdrawn prior to what age? Select one: a.55 b.59 ½ c.65 d.70 ½
59 ½
Which of the following does not actually exist? Select one: a.A Flexible Premium Deferred Annuity. b.A Lump Sum Immediate Annuity. c.A Flexible Premium Immediate Annuity. d.A Lump Sum Deferred Annuity.
A Flexible Premium Immediate Annuity.
Moliq has been paying on her whole life policy since age 25. She is now 80. She is concerned about her savings running out but she doesn't think she has any further need for life insurance. Moliq should consider cashing in the whole life policy and buying: Select one: a.A life annuity. b.Term Insurance.
A life annuity.
Which Annuity has payments that will end upon the death of the annuitant? Select one: a.An Amount Certain Annuity. b.A Straight Life Annuity. c.A Period Certain Annuity. d.A Refund Annuity.
All of these choices provide for payment to continue after the death of the annuitant except for the Straight Life Annuity (Straight Annuity) where payments cease when the annuitant dies. The correct answer is: A Straight Life Annuity.
Both a Life Insurance license and a Securities license are required to offer which annuity? Select one: a.Qualified b.Straight c.Fixed d. Variable
Any time you see the word "variable," you know that a securities license is needed; that the owner controls the investment account; there must be a separate account for this investment; and the account's value is measured in "investment units." The correct answer is: Variable
Alex sells his business and is ready to retire. He wants to use his lump sum of cash to fund his retirement starting immediately. Which of the following might be a good option for Alex? Select one: a.A Flexible Premium Immediate Annuity b.A Lump Sum Deferred Annuity c.Single Premium Whole Life Insurance d.A Lump Sum Immediate Annuity
He funds this with a "lump sum" and it begins to pay "immediately." Thus, we have a Lump Sum Immediate Annuity. The correct answer is: A Lump Sum Immediate Annuity
Which of the following would not be a factor in calculating Jacob's Straight Life Annuity payment? Select one: a.Jacob's Annuity's total value. b.Jacob's gender. c.Jacob's occasional cigarette smoking habit. d.Jacob's age.
Jacob's occasional cigarette smoking habit.
What is the amount of the excise tax if a qualified annuity doesn't begin Required Minimal Distributions by age 70 ½? Select one: a.20% b.30% c.50% d.60%
LH Addendum Page 21-1, Lines 39-40. A review point from the prior chapter (21) - With both Qualified and Nonqualified plans, required Minimum Distributions (RMDs) not begun by 70 ½ will be subject to a 50% excise tax. The correct answer is: 50%
The purpose of a life annuity is to guarantee against: Select one: a.Living too long. b.Dying too soon.
Living too long.
Maryann is very concerned that she will outlive her retirement savings. She wants to ensure that she will have a dependable income no matter how long she lives. What should Maryann buy? Select one: a.An Amount Certain Annuity b.A Single Premium Whole Life policy c.A Period Certain Annuity d.A Straight Life Annuity
Look for the answer that has "life" in it if she wants to get payments for life. The correct answer is: A Straight Life Annuity
If after-tax dollars are used to fund an Annuity (there is no tax deduction), the Annuity is referred to as: Select one: a.Qualified b.Non-qualified
Non-qualified
Janice wins a substantial cash prize at age 25, which she would like to put away until her expected retirement at age 65 when she plans to withdraw all of the money. Which of the following might be a good option for Janice? Select one: a.Single Premium Whole Life b.A Flexible Premium Deferred Annuity c.A Lump Sum Deferred Annuity d.A Lump Sum Immediate Annuity
She wants to put the money into the annuity fund right away (lump sum) but not withdraw the money until retirement at age 65 (deferred). So, Janice wants a Lump Sum Deferred Annuity. The correct answer is: A Lump Sum Deferred Annuity
An annuitant is receiving monthly benefits from a 20-year life annuity. The annuitant dies after receiving exactly 239 payments. The beneficiary of the annuity will receive: Select one: a.0 payments b.1 payment c.12 payments d.20 payments Feedback The 20 year life annuity will make one more payment because it guaranteed that it would pay for at least 20 years (240 payments). It would have even continued to pay after 20 years if the annuitant were still alive. The correct answer is: 1 payment
The 20 year life annuity will make one more payment because it guaranteed that it would pay for at least 20 years (240 payments). It would have even continued to pay after 20 years if the annuitant were still alive. The correct answer is: 1 payment
Which policy provision is designed to shield an annuity owner from the irrevocable loss of cash value due to nonpayment of premium? Select one: a.Insuring Agreement b.Grace Period
The Grace Period prevents forfeiture due to nonpayment of premium. Watch out, another possible answer to this question could be Nonforfeiture Provision (although that wasn't a listed choice). The correct answer is: Grace Period
A Life Annuity protects against: Select one: a.The risk of divorce. b.The risk of job loss. c.The risk of dying to soon. d.The risk of living too long.
