Annuities CE

An annuity purchased with a single premium to begin providing income one payment interval in the future is called A. A single premium-deferred annuity B. A life annuity C. An immediate annuity D. A fixed annuity

C Why: Immediate annuities are so called because they allow no time for accumulations on the purchase premium or additional premium payments before annuity payments begin to be made to the annuitant

An annuity is sometimes called the flip side of A. Compounding B. Qualified retirement plans C. Social Security D. Life insurance

D Why: an annuity protects against living too long (and outliving one's financial resources), while life insurance protects against dying too soon (and leaving one's surviving dependents without sufficient financial resources)

The rate of return on a variable annuity is A. Tied to the performance of securities in the insurer's separate account B. Variable within a specified number of percentage points C. Flexible but guaranteed to be no less than the minimum rate specified in the contract D. Guaranteed to reflect activity on the New York Stock Exchange

A Why: a variable annuity's rate of return is tied to the performance of securities in the insurer's separate account

A risk-averse client seeking safety and preservation of principal is NOT a likely candidate for A. A traditional fixed annuity B. A variable annuity C. An indexed annuity D. A combined annuity

B Why: a variable annuity carries risk. Therefore, it would not be appropriate for a risk-averse client who desires preservation of principal

The type of annuity that guarantees a minimum rate of return is A. The variable annuity B. The fixed annuity C. The immediate annuity D. The deferred annuity

B Why: the fixed annuity guarantees a minimum rate of return

In most cases, the annuitant's cost in the annuity contract A, will be taxed at distribution B. Is taxed at capital gains rates C. Is not taxed D. Is withdrawn before earnings

C Why: in most cases, annuities are purchase with after-tax dollars. Because these dollars have already been taxed, they are not taxed again when they are paid out of the annuity to the annuity owner.

Under which of the following payout options are payments made regardless of how long the annuitant lives? A. Fixed period payments B. Interest only payments C. Life annuity payments D. Fixed amount payments

C Why: life annuity payments are made regardless of how long the annuitant lives

An annuity purchased with a single premium to begin providing income one payment interval in the future is called A. A fixed annuity B. An immediate annuity C. A variable annuity D. A deferred annuity

B Why: an immediate annuity is purchased with a single premium and begins providing income one payment interval in the future

If an annuity owner, age 55, sets up a properly designed systematic withdrawal plan, A. The owner generally will not be subject to the penalty tax on premature distributions B. With most companies, the withdrawal payments will be subject to a surrender charge C. The owner normally loses rights to the cash value accumulated in the annuity D. The payments will be based on the annuity payments projected at retirement

A Why: properly designed, the systematic withdrawal plan will not subject the annuity owner to the penalty tax on premature distributions

Which of the following is(are) tax restriction(s) on premature withdrawals on annuity contracts? A. Both answers are correct B. Neither answer is correct C. Interest-out-first rule D. 10% penalty tax

A Why: tax restrictions on premature withdrawals from annuity contracts include both the interest-out-first rule and the 10% penalty tax

All of these are mitigating factors that may affect verifying a senior client's mental capacity except: A. The use of online banking B. Individual traits, experiences, education, values, and traditions C. Depression, grief, stress, or recent traumatic event D. Normal changes in mental capacity in seniors

A Why: when verifying a senior client's mental capacity, producers should be aware of mitigating factors that may affect their observations. Some mitigating or qualifying factors include the following: depression, grief, stress, or recent traumatic events, hearing/vision loss, normal changes in mental capacity in seniors, individual traits, experiences, education, values and traditions, medical conditions and medication factors

Which of the following statements regarding the licensing requirements for selling variable annuities is true? A. One must have a state life insurance license and be a registered representative with a FINRA member; some states also require a separate variable contracts license B. One needs only a life insurance license from the state insurance department C. One needs only to be a registered representative with a FINRA member D. In most states, it is sufficient to hold a specific state-issued variable contracts license

A Why:variable annuities are subject to regulation as both life insurance and as a security, meaning that one must be licensed with the state as a life insurance agent and be a register securities sales representative with a FINRA member. In addition, some states have a separate variable contracts license that individuals must qualify for in order to sell variable annuities

Which of the following is a potential sign that someone is suffering from diminished capacity? A. The client wishes to bring her children into financial affairs B. The client seems confused or disoriented C. The client balances her checkbook only once a week D. The client is concerned about current events

B Why: the signs of diminished capacity can be observed in a senior client's cognitive functioning, emotional functioning, and behavioral functioning. These include confusion about simple items and disorientation.

