Lesson 6: Annuities and Retirement Plans

When Sarah retired, she selected the annuity settlement option that paid the largest monthly income; however, upon her death paid no survivor benefits. She chose which settlement option? Installment refund Period certain Joint life Straight life

Straight life - The straight life settlement option will pay Sarah for the remainder of her life; however, if she dies after receiving just one payment, no more payments would be made to anyone else. Because of this provision, this option will pay the highest monthly income and potentially the highest total payout of any other settlement option if Sarah lives long enough. But, this option also has the potential to payout the least amount of benefits if Sarah dies within the first few years.

All of the following statements regarding annuities are correct EXCEPT: an annuity contract provides for the purchase of income. an annuity is based on mortality assumptions and the law of large numbers. annuity payments are guaranteed. like life insurance, an annuity is used primarily to provide income at death.

like life insurance, an annuity is used primarily to provide income at death - 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.

Annuities are classified by all of the following EXCEPT: method of payment (single vs. periodic). number of lives covered (single vs. joint). disposition of proceeds (fixed vs. variable). who issues them.

who issues them - Annuities are classified by method of payment, number of lives covered, disposition of proceeds and various other methods.

Of the following annuity options, which one would be best suited for a 25-year-old worker who wants to start a retirement plan and is concerned about inflation? A Single Premium Deferred Annuity A Single Premium Immediate Annuity A Flexible Premium Fixed Annuity A Flexible Premium Variable Annuity

A Flexible Premium Variable Annuity - A Flexible Premium Variable Annuity gives the individual the ability to add periodic contributions to the plan as compared to the single premium options. The variable contract can be structured using a variety of investment options and strategies to potentially offer better protection against inflation than fixed products.

If the annuitant dies before an amount at least equal to the purchase premium is paid, the remaining payments will be paid to the beneficiary. What annuity settlement option does this describe? A Straight Life Annuity A Refund Life Annuity Life Annuity with Period Certain A Joint and Survivor Life Annuity

A Refund Life Annuity - With a refund life annuity, if the annuitant dies before an amount at least equal to the purchase premium is paid, the remaining payments will be paid to the beneficiary.

Which of the following statements pertaining to an immediate annuity is NOT correct? An immediate annuity is funded with a single payment. An immediate annuity has a long accumulation period. An immediate annuity is designed to make its first benefit payment to the annuitant at the first payment from the date of purchase. An immediate annuity usually makes its first payment 1 month from the purchase date.

An immediate annuity has a long accumulation period - Since an immediate annuity makes its first payment at the first payment from the date of purchase, and since most annuities make monthly payments, an immediate annuity would typically pay its first payment one month from the purchase date. Thus, an immediate annuity has a relatively short accumulation period.

Eric purchased an annuity with favorable rates. However, due to unforeseen circumstances, he needs to surrender the annuity. If interest rates have increased since his purchase, Eric will need to pay a higher surrender charge than if interest rates had decreased. Eric owns a(n): fixed annuity. variable annuity. market-value adjusted annuity. equity-index annuity.

market-value adjusted annuity - MVAA annuities can either increase or decrease the cost to surrender the annuity, depending on the interest rates at the time of purchase as compared to the interest rates at the time of surrender.

Don is describing the features of an annuity to a prospect. Don tells the prospect that the annuity premiums are deposited into the insurer's separate account where the annuitant is credited with a certain number of accumulation units. What type of annuity is Don describing? variable annuity fixed annuity market value adjusted annuity equity index annuity

variable annuity - Variable annuity premiums are deposited in the insurer's separate account and credited with a certain number of accumulation units.

Before dying of a heart attack, Robert had received $15,000 in monthly payments from his $80,000 straight life annuity. He also was the insured under a $55,000 Whole Life policy that his wife, Ruth, is primary beneficiary of. For both contracts, how much will Ruth receive in death benefits? 135000 120000 55000 80000

55000 - The life insurance policy would pay the face amount of $55,000 to Ruth. Because Robert selected the straight life settlement option on his annuity, payments would cease upon his death.