The risk of living too long.
Anna bought an immediate Single Premium Annuity with a 10 Year Period Certain. She died 23 years later. When did her annuity payments stop? Select one: a.Can't tell - not enough information. b.Ten years after she purchased it. c.Ten years after her death. d.When she died.
This was simply a plain old "10 Year Period Certain" Annuity. It wasn't a Life Annuity, so payments stopped after 10 years. So, not all annuities are "life" annuities, particularly on the exam! The correct answer is: Ten years after she purchased it.
Which of the following will be a factor when determining an annuitant's monthly benefit amount? Select one: a.the annuitant's age and gender b.the annuitant's health
the annuitant's age and gender
An annuity paid the annuitant Emma for 10 years. When she died, the annuity continued to pay her estate for another 5 years and then stopped paying. From the information given, we can assume that this annuity was: Select one: a.A life annuity 5 year period certain b.A joint and survivor annuity c.A 15 year period certain annuity d.A straight life annuity
• A straight life annuity would have stopped paying when Emma died. • A joint and survivor annuity would have continued to pay not for 5 years but for the life of a second person, such as Emma's husband. • A life annuity 5 year period certain would have paid for a minimum of 5 years and then stopped when Emma died. • So, this could have been a 15 year Period Certain Annuity which would continue to pay for the remainder of the 15 years even if Emma died earlier. The correct answer is: A 15 year period certain annuity
Which of the following Annuities has no minimum pay-out guarantee? Select one: a.Straight Life Annuity. b.Refund Life Annuity. c.Life Annuity with Period Certain. d.Life Annuity with Amount Certain.
The Straight Life Annuity is a bit of a gamble - live to age 153 and it will pay that long. But if you die after receiving the first payment, you get nothing more. It doesn't have a guarantee of the amount or the time it will pay. The correct answer is: Straight Life Annuity.
What is the disadvantage of an Annuity Certain? Select one: a.There is no way of knowing how much the income payments will be each month. b.The income payments are taxed more than other annuity payments. c.It is too difficult to qualify for an Annuity Certain. d.You can outlive the income benefits.
An Annuity Certain (either period certain or amount certain) may stop paying before the client dies. But, the Annuity Certain is cheaper than a Life Annuity that will continue paying after the period certain or amount certain has been paid out. The correct answer is: You can outlive the income benefits.
Which of the following provides lifetime income benefits? Select one: a.An Immediate Lump Sum Annuity b.An Amount Certain Annuity c.A Straight Life Annuity d.A Period Certain Annuity
If you want to be sure that you will be paid as long as you live, select a Life Annuity, also known as a Straight Life Annuity. That could be structured as a Life Annuity with Period Certain, a Life Annuity with Amount Certain (a refund annuity), or a Joint and Survivor Annuity. All will pay for at least your life and perhaps longer. The correct answer is: A Straight Life Annuity
Which Annuity names two persons as Annuitants but stops paying on the death of the first annuitant? Select one: a.Joint and Survivor Annuity b.Joint Annuity
LH Addendum Page 22-11, Lines 24-32. The rare Joint Annuity stops paying when the first of the joint annuitants dies. Don't confuse this with a Joint and Survivor Annuity which continues to pay until a second person dies. Of course, the Joint Annuity would pay more each year because that annuity won't pay as long as will a Joint and Survivor Annuity. The correct answer is: Joint Annuity
Koni established an annuity for Luke. The annuity specified that when Luke died, any remaining payments still owing would be paid to Ted. Which of the following is TRUE? Select one: a.Luke is the beneficiary. b.Koni is the annuitant. c.Ted is the owner. d.Koni is the owner.