The licensing requirements for agents who sell variable annuities include A. All of these B. In some states, a separate state variable contracts license C. Life insurance license from their state insurance department D. Registration as a representative with FINRA

A Why: all of these are requirements for agents who sell variable annuities

Which of the following is a characteristic of a variable annuity? A. Fixed annuity payment B. Guaranteed interest C. Investment risk assumed by the contract owner D. Investment risk assumed by the insurer

C Why: a variable annuity involves investment risk assumed by contract owners

One of the advantages of an annuity systematic withdrawal plan is A. The payments are received tax-free B. The minimum surrender charge C. The flexibility the plan gives to the contract owner D. The forced savings aspect of the plan

C Why: an advantage of an annuity systematic withdrawal plan is the flexibility it provides the contract owner

A fixed annuity contract calls for a 5% guaranteed interest rate. The annuitant will A. Never receive less than 5% interest B. Always be credited with additional interest equal to the rate at which the company earns excess interest C. Never receive more than 5% interest D. Always receive some rate above 5% which the company chooses to pay

A Why: if a fixed annuity contract calls for a 5% guaranteed interest rate, then the annuitant will never receive less than 5% interest.

Which of the following enjoys tax deferral of the earnings on annuity cash values? A. Individuals B. Any type of trust C. Any type of non natural person D. Corporations

A Why: non natural persons do not enjoy tax deferred accumulation of earnings in an annuity

During the accumulation period, how is the interest credited to an annuity generally taxed in regard to its owner, if the owner is an individual? A. Treated as tax losses B. Taxed as ordinary income currently C. Taxed as capital gains D. Excluded from current taxation

D Why: annuity earnings are tax deferred for owners who are individuals. This is one of the annuity's most attractive features, compared to financial vehicles whose earnings are taxable in the year credited

A variable annuity offers a possible hedge against which of the following? A. Recession B. Falling stock market C. Depression D. Inflation

D Why: a variable annuity offers a possible hedge against inflation

Consumer profile information about a prospect must be considered by a producer who is deciding whether to recommend an annuity to the prospect. This Suitability information about a prospect in an annuity transaction includes all of the following EXCEPT A. Liquidity net worth B. Financial time horizon C. Intended use of the annuity D. Current health status

D Why: consumer profile information is information that is reasonably appropriate to determine whether a recommendation addresses the consumer's financial situation, insurance needs, and financial objectives. It does not include current health status

What is the primary use of a deferred annuity? A. Tax-free income B. Liquidity C. Estate distribution D. Tax-deferred accumulation

D Why: the primary purpose of a deferred annuity is a long term-tax deferred accumulation

To compute the annuity exclusion ration for income tax purposes, divide the investment in the contract by A. The dividends reinvested in the contract B. The excess of cash value over cost basis C. The policy loans outstanding D. The expected return

D Why: the exclusion ratio is calculated by dividing what the owner has paid for the contract by the amount expected to be paid out of the contract or the expected return

Which of the following payout options guarantees that the annuitant will have an income regardless of how long the annuitant lives? A. Lump-sum payments B. Fixed amount payments C. Life annuity payments D. Fixed period payments

C Why: a life annuity guarantees that payments will continue for as long as the annuitant lives, even if the annuitant's life expectancy is outlived

Who does the NAIC Model Regulation 275 apply to? A. Insurance producers B. Investment advisors C. Broker dealers and associated persons D. All licensed insurance adjustors

A Why: producer means a person or entity required to be licensed under the laws of this state to sell, solicit, or negotiate insurance, including annuities. For purposes of this regulation, producer includes an insurer where no producer is involved.

Who receives lifetime payments from an annuity? A. A beneficiary B. A trustee C. An executor D. An annuitant

D Why: an annuity contract owner names the annuitant, who receives lifetime payments from the annuity. Usually, the contract owner and the annuitant are the same person. The contract owner also names a beneficiary, who receives any survivor benefits payable under the annuity upon the annuitant's death.