Ken and Kathy are twins that have worked for the same company for 30 years. When they both decided to retire together, they each chose to purchase a $300,000 annuity with a life income option. Since each selected the life income option, which twin will receive the larger monthly annuity payment? Ken they will receive the same amount Kathy depends on their health

Ken - Being female, Kathy's life expectancy is longer than Ken's; therefore, her payments are calculated over a longer period of time, making the payments less.

The type of annuity in which the cash values are invested in securities is called a (n): Fixed Annuity Variable Annuity Single Premium Annuity Immediate Annuity

Variable Annuity - The type of annuity in which the cash values are invested in securities is called a Variable Annuity.

The annuity phase of an annuity contract offsets the risk of: dying too soon. living too long. disability. unintentional unemployment.

living too long - With life insurance contracts, the company had to be concerned with how soon you would die and present a claim. With the annuity phase, they must be concerned with how long you will live due to the length of the payout.

All of the following statements about immediate annuities are correct EXCEPT: the income flow must be fixed rather than variable. they have relatively short accumulation periods. they can only be funded with a single payment. the first benefit payment is typically made one month from the purchase date.

the income flow must be fixed rather than variable - The income flow from immediate annuities can be either fixed or variable. With a fixed immediate annuity, the annuitant is guaranteed an income flow without risk of market fluctuations affecting the amount of income. With a variable immediate annuity, the investment risk is transferred to the annuitant. This means that once an income stream is created, the payments can increase or decrease depending on the performance of the underlying investments.

Marcus purchases an annuity that offers a guaranteed minimum interest rate and a guarantee against loss of principal if the contract is held to term. However, if the S&P 500 moves upward, his annuity might be credited with more than the guaranteed minimum interest rate. Marcus has purchased a(n): fixed annuity. equity-indexed annuity. market-value adjusted annuity. variable annuity.

equity-indexed annuity - Equity index annuities pay a return based on an index such as the S&P 500. Most EIA's pay a guaranteed minimum return and guarantee the principal.

All of the following statements regarding market value adjusted annuities (MVAAs) are correct EXCEPT: an MVAA lets the annuity owner secure a variety of interest rates. an MVAA lets the annuity owner divide his money over several different contract periods, each with its own rate of interest. it is necessary for agents and brokers to hold either the NASD Series 6 or 7 registrations to market and sell MVAAs. with an MVAA, interest rates credited may fall as well as rise.

it is necessary for agents and brokers to hold either the NASD Series 6 or 7 registrations to market and sell MVAAs - Though there is a certain variability to the interest rates credited, MVAAs are guaranteed under the insurer's general accounts. They are not regulated by the NASD, nor is NASD registration required of those who sell EIAs.

Betty was age 59 when she purchased a deferred annuity with a five-year surrender charge period. She is now age 62, and her annuity contract value is $175,000. Her annuity contract has the typical surrender charge stipulations; therefore, all the following may be nonforfeiture options available to Betty at age 62 EXCEPT: the lump-sum cash surrender value. a 1035 exchange of the full contract value for another deferred annuity offered by a different insurer. convert the full contract value into an immediate annuity through the same insurer. annuitize the full contract value using a life annuity with period certain.

a 1035 exchange of the full contract value for another deferred annuity offered by a different insurer - Even if the surrender is part of a 1035 exchange, the surrender of a deferred annuity within the surrender charge period is equal to the full contract value, minus any applicable surrender charges.

All of the following are annuity premium factors EXCEPT: medical history. age. sex. assumed interest rate.

medical history - Age, sex and assumed interest rate are annuity premium factors, while medical history is not. Annuities do not typically require medical underwriting for issuance.

Which of the following statements regarding annuity settlement options is CORRECT? The survivor under a joint and full survivor annuity receives 100% of the original joint income. An installment refund annuity continues the same income amount to the beneficiary until the beneficiary dies. The survivor under a joint and full survivor annuity receives 50% of the original income. A straight life income pays the remaining amount left in the annuity to the annuitant's beneficiary upon the death of the annuitant.

