Chapter 7

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poors 500 index. She would likely purchase a:

Equity indexed annuity

What type of annuity credits its interest based upon an index such as S&P 500?

Equity indexed annuity

What is a level benefit payment amount?

Exact amount of each payment received from the annuity during the annuity period

An agent selling variable annuities must be registered with

FINRA

What is an indexed (or equity indexed) annuities?

Fixed annuities that invest on a relatively aggressive basis to aim for higher returns.

Annuities may be classified as ________ or __________ based on how the premium payments are invested.

Fixed or Variable

What annuity option pays for a specific time only, whether or not the annuitant is living?

Fixed period option

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.

In fixed annuities, the premiums are deposited in the companys __________

General account

What does a fixed annuity provide?

Guaranteed minimum rate of interest to be credited to the purchase payment(s); Income (annuity) payments that do not vary from one payment to the next; and The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.

What is the purpose of the surrender charge?

Helps compensate the company for loss of the investment value due to an early surrender of a deferred anuity.

What is life with guaranteed minimum?

If the annuitant dies before the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary.

A lucky individual won the state lottery, so the state will be sending him a check each month for the next 25 years. What type of annuity products are they likely to use to provide these benefits?

Immediate annuity

An individual buys a flexible premium deferred life annuity with a 20 year period certain. What would his beneficiary receive if he died 5 years after beginning the annuity phase?

Payments for 15 years

What are the 3 main characteristics of a variable annuity?

Payments made by the annuitant go into the insurers SEPERATE ACCOUNT, no guarantee minimum interest rate, variable annuities require both life and securities license.

What is the 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

What annuity payment option provides the highest monthly benefits?

Pure life

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

Which of the following best describes a pure life annuity settlement option?

Pure life provides payments for as long as the annuitant is alive

What are annuities certain (types)?

Short term annuities that limit the amount paid to a certain fixed period or until a certain fixed amount is liquidated.

How are annuities classified depending on how many lives they cover?

Single life and multiple life annuities

What is a single premium and periodic premium?

Single premium = one time lump sum payment, periodic premium = premiums are paid in installments over a period of time

What are the two premium payment options for an annuity?

Single premium and periodic premium

The advantage of qualified plans to ers is

Tax deductible contributions

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

What is fixed amount installments?

The annuitant selects how much each payment will be, and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings.

What is a pure life also known as life only or straight life contingency option?

The annuity payment ceases at the annuitants death (no matter how soon in the annuitization period that occurs).

What causes a variable annuity benefit to vary?

The annuity's underlying investments

Who bears the investment risk in a fixed annuity?

The insurer

What happens if an annuitant dies during the accumulation period?

The insurer is obligated to return to the beneficiary either the cash value or the total premiums paid, whichever is greater.

What happens if a deferred annuity is surrendered before the annuitization period?

The owner will receive the surrender value of the annuity

What is the accumulation period (also known as the pay in period)?

The period of time over which the owner makes payments (premiums) into an annuity. Also period of time which the payments earn interest on a tax deffered basis.

What is the beneficiary in an annuity?

The person who receives annuity assets.

Who is an annuitant?

The person who receives the benefit or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written.

What is an owner in an annuity?

The purchaser of the annuity contract, but not necessarily the one who receives the benefit.

Under a pure life annuity, an income is payable by the company

Only for the life of the annuitant

What are the parties to an annuity?

Owner, Annuitant, Beneficiary

What is the installment refund?

When the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out.

403(b) plans are for ___________

nonprofits and public-school systems.

Insurers who violate the annuity laws for senior consumers are liable for:

10k for the first violation and 30k-50k for each subsequent

At surrender, the owner gets ________

the premium, plus interest (the value of the annuity), minus the surrender charge.

What is an individual fined if they violate reguations for annuity laws for senior consumers?

1k the first violation and 5k-50k for the second or subsequent

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

The annuity income amount is based upon:

- The amount of premium paid or cash value accumulated - The frequency of the payment - The interest rate - The annuitant's age and gender

What is the penalty for early withdrawals for an annuity?

10% penalty (prior to age 59 1/2).

Every individual annuity that is delivered or issued to a senior citizen in this state must have printed on the front or on the cover page a notice stating that, after receipt of the policy by the owner, the policy may be returned for cancellation to the insurer or agent from who it was purchased. The period of time for the return must be clearly stated in the notice and must be at least ____-____

30 days

Before he died, an annuitant had received $12,500 in monthly benefits from his $25,000 straight life annuity. He was also the insured under a $50,000 paid-up whole life policy that named his wife as primary beneficiary. Considering both contracts, how much will the annuitant's spouse receive in benefits?