Premiums paid for a personal annuity contract are A. Deductible if benefits do not begin until the annuity starting date B. Nondeductible C. Deductible if purchased after age 59 1/2 D. Nondeductible, unless the benefits are paid to a beneficiary other than the policyowner

B Why: premiums paid for a personal annuity contract are nondeductible

Which of the following is a purpose of the annuity? A. The replacement of earnings upon the disability of an individual B. The distribution of a lifetime income C. The discounting of a principal sum back to its present value D. The creation of a fund at the earth of an individual

B Why: the purpose of an annuity is the distribution of a lifetime income

Which of the following statements about annuities is TRUE? A. Earnings within an annuity have a tax advantage over earnings within a bank CD B. The annual increase in an annuity must be declared as income each year C. Annuity payments are entirely exempt from federal income tax D. There is no difference between the tax treatment of annuities and other financial vehicles

A Why: bank CD earnings are taxable as income in the year earned, while annuity earnings kept inside the annuity are not. This gives annuities a tax advantage over bak CDs

For a joint and survivor annuity for two unmarried people purchased entirely with the funds of the survivor, how much is included in the gross estate of the first to die? A. 50% of the value of the survivor annuity B. It depends on the ages of the 2 annuitants C. 0% D. 100% of the value of the survivor annuity

C Why: if the survivor contributed 100% of the funds to the joint and survivor annuity, then 0% of the funds will be included in the gross estate of the first to die

An individual who wants the potential for hedging against inflation with money invested in an annuity should choose A. A variable annuity B. A split-dollar annuity C. A fixed annuity D. An immediate annuity

A Why: a variable annuity allows an individual to hedge against inflation

Daniel and Karen are the annuitants of a joint-and-survivor annuity. When either Daniel or Karen dies, A. Installment payments continue for as long as a designated amount is available in the annuity B. The balance of the annuity will be paid to the survivor in a lump sum C. The surviving annuitant will continue to receive payments for life D. A guaranteed number of annuity units will be paid to the survivor

C Why: a joint and survivor annuity makes payments for as long as either of the 2 annuitants live

An annuity is sometimes called the flip side of A. Qualified retirement plans B. Social security C. Life insurance D. Compounding

C Why: the flip side of an annuity is life insurance

General tax restrictions on premature withdrawals from annuity contracts include A. A 10% penalty tax only B. Neither the interest-out-first rule nor a 10% penalty tax C. Both the interest-out-fist rule and a 10% penalty tax D. The interest-out-first rule only

C Why: the interest-out-first rule applies to contracts issued after August 13, 1982, and to any deposits added after that date to contracts already in existence. A 10% penalty tax also applies to any taxable portion of a premature withdrawal from an annuity

The primary difference between traditional insurance contracts and variable contracts is that A. Traditional contracts were designed to last for the lifetime of the insured, while variable contracts are designed for a shorter term B. Agents do not need to be licensed to sell variable contracts C. Under traditional contracts, the company assumed the investment risk, while under variable contracts, the contract owner assumes the risk D. Traditional contracts are regulated by the federal and state governments, while variable contracts are not subject to state regulation

C Why: under traditional contracts, the company assumed the investment risk; under variable contracts, the contract owner assumes that risk

When recommending an annuity, an insurance producer, or insurer where no producer is involved, must have reasonable basis to believe that recommendations are A. Timely given the consumer's timeline for buying an annuity B. Fair based on the research the insurer and producer conduct about a prospect before attempting to sell an annuity to the prospect C. In the best interests of the client based on the circumstances known at the time of the recommendation D. General and, therefore, not based on the prospect's particular financial circumstances

C Why: a producer, when making a recommendation of an annuity, must act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interest.

The type of annuity that guarantees a minimum rate of return is A. The immediate annuity B. The variable annuity C. The fixed annuity D. The deferred annuity

C Why: fixed annuities guarantee a minimum rate of return. This contrasts with variable annuities under which the return will vary depending on the investment performance of the funds underlying the annuity.

All of these are features of fixed annuities EXCEPT A. A risk to principal B. A predictable rate of return C. A minimum interest rate guarantee D. A guarantee of principal

A Why: fixed annuities have a guaranteed principal and a minimum interest rate guarantee, and therefore, a predictable rate of return

Which of the following statements is false? A. An insurance producer, or an insurer where no producer is involved, must make reasonable efforts to obtain a consumer's profile information within six months after executing a purchase, exchange, or replacement of an annuity resulting from the insurer's or producer's recommendation. B. At the time of sale, an insurance producer, or responsible insurer representative where no producer is involved, must make a record of any recommendation to a consumer to purchase or exchange an annuity that results in another insurance transaction C. An insurer's issuance of an annuity generally must be reasonable based on all the circumstances actually known to the insurer at the time it issued the annuity D. An insurance producer and insurer owe no duty to a consumer regarding an annuity transaction when no recommendation was made

A Why: consumer profile information is information that is reasonably appropriate to determine whether a recommendation addresses the consumer's financial situation, insurance needs, and financial objectives. It is to be collected before a recommendation is made.