LH Addendum Page 22-3, Lines 31-40. Koni established the annuity and thus is the Owner. The annuity paid Luke for Luke's life - Luke is the Annuitant. The annuity paid Ted upon Luke's death, so the annuity: 1)could have been an annuity period certain; or 2)could have been an annuity amount certain; or 3)could have had a death benefit). In each of these 3 situations, Koni (the Owner) would have named a beneficiary. Ted is the Beneficiary. The correct answer is: Koni is the owner.
The rate paid by a Fixed Annuity before it begins to pay the current rate or guaranteed rate is called what rate? Select one: a.Accumulation rate b.Base or predetermined rate c.Bonus or Initial rate d.Minimal rate
LH Addendum, Page 22-9, Line 16. Fixed Annuities usually pay: •At least a "minimum guaranteed" rate (such as 1.5%); and •An enticing and relative high "initial" or "bonus" interest rate the first year; and •After the first year, a "current" rate that changes each year (or some other period) - the current rate is calculated according to a disclosed formula - but never less than the minimum guaranteed rate. The correct answer is: Bonus or Initial rate
Which best deals with inflation? Select one: a.Fixed annuity b.Variable annuity
LH Addendum, Page 22-9, Lines 25-30. The Variable Annuity may keep up with inflation. The Fixed Annuity rarely will keep up with inflation. However, the Fixed Annuity has no stock market risk (market risk). The correct answer is: Variable annuity
With a Life Annuity with 10 Year Period Certain, what does the "10 year" portion refer to? Select one: a.The length of time after the annuitant's death that payments will be made. b.The minimum length of time that payments will be made. c.The maximum length of time that payments will be made. d.The length of time that payments will be deferred after the Annuity is purchased.
The minimum length of time that payments will be made.
Which Annuity's benefits are dependent on investment performance? Select one: a.Refund Life Annuity b.Variable Annuity c.Installment Refund Annuity d.Period Certain Annuity
The typical annuity guarantees the pay-out. However, with a variable annuity, the pay-out is dependent on the performance of the investment selected by the annuitant. The correct answer is: Variable Annuity
Annuity premiums are based on: Select one: a.mortality tables b.A medical exam c.morbidity tables d.MIB reports
The annuity premium is based on a mortality table that looks only at age and gender. Annuity underwriting is rather simplified compared to life and health insurance underwriting. The correct answer is: mortality tables
Which Annuity provision is designed to discourage the owner from withdrawing funds early? Select one: a.Surrender provision b.Nonforfeiture provision c.Owner's rights provision d.Entire contract provision
LH Addendum, Page 22-5, Lines 25-28. The purpose of the surrender/withdrawal charge is to discourage withdrawals. The correct answer is: Surrender provision
Which is true of an Immediate Annuity? Select one: a.Surrender and partial withdrawal fees are not applicable. b.Surrender and partial withdrawal fees are higher than with a Deferred Annuity.
LH Addendum, Page 22-5, Lines 25-32. Immediate Annuities don't have withdrawal/surrender fees because they can't be surrendered - they begin their payout immediately. The correct answer is: Surrender and partial withdrawal fees are not applicable.