50k

What is the excess contribution penalty for traditional IRAs?

6% until withdrawn

What is an annuity?

A contract that provides income for a specified period of years, or for life. An annuity protects individuals against outliving their money.

What is joint life?

A payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then payments stop.

In flexible premium payment annuities, the term "flexible" refers to what?

Amount of premium

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount

Who can make a fully deductible contribution to a traditional IRA?

An individual who has earned income

What is fixed period installments?

Annuitant selects the time period for the benefits and the insurer determines how much each payment will be based on the value of the account and future earnings projections.

What changed with the pension protection act of 2006 for annuities?

Annuitants are allowed to transfer money from an annuity to pay for long term care insurance premiums, tax free.

Which of the following is a short term annuity that limits the amount paid to a specific fixed period or until a specific fixed amount is liquidated?

Annuity certain

What is life with period (term) certain?

Another life contingency payout option. Annuity payments are guarantee for the lifetime of the annuitant and for a specified time for the beneficiary.

What is joint and survivor?

Arrangement is a modification of the life income option in that it guarantees an income for two recipients that neither can outlive.

Which of the following is a feature of a variable annuity?

Benefit payment amounts are not guaranteed

Which of the following is NOT true regarding an annuity certain?

Benefits stop at the annuitants death

What license or licenses are required to sell variable annuities?

Both life insurance and securities

What are the two types of refund life annuities?

Cash refund and Installment refund

What are the two types of refund life annuities?

Cash refund and installment refund

All of the following statements are true of a non-qualified retirement plan EXCEPT

Contributions are tax exempt

What is a single premium immediate annuity?

Converts the lump sum into a series of periodic payments, providing a stream of income for the annuitant.

How long is income paid under a pure life annuity?

Only for the life of the annuitant

Under which of the following annuity options does the annuitant select the time period for the benefits, and the insurer determines how much each payment will be?

Installments for a fixed period

During the accumulation period, funds are paid _______ the annuity. During the annuity period, funds are paid _______ to the annuitant.

Into, oUT

What is a qualified retirement plan?

Is one that conforms to the requirements of federal tax laws and for which the Internal Revenue Service (IRS) recognizes contributions to the plan as tax-deductible expenses to the employer. When a plan is qualified, it receives favorable tax treatment.

Which of the following is NOT true regarding the life with guaranteed minimum annuity settlement options?

It does not guarantee that the entire principal amount will be paid out?

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

What is a variable annuity?

It serves as a hedge against inflation and is variable from the stanpoint that the annuity may receive different rates of return on the funds that are paid into the annuity.

What is an actual surrender charge?

It's levied against the cash value, and is generally a percentage that reduces over time.

If a contract provides a set amount of income for two or more persons with the income stopping upon the first death of the insured, it is called a

Joint life annuity

What is nonforfeiture in annuities?

Law that stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization.

Periodic payment annuities can be either __________ or ___________.

Level premium = annuitant pays a fixed installment, flexible premium = amount and frequency of each installment varies.

The form of life annuity which pays benefits throughout the lifetime of the annuitant and also guarantees payment for a minimum number of years is called

Life income with period certain

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

Can a business or a corporation be an annuitant?

No, an annuitant must always be a natural person.

What is a nonqualified retirement plan?

One in which the contributions are not exempt from taxation. However, increase of the funds during the accumulation period are not taxed until they are actually received.

What is an immediate annuity?

One that is purchased with a single lump sum payment and provides income payments that start within 1 year from the date of purchase. Usually first payment is early as 1 month from purchase date.

What is the annuity period (also known as the annuitization period, liquidation period or pay out period)?

The time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant.

Which of the following is NOT true regarding Equity Indexed Annuities?

They earn lower interest rate than fixed annuities

What is a guaranteed minimum withdrawal benefit?

This option to an annuitant can withdraw a maximum percentage of his or her investment annually until the initial investment has been recovered.

What is the main use of annuities?

To provide retirement income

As it pertains to IRA eligibility, which of the following would NOT be considered earned income?

Unemployment benefits

What is a deferred annuity?

When income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum or periodic payments.

What is cash refund?

When the annuitant dies, the beneficiary receives a lump sump refund of the principal minus the benefit payments already made to the annuitant.

Can qualified retirement annuities be both individual and group?

Yes

Is an individuals contributions to a traditional IRA tax deductible?

Yes for the year of contribution

Shorter life expectancy = ______; longer life expectancy = ______

higher benefit, lower benefit

Equity indexed annuities are ___________ than a _____________ but are expected to earn a higher interest rate than a fixed annuity.

less risky, variable annuity or mutual fund