Chapter 8

What is the minimum premium that most plans have?

$100, and a possible maximum

What is the minimum amount when funding an annuity through a single premium annuity?

$5,000 or $10,000

What are the two phases the annuities pass through?

1. Accumulation phase 2. Annuitization phase

What are the duties and responsibilities of selling annuities?

1. An agent must have reasonable grounds for believing that the recommendation is suitable 2. An agent is required to make a reasonable effort to obtain information concerning the senior consumer financial status 3. An agent is not responsible for a transaction if the senior consumer refuses to provide accurate or complete information 4. Agents must establish and maintain procedures to comply with the law 5. Agents must maintain records of the information for 5 years 6. compliance with the National Association of Securities Dealers Conduct Rules

What are the Qualified Annuity plans?

1. Created as a tax deferred arrangement by an employer to provide retirement benefits 2. Funding mechanism for TSA(Tax sheltered annuity, IRA or other IRS qualified plan, including pensions and 401(k) plans

What is an Equity Indexed Annuity?

1. Credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index, such as the S&P 500 usually computed as a fraction of that index's total return. 1. Cannot lose value- guaranteed fixed minimum value 2. May have a significant surrender charge and tax penalties.

According to the mode and source of benefit payments, annuities are classified as:

1. Fixed (guaranteed) 2. Variable (non guaranteed) 3. Equity indexed

According to when benefits begin, annuities are classified as:

1. Immediate 2. Deferred

What is the Wealth accumulation and income stream use of an annuity?

1. It creates and accumulates income for retirement 2. Flexible enough to meet a variety of needs 3. variety of payout options 4. Creates and accumulates funds for college education 5. Creates a stream of income for a few years or a lifetime

What are the possible sources of funding for a single premium annuity?

1. Lump sum from a retirement plan 2. Transfer of a maturing certificate of deposit 3. Sale of a house or estate 4. Sale of investments or mutual funds 5. Proceeds from a life insurance settlement 6. Inheritance

What are some of the Penalties for violations of duties and responsibilities

1. Penalties may be reduced or eliminated if corrective action was taken promptly after a violation was discovered. 2. The office may order the insurer, insurance agent or insurance agency to take reasonably appropriate corrective action for any senior consumer harmed by a violation of this section by the insurer or the insurer's insurance agent

How are Variable Annuities differ from Mutual Funds?

1. Periodic payments for the rest of the annuitant's life- This feature offers protection against the possibility of outliving one's assets after retirement 2. Death benefit- if death occurs before the insurer has started making payments, the beneficiary is guaranteed to receive a specified amount. 3. Tax- Deferred- no taxes are due on the income and investment gains until money is withdraw or paid out. (can also transfer money from one investment option to another)

According to how premiums are paid (funding method ) annuities are classified as:

1. Single premium 2. Periodic premium

What are the advantage of an immediate commencement annuity?

1. Supplement current income- if nearing retirement, one might transfer another savings or investment account into an immediate annuity, or move the proceeds from a deferred annuity into an immediate annuity 2. Pay taxes only on the portion of payments that is considered earnings- The principal, which is not taxed, is the initial deposit made with funds that have already been taxed.

What are the five factors that determine the annuity premium?

1. The annuitant's age 2. The annuitant's gender 3. The assumed interest rate 4. The periodic income amount and guaranteed amount or number of payments (if any) 5. Company expended (load)

What is the Accumulation phase?

1. The owner makes payments to build up assets in the fund, and interest earnings are credited.

What is the Annuitization phase?

1. aka payout period or benefit period 2. The contract is said to be annuitized, the benefit payments begin; benefits are commonly paid on a monthly basis, but other payout arrangements are possible

What is the invested amount/expected return?

1. amount paid in as premiums 2. It is the guaranteed annual payout times life expectancy

According to how benefits paid, annuities are classified as:

1. life 2. Period certain 3. Joint Life 4. Joint and survivor 5. Temporary 6. Installment refund 7. Cash refund

What is the 1035 tax free exchanges ?

