Annuities (Chapter 2)
Natural Person
A human being.
How long will a life annuity with 15-year certain pay?
A life annuity with 15-year certain will pay for the life of the annuitant; however, if the annuitant dies shortly after the annuity payments begin, the payment to the beneficiary will only last 15 years.
What type of license(s) is/are required in order to sell variable annuities?
A life insurance license and a securities license.
Suitability
A requirement to determine if an insurance product or an investment is appropriate for a particular customer.
Qualified Plan
A retirement plan that meets the IRS guidelines for receiving favorable tax treatment.
What are the two phases of an annuity?
Accumulation and annuitization (or pay-in or pay-out).
Phases of Annuities
Accumulation period - payments in, to insurer. Annuitization period - payments out, to insured.
What are accumulation units?
Accumulation units represent ownership interest in the separate account. Instead of buying shares, the annuity holder purchases units.
In flexible premium payment annuities, the term "flexible" refers to what?
Amount of premium.
Know This!
An immediate annuity is purchased with a single premium.
Parties of Annuities
Annuitant - insured; policy issued on annuitant's life; must be a natural person. Beneficiary - will receive any amount contributed to an annuity (plus any gain) if annuitant dies during accumulation period. Owner - has all rights to policy (usually annuitant); can be corporation or trust.
If there is no named beneficiary for the annuity benefits, to which entity will the benefits be paid?
Annuitant's estate.
When an annuity is written, whose life expectancy is taken into account?
Annuitant.
Who receives income payments from an annuity?
Annuitant.
Whose life expectancy is taken into consideration in an annuity contract?
Annuitant.
Are annuities a good investment?
Annuities are a good investment for people wanting a reliable income stream during retirement. Annuities are insurance products, not an equity investment with high growth. This makes annuities a good balance to a financial portfolio for someone near or in retirement.
In an annuity, the accumulated money is converted into a stream of income during which phase?
Annuitization period.
In the annuity, the accumulated money is converted into a stream of income during which time period?
Annuitization period.
Who possesses all the rights in an annuity?
Annuity owner.
An individual has a contract that will provide him with a certain amount of income for the rest of his life. However, this is not a life insurance policy. What type of contract does this person have?
Annuity.
Know This!
Because annuities are based on the life expectancy of an annuitant, the annuitant must be a natural person, regardless of who owns the policy.
If the annuitant dies during the accumulation period, who will receive the annuity benefits?
Beneficiary.
What are the two types of refund life annuities?
Cash refund and installment refund.
Liquidation of an Estate
Converting a person's net worth into a cash flow.
Which of the following will NOT be an appropriate use of a deferred annuity?
Creating an estate. // Deferred annuities grow tax deferred, and are best suitable for accumulating retirement income or funds for children's college education. Unlike life insurance, annuities do not create an estate, but liquidate it.
If the current interest rate on an annuity is higher than the guaranteed rate, which rate will the annuity owner receive as part of the annuity payment?
Current.
Life Contingency
Dependent upon whether or not the insured is alive.
Which of the following is NOT a term for the period of time during which annuitant or beneficiary receives income?
Depreciation period. // The annuitization period is the time during which accumulated money is converted into an income stream. It is also referred to as the annuity, liquidation or pay-out period.
Know This!
During the accumulation period, funds are paid INTO the annuity. During the annuity period, funds are paid OUT to the annuitant.
If the annuitant dies before the annuitization period starts, what will the beneficiary receive?
Either the amount paid into the annuity or the cash value, whichever is greater.
What type of annuity credits its interest based upon an index like the S&P 500?
Equity Indexed Annuities, which they invest on a relatively aggressive basis to aim for higher returns.
What type of annuity credits its interest based upon an index such as the S&P 500?
Equity indexed annuity.
Types of Annuities
Fixed Annuities - guaranteed, fixed payment amount; premiums in general account. Equity Indexed Annuities - interest rate tied to an index; earn higher rate than fixed annuities, not as risky as variable annuities or mutual funds. Variable Annuities - payment not guaranteed; premiums are in separate account and invested in stocks and bonds.
Under which installment option does the annuitant select the amount of each payment, and the insurer determines how long they will pay benefits?
Fixed amount.
An annuity purchased with multiple payments that begin income payments after one year from the moment of purchase is known as what type of annuity?
Flexible premium deferred annuity.
How long will a life annuity with a 15-year period certain pay?
For the life of the annuitant unless he/she dies within the first 15 years of the annuitization period; then the payments will last for 15 years.
Interest Rate of Annuities
Guaranteed - company must pay this minimum percentage. Typically around 3%. Current - exceeds guaranteed rate. Paid to annuitant when a company's own investment is better than expected.
According to the nonforfeiture law, if the owner decides to surrender a deferred annuity prior to annuitization, the owner is entitled to which of the following?
Guaranteed surrender value.
If the annuitant dies during the accumulation period, what happens to the account?
If the annuitant dies before the annuitization (or payout period), his/her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater.
Income Payments of Annuities
Immediate - purchased with a single premium; income payments start within one year from the date of the purchase. Deferred - purchased with either lump-sum or periodic payments premium; benefits start some time after one year from the date of the purchase (often used to accumulate funds for retirement).
What are the two classifications of annuities according to the time when annuity payments begin?
Immediate and deferred.
What type of annuity can be purchased with a single premium?
Immediate annuity.
Know This!
In fixed annuities, the premiums are deposited in the company's general account.
What is a disadvantage of owning a fixed annuity, as opposed to a variable?
In times of inflation, the benefit of a fixed annuity will have decreased purchasing power.
Know This!
Income payments from a deferred annuity begin sometime after 1 year from the date of purchase.