Jerry, an insurance producer, is collecting consumer profile information from a prospective annuity client. He has already collected the prospect's age, annual income, financial situation and needs, including debts and other obligations and existing assets or financial products, including investment, annuity, and insurance holdings. Which of these will Jerry also need from the prospect for the consumer profile? A. The prospect's financial experience B. The prospect's club memberships C. The prospect's make and year of his car D. The prospect's educational background

A Why: consumer profile information means information that is reasonably appropriate to determine whether a recommendation addresses the consumer's financial situation, insurance needs, and financial objectives, including, at a minimum: age, annual income, financial situation/needs, existing assets or financial products and financial experience

Jessica, an insurance producer, is working with a prospective annuity client. She provides the prospect with a description of the sources and types of cash compensation and non cash compensation she will receive. What obligation is she attempting to fulfill? A. Disclosure obligation B. Documentation obligation C. Care obligation D. Conflict of interest obligation

A Why: prior to the recommendation or sale of an annuity, the producer must prominently disclose to the consumer a description of the sources and types of cash compensation and non cash compensation to be received by the producer. This includes producer compensation for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting fees

Annuity purchasers transfer to an insurance company their risk of A. Outliving their financial resources B. Becoming uninsurable C. Dying prematurely D. Having to pay unexpectedly high estate taxes

A Why: when people purchase annuities, they transfer the risk of outliving their financial resources to an insurance company

Which of the following contracts begins making the annuity payout shortly after the premium is paid? A. Flexible premium deferred annuity B. Single premium immediate annuity C. Single premium deferred annuity D. Deferred variable annuity

B Why: a single premium immediate annuity begins making the annuity payout shortly after the premium is paid

One of the real tax advantages of annuities is A. The annuity payments are not subject to income tax B. The earnings in the contract are not taxed as income each year C. They are classified as tax-exempt investments D. The earnings are taxed as capital gains rather than income

B Why: annuities provide tax advantage in that earnings in the contract are not taxed as income each year

The 10% penalty tax on premature withdrawals applies EXCEPT in which of the following situations? A. The withdrawal was made by reason of the contract owner's death B. Any of the circumstances described C. The contract owner is at least age 59 1/2 D. The contract owner is disabled

B Why: the 10% penalty tax on premature withdrawals does not apply when any of the circumstances described are present

Once the exclusion ratio is completed, multiply it by the annual payments to find A. The investment in the contract B. The amount excludable from gross income C. The expected return D. The amount includable in gross income

B Why: you multiple the exclusion ratio by the annual payments to determine the amount excludable from gross income

During the payout period, the annuitant's payments from the company are A. Taxed as income up to the cost basis B. Tax exempt C. Taxed entirely as ordinary income D. Taxed as income on the part of the payment that is not a return of the annuitant's cost

C Why: a principle of taxation is that an individual's income is generally taxed only once. Nonqualified annuities are purchased with after-tax dollars, so any annuity value that represents premiums paid into the annuity would not be taxed again

The account set up by the insurance company to handle variable contracts is called A. The registered account B. The segregated asset account C. The separate account D. The general account

C Why: a separate account is set up to handle variable contracts

An insurer must establish a supervision system reasonably designed to achieve the insurer's and its producers' compliance with the NAIC suitability regulation by doing all of the following EXCEPT A. Providing product-specific training and training materials to its insurance producers B. Maintaining reasonable procedures to inform its producers of the requirements of the regulation and incorporating such requirements into relevant product training manuals C. Establishing standards for product specific training for its producers and maintaining reasonable procedures to require its producers to comply with the producer training requirements of the regulation D. Maintaining procedures to review each recommendation within 90 days after issuing an annuity

D Why: the insurer must establish and maintain procedures for the review of each recommendation, PRIOR to the issuance of an annuity, that are designed to ensure that there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumer's financial situation, insurance needs and financial objectives

Assume an annuity owner has just died. Which of the following statements is TRUE? A. The value in the annuity account reverts to the insurance company B. The value of the annuity is not included in the annuity owner's estate C. The beneficiary must select an annuity payout options within 60 days D. The proceeds from the annuity do not go through probate

D Why: when an annuity owner dies, the proceeds from the owner's annuity do not go through probate