1035 tax-free exchanges as defined by the Internal Revenue Code allow one annuity contract to be exchanged for another annuity contract, and for a life insurance or endowment contract to be exchanged for an annuity contract, without causing a "taxable event;" that is, no gain from the exchange will be recognized or taxed. However, the same is not true in reverse. An annuity cannot be exchanged for a life insurance contract without incurring a tax liability.

How long does an agent must maintain records of the information?

5 years

In Equity Index Annuity, what is the interest rate cap?

A maximum rate of interest that the equity indexed annuity can ear

In Equity Index Annuity, what is the Margin/spread/administrative fee?

A percentage subtracted from any gain in the index

Who can sell variable annuities?

A salesperson who holds an insurance license and has to be registered with the Financial Industry Regulatory Authority (FINRA) and are subject to the Rules of Conduct of the NASD ( National Association of Securities Dealers)

How are annuities taxed?

Annuities provide tax-deferred income but no deduction for contributions. 1. Earnings on funds in tax-deferred annuity are not taxed until withdrawn and then are taxed as ordinary income. 2. Once payments from the annuity begin, the previously untaxed earnings are paid out over the term of the annuity as part of the payment. 3. The interest received with each payment is taxed

In Equity Index Annuity, what is the Point to point?

Bases interest on any increase in index value from the beginning to the end of the contract's term

In Equity Index Annuity, what is the High Water Mark?

Bases interest on any increase in index value from the index level at the beginning of the contract's term to the highest index value at various points during the contract's term, often annual anniversaries of the annuity's purchase date

In Equity Index Annuity, what is the Participation rate?

Determines how much of the index's increase will be used to compute the index linked interest rate

What are the penalty tax for burrowing or withdrawals?

Distributions taken before age 59.5 may be subject to a 10% federal income tax penalty. The IRS treats such withdrawals as taxable ordinary income until all of the earnings portion has been taxed.

T/F the credited interest accumulation is taxable as income to the annuitant

False, it is currently not taxable

What is a surrender charge?

If an annuitant wishes to liquidate a deferred annuity early in the contract, insurer impose this charge to cover expenses.

What is an Annuity?

It is a contract that provides income to an annuitant while that person is alive.

What is the basic use of an annuity?

It is to create an income stream to be delivered over time.

What is the exclusion ratio?

It is used to determine which portion of a payment is to be considered taxable interest? Invested amount --------------------- = exclusion ratio expected return Example Paid in: $20,000 Monthly guaranteed benefit payment for life: $150 Age at purchase 65 Life expectancy: 20 Expected return: $150 X 12 x 20 = $36,000 Exclusion ratio: $20,000 / $36,000 = 56% Annual benefit excluded from tax: $150 x 12 x .56 = $1,008 Annual benefit subject to income tax: ($150 x 12) - $1,008 = $792

What is a deferred commencement annuity?

Purchased with a single or period premiums, this type of annuity begins payment of benefits at a specified point after more than one premium payment period has passed. In most cases it will be several years, the longer the deferral the more flexibility is allowed in premium payments.

What is a flexible premium?

The annuitant pays a flexible periodic payments until the date of plan maturity. 1. The payment may vary from year to year, the annuitant paying whatever he or she wishes.

What is level premium?

The annuitant pays the same annual premium to a specified age in order to create a desired amount of annuity funds. 1. Can be paid monthly, quarterly, semi annually. 2. At the specified age, the fund is annuitized and paid out in a stream of payments.

What is immediate commencement?

The annuity is purchased with a single premium and benefits are payable at the end of the initial premium payment period, whether monthly, quarterly, or annually. Thus the benefit payments begin after the period in which the annuity becomes fully funded

What are accumulation units?

The contribution minus the expenses are converted into accumulation units 1. The value varies according to the value of the underlying investment ($500 can purchase 20 accumulation units one month and only 19 the next month)

What is a fixed annuity?

The insurance company guarantees the principal and a minimum rate of interest. 1. Growth of the annuity's value do not depend on the insurance company's performance 2. The company also guarantees periodic payments of a certain amount per dollar in the account (annuitant known exactly whet he or she will receive each month)

What happens during the accumulation phase in the fixed annuity?