During the pay-in phase, funds in the Qualified Annuity's cash value account grow on what basis? Select one: a.tax-free b.taxable c.tax-deferred d.double taxable
The annuity is treated just like its first-cousin, the life insurance policy. The money in the fund grows on a tax-deferred basis. The correct answer is: tax-deferred
Molly has a $2 Million life annuity. Her annuity guarantees that if she dies before the money has been fully paid to her, the balance will be paid to her church over a period of time. This is an example of: Select one: a.An Installment Refund Life Annuity b.A Cash Refund Life Annuity c.Whole Life policy d.Endowment Policy
This is an example of a refund annuity (the extra money is refunded) where the balance of the funds are paid to the church as beneficiary after the death of the annuitant. Here the beneficiary gets the "refund" not in a lump sum (Cash Refund) but in payments over time. Thus, this is an example of an Installment Refund Life Annuity. Tough Question but common. The correct answer is: An Installment Refund Life Annuity
Each of the following Annuity payout options may continue to pay a benefit to a surviving spouse EXCEPT: Select one: a.A Life Annuity with Period Certain. b.A Joint and One Half Survivor Annuity. c.A Life Annuity with Amount Certain. d.A Straight Life Annuity.
When I die, Nancy collects nothing under a straight life annuity. The other choices could continue to pay after my death. The correct answer is: A Straight Life Annuity.
All things being equal, which person would receive the largest monthly Annuity payments? Select one: a.A 33-year old woman. b.A 33-year old man. c.A 63-year old woman. d.A 63-year old man.
All things being equal (presuming the same amount of money invested in the annuity), the 63 year old man will get the largest payment because the actuary would predict that he would die the soonest. The 33 year old woman will likely live the longest, so the annuity will pay her the smallest monthly amount. The woman gets the smallest amount because the Insurance Company knows it will have to pay the average woman long after the average man has died. The correct answer is: A 63-year old man.
Prior to annuitization, Milner surrendered his Fixed Annuity that he had purchased several years earlier. He will receive: Select one: a.The full cash value b.The premiums paid only c.The growth only d.The full cash value less any surrender charges
LH Addendum Page 22-5, Lines 16-21. When an Annuity is surrendered in the accumulation phase (it can't be surrendered after annuitization), the premiums paid plus the growth (the full cash value) will be paid less any surrender charges (which can be very substantial). The correct answer is: The full cash value less any surrender charges
An Immediate Annuity: Select one: a.Has no accumulation period b.Begins payments immediately upon purchase
LH Addendum Page 22-5, Lines 4-10. An Immediate Annuity is purchased with a single premium and thus has no accumulation period. However, an Immediate Annuity will begin to pay only after the fund has been invested for 30 days or up to one year (depending on how the annuity payments are scheduled). The correct answer is: Has no accumulation period
If a Variable Annuity is sold, it may be subject to regulation by each of the following EXCEPT: Select one: a.The state insurance regulator b.The SEC c.The state securities regulator d.The state secretary of state
LH Addendum, Page 22-10, Lines 1-8. A Producer selling a Variable Annuity will need a life license from the state's insurance department and a state securities license from the state's security regulator and an SEC registration with FINRA (Federal Investment Industry Regulatory Authority), plus the owner must be given a prospectus disclosing the details of the investments. The correct answer is: The state secretary of state
Which type of annuity has a guaranteed minimal interest rate plus a potentially higher rate that pays if there is a specified gain in the stock market? Select one: a.Indexed Annuity b.Fixed Annuity
LH Addendum, Page 22-10, Lines 16-22. The Indexed Annuity supposedly has the best of both worlds - part of the accumulation fund can be invested at a fixed rate (such as 4%) and the rest can pay a return that is determined by a particular index, such as the S&P 500, Moody's Bond Index, or the Dow Jones stock market. The correct answer is: Indexed Annuity
Which would be most appropriate if one is concerned about life savings being exhausted due to longevity? Select one: a.Life insurance b.Life annuity
LH Addendum, Page 22-11, Lines 3-6. The purpose of the Life Annuity is to provide an income stream that the Annuitant can't outlive. Life Annuities protect against "longevity risk" - the risk of outliving one's savings. The correct answer is: Life annuity
Who gets the refund under a Refund Life Annuity? Select one: a.The Beneficiary b.The Insurer c.The Annuitant d.The Owner
LH Addendum, Page 22-11, Lines 9-15. The Refund Life Annuity (another name for an Annuity Certain) guarantees that upon the death of the Annuitant, the remainder of the payments will be paid to the Beneficiary. The correct answer is: The Beneficiary
Which annuity would be purchased by a parent or grandparent to provide funding for a child's future educational needs? Select one: a.Deferred Annuity b.Immediate Annuity
LH Addendum, Page 22-2, Lines 37-44. An annuity that begins to pay out more than one year after it is funded is a Deferred Annuity. The education annuity is likely deferred rather than immediate. The correct answer is: Deferred Annuity
If the owner dies prior to pay-out (annuitization), the accumulation fund will be: Select one: a.Refunded to the beneficiary. b.Refunded to the beneficiary after the deduction of the surrender/withdrawal charge.