The survivor under a joint and full survivor annuity receives 100% of the original joint income - The survivor under a joint and full survivor annuity receives 100% of the original joint income amount. Under an installment refund annuity, after the death of the annuitant, the same income will be paid to the beneficiary until the full annuity face amount has been paid. A straight life income annuity pays out only during the lifetime of the annuitant and has no provisions for payments to continue to a beneficiary.

If an annuitant wants the largest amount of income from his/her annuity, he/she should choose which income option? Life Annuity Single premium immediate annuity Life with 20 year Period Certain Life Refund

Life Annuity - The life income option offers the highest payout amount. However, there are no survivor options. Payments stop upon the death of the annuitant. Therefore, this annuity payout offers the highest payout amount.

Which annuity settlement options guarantees that if the annuitant dies before the end of the payout period, payments will continue to the beneficiary until the end of the payout period? Straight Life Annuity. Refund Life Annuity. Life Annuity with Period Certain. Joint Life Annuity

Life Annuity with Period Certain - If the annuitant outlives the guarantee period, the payments continue until the annuitant's death. It also guarantees that if the annuitant dies before the end of the payout period, the payments will continue to the beneficiary until the end of the payout period.

Which of the following statements best describes the primary reason annuities are commonly used in distributing large lump-sum structured settlements? Distributions are income tax free. The sum of payments received will be larger than the original lump-sum. The person receiving the income is assured of receiving the entire lump-sum amount. Lump-sum settlements can be distributed over a guaranteed period of time using a method that works best for the recipient's needs.

Lump-sum settlements can be distributed over a guaranteed period of time using a method that works best for the recipient's needs - The primary reason for using an annuity in a structured settlement is that it provides a guaranteed way to distribute a lump-sum over a period of time. Annuities can provide the guarantee that is usually required with the large sum settlements.

All of the following are factors that determine the annuity benefit amount EXCEPT: annuitant's age. annuitant's sex. company's expense (loading) factor. annuitant's tax bracket.

annuitant's tax bracket - Age, sex, expenses (plus premium contributions, payment cost, interest rate, and type of annuity option selected) are factors that determine the annuity benefit. The annuitant's tax bracket is not a factor.

Annuity buyers who want their product to be supported by the insurers' general accounts would most appropriately be looking for interest returns that: can compete with equity investment returns. will keep pace with inflation. can go up but can never go down. are guaranteed never to be less than the rate specified in the contract.

are guaranteed never to be less than the rate specified in the contract - Life insurance and annuity policies that are supported by the insurer's general account include a provision that guarantees interest returns to never be less than the rate specified in the contract.

Which of the following statements regarding annuities is NOT correct? Pure life annuities provide income as long as the annuitant lives; benefits terminate at his or her death. An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs prior to total payout, a portion of the premium is refunded to the annuitant's estate or beneficiary. Annuities that pay benefits in specified dollar amounts are fixed annuities; annuities that pay benefits in relation to units are variable annuities. An annuity can be classified as "immediate" or "deferred," depending on when benefit payments begin.

An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs prior to total payout, a portion of the premium is refunded to the annuitant's estate or beneficiary - A refund annuity guarantees a specific amount of benefits, which will be paid regardless of whether the annuitant is alive to receive them. If the annuitant dies before receiving this minimum guaranteed benefit, the money is paid to a beneficiary or to the estate.

An annuity which guarantees a minimum rate of return is: a fixed annuity. a variable annuity. a deferred annuity. an immediate annuity.

a fixed annuity - A fixed annuity has a minimum guaranteed interest rate. It will pay the current rate or the guaranteed rate, whichever is higher.

Albert has purchased an annuity that will pay him a monthly income for the rest of his life. If Albert dies before the annuity has paid him an amount equal to what he put in it, the insurance company has agreed to pay the difference to Albert?s daughter. Albert has purchased: a refund life annuity. a life annuity with period certain. a temporary annuity. a straight-life annuity.

a refund life annuity - A refund life annuity will pay an amount equal to at least the amount paid into it, or the remainder of the annuitant's life, whichever is longer. If the annuitant dies before the full amount has been paid, then the remainder will be paid to the annuitant's beneficiary.