The interest rate payable for each year is announced and guaranteed, this rate can never be lower than the guaranteed minimum.

What happens during the annuitization phase in fixed annuity?

The interest rate, amount of the benefit and the duration of the payout period are fixed and guaranteed at the time of annuitization

What is the Joint Life Annuity Settlement?

The joint life annuity can be viewed as a special case of the straight life annuity. 1. It provides a specified amount of income for two or more annuitants, with payments ending on the death of the first annuitant 2. Not considered suitable as a joint husband and wife annuity

What is the difference between annuities and life insurance?

The main function of an annuity is to liquidate an estate by periodically paying money out, while the main function of life insurance contract is to create an estate by periodically paying money in.

What is a variable annuity?

The monthly benefits are based on a specific number of units owned instead of a fixed dollar amount. 1. The value of the unit is determined at the time the benefit is to be paid, depends on investment results, varies, and is not guaranteed. 2. Money is invested in a fund similar to mutual fund 3. Amount is determined by the investment performance of the fund

What are replacement and exchange contracts?

The requirements that an agent have reasonable grounds for believing that the recommendation is suitable and that the agent make a reasonable effort to obtain information concerning the senior consumer apply specifically to cases where an existing policy will be replaced or exchanged in the transaction .

What is the Period Certain Option for the Settlement option?

This option guarantees benefit payments for a certain period, whether the annuitant lives or dies. 1. At the end of the period, payments stop. 2. Thus, this kind of option carries the risk that the annuity payments can run out before the annuitant's death.

What is the Life with Period Certain option settlement ?

This payout option pays an income for life but also guarantees a minimum number of payments. 1. Monthly payments are generally guaranteed for 5,10,15 or 20 years. 2. The longer the period, the smaller the monthly payment (2000 for 10 years or 1000 for 20 years) 3. If the annuitant dies after payments have begun but before the end of the guaranteed number of years , the annuitant's beneficiary receives payments until the end of that period

What is the installment refund annuity settlement?

This policy pays annual benefits to the annuitant until death and refunds the remainder to a beneficiary in installment 1. Guarantees an amount at least equal to the purchase price 2. An annuitant who lives for a long time after, could receive more in benefits than the contract cost 3. If the annuitant dies, the beneficiary receive the difference in installment payments

What is a Temporary Annuity Settlement?

This policy pays benefits for a specified number of years or until the annuitant dies, whichever comes first. If the annuitant survives the fixed period, the annuity creases, as it does if he dies during that period

What is the Joint and Survivor Annuity Settlement?

This policy pays benefits to two or more annuitants and continues to pay until the death of the last annuitant 1. It allows an annuitant to provide for him/herself and spouse until the annuitant's death 2. Annuity payments may start at a relatively high level while both are alive and drop to a lower level upon death of either

What is the Cash Refund Annuity settlement?

This policy pays the beneficiary or the annuitant's estate a lump sum refund of the difference between premiums deposited and benefits payments paid out up to the death of the annuitant 1. If the annuitant dies, the beneficiary receives the difference in a lump sum 2. If the annuitant lives after the income paid equals the premiums paid, the insurance company continues to make income payments to the annuitant for life.

What is the Life income option for settlement?

This policy type pays the annuitant beginning at a specified date until the death of the annuitant. 1. There is no refund of any remaining cash to survivors. 2. There is no guaranteed minimum amount of benefits 3. Pays until the annuitant dies

What are the structured settlements use of the annuity?

Used to distribute funds from lawsuit settlements, lottery payouts, and other lump-sump awards; 1. The payor can purchase an annuity from an insurance company at a discount and structure the payout over time

What is commencement?

When the benefits begin

What are Annuity Units?

When variable annuity benefits are to be paid out, the accumulation units in the individual's account are converted to annuity units. 1. The number of annuity units is set at the time of the initial payout and remains constant, while the value of the annuity units continues to vary according to investment results.

In Equity Index Annuity, what is the Floor?

a limit, either as a percentage or a fixed dollar amount, on how much the cash value can decrease over a specified period

In Equity Index Annuity, what is the Annul reset (ratchet)?

based interest on any increase in index value from the beginning to the end of the year