LH Addendum, Page 22-4, Lines 12-15. Note that most Insurers don't charge a withdrawal/surrender fee if the Owner dies prior to annuitization. The correct answer is: Refunded to the beneficiary.
What happens if the owner of a deferred annuity dies prior to annuitization? Select one: a.The cash value less a surrender fee is paid to the beneficiary. b.The cash value is paid to the beneficiary. c.The annuity is forfeited to the Insurer. d.The annuity is automatically annuitized.
LH Addendum, Page 22-4, Lines 4-15. Most Insurers don't charge a withdrawal/surrender fee if the Owner dies prior to annuitization. The correct answer is: The cash value is paid to the beneficiary.
With an annuity, the owner may also be: Select one: a.Both the annuitant and the beneficiary b.Neither the annuitant nor the beneficiary c.The annuitant d.The beneficiary
LH Addendum, Page 22-4, Lines 8-10. The Owner can't be the Beneficiary but may also be the Annuitant. Any person other than the owner may be the Beneficiary. The correct answer is: The annuitant
If a Fixed Annuity contains a Market Value Adjustment, a producer should disclose to the buyer that: Select one: a.The value of the annuity is determined by the stock market. b.The Producer needs a securities registration with FINRA to offer such an annuity. c.The cash value may go up or down if it is surrendered early. d.The interest rate is adjusted daily with the market.
LH Addendum, Page 22-6, Lines 10-15. Naturally, the Owner of an annuity will be tempted to surrender any Fixed Annuity whenever market interest rates are higher than the Fixed Annuity's interest rate. To discourage such surrenders, some Fixed Annuities contain a Market Value Adjustment (MVA) provision that will reduce the value of the annuity in such a situation. The MVA usually is applied only if the Owner surrenders more than 10% of the annuity's value. However, if the Fixed Annuity with a MVA is surrendered at a time when market interest rates are lower than the fixed rate in the Annuity, the adjustment may increase the value of the surrendered Annuity. The Annuity buyer will be warned in the Buyer's Guide and Policy Summary that the surrender charges may be severe and that surrender of an Annuity with a MVA may decrease or increase the value of the annuity. The correct answer is: The cash value may go up or down if it is surrendered early.
A Nonqualified Annuity was purchased with a single payment of $30,000. A number of years later, when the annuity was worth $52,000, the owner (age 67) requested a partial withdrawal and received $34,000. What amount is subject to taxation? Select one: a.$52,000 b.$34,000 c.$22,000 d.$0
LH Addendum, Page 22-8, Lines 1-19. Under the Last In, First Out (LIFO) method of accounting, the growth would be taxed first. There was $22,000 worth of growth ($52,000 minus $30,000). The $22,000 growth is subject to taxation. For the $34,000 withdrawal: •$22,000 (the growth) is subject to taxation; •$12,000 (the part of the withdrawal that represented a return of premiums) is not subject to taxation. So, only the growth of $22,000 is subject to taxation. Because the owner is over 59 ½, there will be no 10% penalty on the growth withdrawn. The correct answer is: $22,000
The Deferred Annuity's accumulation fund may continue to grow after: Select one: a.Payments to the account stop. b.Annuitization of a lump sum payout Immediate Annuity.