How does inflation affect the purchasing power of a fixed annuity?
Inflation can erode the purchasing power of income payments.
IRS
Internal Revenue Service: a U.S. Government agency responsible for collecting taxes, and enforcement of the Internal Revenue Code.
Why is an equity indexed annuity considered to be a fixed annuity?
It has a guaranteed minimum interest rate.
Which of the following is TRUE regarding the accumulation period of an annuity?
It is a period during which the payments into the annuity grow tax deferred.
Which of the following is NOT true regarding the accumulation period of an annuity?
It would not occur in a deferred annuity. // This is the period of time during which the payments earn interest and grow tax deferred (which would be the case in a deferred annuity).
If an annuity provides a set amount of income for two or more persons with the income ceasing upon the first death, what type of annuity is that?
Joint life annuity
Settlement Options of Annuities
Life Only - insured cannot outlive income. Any monies not paid out are retained by the company at insured's death. Pays highest monthly amount. Refund Life Annuity - guaranteed lifetime income. If annuitant dies, balance is "refunded" to beneficiary. Installment option gives beneficiary payments until purchase amount is paid out. Cash refund gives refund of balance of original annuity purchase amount minus payments made to annuitant. Life with Period Certain - specific monthly payment for life and a specified period of time. If annuitant dies before period is up, payment goes to beneficiary. Joint Life - Two or more annuitants receive payments until first death, then payment ceases. Joint and Survivor - Income for two or more that cannot be outlived. Often used with period certain. When one annuitant dies, the other receives 1/2 or 2/3 of the original payment amount. Lump-sum - paid at annuitization; all interest accumulated is taxable. Additional 10% penalty imposed prior to annuitant's reaching 59 1/2. Annuities Certain - payment guaranteed for fixed period or until certain fixed amount paid. NO LIFE option.
What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and also guarantees payment for a specified number of years?
Life income with period certain.
How soon can income payments begin in an immediate annuity?
No later than 1 year from the time of annuity purchase.
With a single premium deferred annuity, when will the annuity payments become available?
No sooner than 1 year after the annuity purchase.
Can a business or a corporation be an annuitant?
No, an annuitant must always be a natural person.
How long is income paid under a pure life annuity?
Only for the life of the annuitant.
What are accumulation units in annuities?
Ownership interest in the separate account (instead of buying shares, annuity holder purchases accumulation units).
Which of the following is another term for the accumulation period of an annuity?
Pay-in period.
Classification of Annuities:
Premium payment method: single premium vs periodic. When income payments begin: immediate vs deferred. How premiums are invested: fixed vs variable. Disposing of proceeds: pure life, annuity certain, or life refund annuity.
Know This!
Pure life annuity provides the highest monthly benefit, but there is no guarantee that the entire principal will be paid out.
What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and ceases at the annuitant's death?
Pure life.
Know This!
Shorter life expectancy = higher benefit; longer life expectancy = lower benefit.
Premium Payments of Annuities
Single - ONE lump-sum payment; the principal is created immediately (used for both immediate and deferred annuities. Periodic (Flexible) - multiple payments; the principal is created over time (used for deferred annuity only).
How are annuities classified depending on how many lives they cover?
Single life and multiple life annuities.
What type of annuity is suitable for someone who wants to select the benefit option that will pay the largest amount only for as long as the annuitant lives?
Straight life.
Which of the following types of annuities will generally provide the highest monthly income?
Straight life.
An annuity can have two distinct periods. What are they called and what happens during each?
The accumulation period, also known as the pay-in period, is the period of time which the annuitant makes payments (premiums) into an annuity. The annuity period, also referred to as the annuitization period, liquidation period, or pay-out period, is the time when money is distributed to the annuitant.
Which of the following is NOT true regarding the annuitant?
The annuitant cannot be the same person as the annuity owner. // While they don't have to be, the annuitant and annuity owner are often the same person. The annuitant is the person who receives benefits or payments from the annuity and for whom the annuity is written. Since the annuitant's life expectancy is taken into consideration, the annuitant must be a natural person.
The president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true?
The annuitant must be a natural person.
Who receives benefits or payments from an annuity?
The annuitant receives benefits or payments from an annuity during the annuitization period.
Regarding annuity payments, what is the difference between the annuitant and the beneficiary of an annuity?
The annuitant receives payments from the annuity during the annuitization period; the beneficiary receives benefits after the annuitant's death.
How long will a life annuity with 15-year certain pay with a Joint and Survivor option?
The annuity will pay out for a guaranteed 15 years. After that, it will pay out for as long as the annuitants are living.
What causes a variable annuity benefit to vary?
The annuity's underlying investments.
The annuitant dies while the annuity is still in the accumulation stage. Which of the following is TRUE?
The beneficiary will receive the greater of the money paid into the annuity or the cash value.
The annuity owner dies during the accumulation period without naming a beneficiary. Annuity's cash value exceeds premiums paid. Which of the following is true?
The cash value will be paid to the annuitant's estate.
Know This!
The fixed-period option pays for a specific time only, whether or not the annuitant is living.
Who bears all of the investment risk in a fixed annuity?
The insurance company.
Who bears the investment risk in a fixed annuity?
The insurer.
Know This!
The main use of annuities is to provide retirement income.
What is the difference between single premium and flexible premium payment options in a deferred annuity?
The number of payments that purchase the annuity.
Which of the following best describes what the annuity period is?
The period of time during which accumulated money is converted into income payments.
What is the main reason for purchasing an annuity?
To provide income that the annuitant cannot outlive.
What type of annuity requires an agent to have a securities license?
Variable annuity.
Deferred
Withheld or postponed until a specified time or event in the future.