chapter 9 - annuities

contract owner

person or couple who by the annuity -name or change the annuitant -name or change the beneficiary -choose the payout option -add more money or take withdrawals -surrender or terminate the agreement

fixed period and fixed amount are types of a-life annuities b-temporary annuities c-life period certain annuities d-joint life annuities

b-temporary annuities

deferred annuities

-do not start an income stream immediately. owner chooses the premium amount and the frequency of premium payments. accumulated funds may be withdrawn at any time subject to a possible surrender charge.

immediate annuities

SPIA - single premium immediate annuity, provides individual with an income that may begin as soon as a month after purchase or may be delayed for up to one year

annuitant (insured)

chosen by the owner to receive the income payments during the annuitization period.

annuity buyers who want their product to be supported by the insurers general accounts would most likely be looking for interest returns that a-will keep pace with inflation b-can go up but can never go down c-can compete with equity investment returns d-are guaranteed never to be less than the rate specified in the contract

d-are guaranteed never to be less than the rate specified in the contract life insurance and annuity policies that are supported by the insurers general account include a provision that guarantees interest returns never to be less than the rate specified in the contract

the life only option is also referred to all of the following EXCEPT a-life with refund b-straight life c-life no refund d-pure life

f-life with refund t t t life with refund is different than the life only annuity option. with the life only options, payments stop when the annuity dies.

joint life and survivor

insurer promises to make payments until the last survivor of two annuitants dies.

beneficiary

no voice in control or management of the annuity and only benefits upon the death of the contract owner

insurer

party who issues the contract

accumulation period

paying in the money interest grows tax deferred annuity value belongs to owner

which of the following statements about a deferred annuity is NOT true a-deferred annuities are a vehicle to accumulate money for future needs b-deferred annuities do not start an income stream immediately c-with deferred annuities, the annuity owner can choose the amount and frequency of the premium d-the deferred annuity owner must annuitize the contract

t t t f-the deferred annuity owner must utilize the contract THE OWNER OF A DEFERRED ANNUITY IS NOT REQUIRED TO ANNUITIZE THE CONTRACT

annuities may be purchased with all of the following EXCEPT a- a single payment that may be deferred for 5 years b-a schedule of flexible payments c-a schedule of fixed payments d-a single lump sum payment

a-a single payment that may be deferred for 5 years annuities may be purchased with a single lump sum, a scheduled payment, or a flexible payment

life with refund

annuitant dies and total payments received are less than the amount paid for the annuity, the difference is paid to the beneficiary money paid as a lump sum (cash refund) or continuation of payments in the same amount as was being paid to the annuitant, called an installment refund

which of the following statements regarding annuities is NOT correct a-annuities that pay benefits in specified dollar amounts are fixed annuities; annuities that pay benefits in relation to units are variable annuities b-an installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, an amount equal to all premiums is refunded to the annuitants estate or beneficiary c-pure life annuities provide income as long as the annuitant lives; benefits terminate at death d-an annuity can be classified as immediate or deferred, depending on when benefit payments begin

b-an installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, an amount equal to all premiums is refunded to the annuitants estate or beneficiary a refund annuity guarantees a specific amount of benefits, which will be paid whether or not the annuitant is alive to receive them. if the annuitant dies before receiving this minimum guaranteed benefit, the difference is paid to a beneficiary or to the estate. the money can be a lump sum (cash refund) or in installments (installment refund)

what type of annuity settlement arrangement stops making payments when the annuitant dies a-installment refund annuity b-pure life annuity c-cash refund annuity d-period certain annuity

b-pure life annuity when an individual owning a pure life annuity dies, no further payments are made. of the settlement arrangements listed, a pure life annuity generates the most monthly income

which type of annuity is most likely to provide death benefits if the insured dies during the accumulation period a-fixed annuity b-variable annuity c-deferred annuity d-immediate annuity

c-deferred annuity a death benefit is paid if the annuitant dies before the annuity payments begin. this is more likely to occur with a deferred annuity

annuitization period

pay out phase of contract -money converted to a series of regular income payments that can continue for life or for a stated period of time no additional premium payments can be made no withdrawals are taken the annuity cannot be surrendered the owner cant change the contract -income generated from accumulated money -money from the accumulation period or from inheritance, lottery winnings, or court settlements -money belongs to the insurance company

life annuities

payout option guaranteed to last for at least as long as the annuitant lives temporary annuities do not

life with period certain

pays income for as long as annuitant is alive, in addition, annuitant selects a payment period and payments are guaranteed to be made for at least that number of years. If the annuitant dies before the end of the selected period, payments continue to the beneficiary for the rest of the period certain.

joint life

pays until the death of the first of two or more annuitants not suitable because the survivor is left without an income

life only

sometimes pure life income - payments stop when annuitant dies, regardless of when that occurs, one month or 20 years. pays the highest monthly income amount because there are no other contingencies straight life, pure life life-no refund

which of the following statements regarding the tax treatment of distributions from an individually owned nonqualified deferred annuity is not correct a-if the contract owner makes a partial surrender, the amount withdrawn is treated first as taxable distribution of grain (LIFO) b-an owner of a deferred annuity who annuitizes the contract will receive the basis tax free c-if the contract owner is younger than age 59.5, a partial surrender may be subject to a 10% penalty in addition to ordinary income taxation d-if the distribution is the result of the annuity contract owners death, the cash value payable to the beneficiary is income tax free

t t t f-if the distribution is the result of the annuity contract owners death, the cash value is payable to the beneficiary income tax free there are no tax free death benefits associated with annuities, as there are with life insurance. the portion of the cash value death benefit that constitutes gain is subject to income taxation whenever distributed

what type of annuity payment option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity is depleted, a lump sum cash payment to the annuitants beneficiary? a-installment refund option b-cash refund option c-straight life option d-period certain option

b-cash refund option a period certain option guarantees payment for a certain amount of time, whether or not the annuitant is alive. the payments stop when the specified period is over. a straight life option pays the annuitant a guaranteed income for her lifetime; no further payments are made after the annuitant dies. an installment refund option pays out what is left to the beneficiary in the form of continued annuity payments

Matteo owns a nonqualified deferred annuity that has a current value of $50,000. He has 2 children, ages 11 and 17. If he decides to devote this annuity solely to help pay for their college education, and his goal is to maximize the annuity income payments, which of the following is the best option? a-convert to an immediate annuity using a 10 year period certain and life annuity income option b-convert to an immediate annuity with an installment refund annuity option c-convert to an immediate annuity using a 10 year period certain annuity option d-convert to an immediate annuity using a straight life annuity income option

c-convert to an immediate annuity using a 10 year period certain annuity option distributing a lump sum of money over a specified period of time with a period certain annuity will only generate a higher annuity payment than any option that includes a life contingency

which of the following annuity payout options pays the highest monthly income a-life with refund option b-joint life option c-life only option d-life with period certain optoin

c-life only option the life only option pays the highest monthly income because there are no other contingencies, and only the annuitants life expectancy was considered to determine the amount of the payout

which of the following statements regarding annuities is NOT correct? a-an annuity contract provides for the purchase of income b-annuity payments are guaranteed c-an annuity is based on mortality assumptions and the law of large numbers d-like life insurance, an annuity is used primarily to provide income at death

t t t f-life life insurance, an annuity is used primarily to provide income at death is NOT TRUE unlike life insurance, an annuity is used primarily to provide income during life; consequently, annuity payments are guaranteed to be paid as long as the annuitant lives