LH Addendum, Page 22-8, Lines 37-38. Premium payments stop at the point of annuitization. However, even though annuity premium payments have stopped, the accumulation fund will continue to grow until the fund has been distributed. However, with a lump sum payout Immediate Annuity, the cash is distributed to the Annuitant immediately upon annuitization, so there is no ongoing growth of the fund after annuitization. The correct answer is: Payments to the account stop.
May a deferred annuity continue its accumulation phase even after premium payments cease? Select one: a.No, accumulation must stop when premium payments stop. b.Yes, the annuity may continue the accumulation phase until annuitization.
LH Addendum, Page 22-8, Lines 37-38. The annuity fund continues to accumulate earnings growth even though premium payments have ceased. An obvious example would be a single premium annuity which of course continues to grow even though premium payments have stopped. The correct answer is: Yes, the annuity may continue the accumulation phase until annuitization.
Over the years, Fixed Annuities have: Select one: a.paid a return equal to the growth of the Insurer's general account b.paid more than any other investments c.paid their guaranteed amount d.kept up with inflation
LH Addendum, Page 22-9, Lines 3-9. Of course, Fixed Annuities will always pay at least the guaranteed amount. But, Fixed Annuities haven't kept up with inflation. The return is typically relatively low and thus pays less than many other investments. The return for the Fixed Annuity is "fixed" and thus has no relationship to the growth of the Insurer's general account. The correct answer is: paid their guaranteed amount
Which type of annuity is "backed by" the Insurer's general account? Select one: a.Variable annuity b.Fixed annuit
LH Addendum, Page 22-9, Lines 3-9. The Fixed Annuity accumulation fund is kept in the Insurer's general account and the Insurer "backs up" the Fixed Annuity Account by guaranteeing that the money won't be lost - plus, the fund is also guaranteed by the state's Guaranty Fund. The money in a Variable Annuity isn't "backed" by the Insurer's general account nor is it "backed" by the state's Guaranty Fund. We will study state Guaranty Funds in the skinny state manual. The correct answer is: Fixed annuity
Which Annuity's payments will always cease upon the annuitant's death? Select one: a.Life Annuity with Amount Certain b.Installment Refund Annuity c.Refund Life Annuity d.Straight Life Annuity
The correct answer is: Straight Life Annuity
JQ bought a 30-Year Life Annuity at age 65. On her 106th birthday she died in a tragic ping pong accident. When did her Annuity payments stop? Select one: a.They will continue to her estate until the Annuity is exhausted. b.Can't tell - not enough information. c.At age 94. d.When she died.
The correct answer is: When she died.
Mrs. M has a $100,000 life annuity. Her annuity guarantees that if she dies before the $100,000 has been fully paid to her, the balance will be paid to her designated beneficiary in a single payment. This is an example of: Select one: a.Term Life Policy b.A Cash Refund Life Annuity c.An Installment Refund Life Annuity d.Endowment Policy
This is clearly an example of a refund annuity. More specifically, it is a Cash Refund Annuity because the whole balance is given to the beneficiary in a single payment. With an Installment Refund Annuity, payments are given to the beneficiary in installments rather than with a single payment. The correct answer is: A Cash Refund Life Annuity
Simon has a Qualified Annuity. He starts to receive payments at age 65. What portion of the payments will be subject to income taxation? Select one: a.The entire amount b.Only the premiums paid c.None d.Only the growth
With a Qualified Annuity, Simon received a tax deduction when the money went into the fund. That means the money hasn't yet been taxed. So, Congress will want to tax the original funds that created the annuity as well as the tax-deferred growth. Sorry, it is all taxable. The good news is that the funds grew on a tax-deferred basis, which is a big advantage. The correct answer is: The entire amount