Annuities Chap 5
Insurance aspects of an annuity
-based on a mortality table -if a life contingency settlement option is chose, the insurance company guarantees the income benefit as long as the annuitant is alive
Death benefits
-qualifies when annuitant dies before annuitizing the contract -policy has a named beneficiary -insurer pays out amount equal to the premiums paid or the account value (whichever is greater)
accumulating a retirement fund
Deferred annuities are normally purchased to defer taxes on any contract earnings. They are ideal for ___________________________. During the accumulation period, only the contract owner can sign the request for surrender of a deferred annuity. During the early part of the accumulation period, the insurer normally assesses a surrender charge.
Fixed (Guaranteed) Annuity
During the accumulation period, the insurer guarantees a minimum fixed interest rate. At annuitization benefits are paid as a minimum level fixed amount.
Varible Annuity
For a_______________ Both an insurance license and a securities license (FINRA) are required. This annuity is considered a security, and therefore, must comply with the Federal Securities and Exchange Commission (SEC) rules as well as the state insurance laws
irrevocable
If the owner chooses to annuitize the contract, the choice of distribution option is____________ —once selected it may not be terminated or changed to another option. *
70
Sam wants to know at what age he should select a settlement option in order to receive the highest monthly income benefit payment. Which of the following will meet his objective regardless of the settlement option selected? A Age 55 B Age 70 C Age 62 D Age 65
Annuitant
The __________ is the person on whose life the annuity contract's income benefit is based.8
outlive
The fundamental purpose of an annuity is to systematically liquidate a sum of money over time in order to provide a source of income the annuitant cannot ___________. *
10 59
To discourage the use of annuities as short-term tax shelters, a____% penalty tax is levied against any premature withdrawals prior to _______½ years of age. This discourages withdrawals. The tax penalty does not apply if premature distributions occur due to the death or disability of the contract owner.
Annuity payments and cash values fluctuate
Variable annuities are regulated by the SEC, FINRA, and State insurance departments. ________________________________ according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars.
Annuitant
_______ is the individual whose life the contract is based upon. Upon a lifetime annuitization, payments will be made to the annuitant based upon the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments.
Life Insurance
___________ creates an estate.
Annuities
______________are used primarily to provide a steady stream of income to an individual typically upon retirement.
Joint and ½ Survivor
annuity pays half of the total payment two or more annuitants were receiving when the contract was first annuitized. Payments continue until the last surviving annuitant has died.
Flexible Premium
contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum dollar amount they will accept.
liquidate an estate
one of the primary functions of an annuity is to ___________, or to pay benefits until the death of an annuitant
Owner of annuity
the individual who controls the contract and is responsible for making payments into the contract as well as having all of the contractual rights in the policy
Single Premium Immediate Annuity
A _________________________ (lump sum) is put into an annuity from which the annuitant may immediately begin drawing benefits (within a year of the issue date). A retirement plan rollover, savings account balances or CDs, mutual funds, deferred annuity values, or the death proceeds of a life insurance policy might be used to purchase a SPIA.
Deferred annuity
A ____________________will pay periodic benefits starting at some specified time in the future; income benefits begin more than 1 year from the issue date.
Single Premium
A lump sum payment is made into an annuity
deferred annuity
A periodic premium annuity, by definition, is a _________________. *
Contract
An Annuity is a contract or Policy?
Liquidates
Annuity________ an estate.
tax-deferred growth of principal
Both annuities and life insurance offer _______________.
assumed interest rate (AIR)
With a Varible Annuity, The investment return varies according to the separate account selected based on the _______________________. If the actual return is lower than the _______________, the monthly annuity payment will be reduced. If the actual return is equal to the ______________ the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the ________________, the monthly annuity payment will increase from the previous month.
Accumulation period
____________Is the period of time from the first deposit to the selection of a settlement option is considered the accumulation period, during which taxes are deferred. These are found within deferred annuities.
Flexible Premium Deferred Annuity (FPDA)
________________ contributions may be made as often and in whatever amount the contract owner desires. However, most insurers set a minimum and a maximum amount for contributions. Benefits begin more than 1 year from the issue date.
Additional payments
_____________________ may be made on annuities in most contracts on a scheduled (monthly, quarterly, semiannual, or annual) or unscheduled basis, with minimum and maximum limitations. *
Annuity Classifications
___________________________________are based on: Method of premium payment (single, flexible, and periodic) Funding (fixed vs. variable) When income benefits are payable (immediate vs. deferred) The payout option selected (Life only vs Annuity certain)
Personal
_________________uses of Annuities Purchase other insurance Education Funding Retirement fund accumulation Retirement Income Long-term care benefits Lump sum structured settlements
Annuitization
__________is the process of converting an annuity investment into a series of periodic income payments.
Beneficiary of annuity
-the individual or person named in the contract to potentially receive benefits if the owner and/or annuitant die prior to annuitization -or if the settlement selected offers any residual benefits -during the accumulation period, if contract owner and the annuitant are the same person and the designated beneficiary is the annuitant's spouse, the IRS code allows the spouse to assume ownership of the annuity upon the death of the annuitant
Annuitant of annuity
-the individual whose life the contract is based upon -payments will be made to the annuitant based upon the annuitant's age, gender, settlement option selected, and dollar amount used to fund the income benefit payments
non-qualified
A _______________ annuity is funded with after-tax dollars, meaning taxes on the money were paid before it goes into the annuity. Upon distribution, only the earnings are taxable as ordinary income.
long term care
A _______________ provision may be offered to help offset ______________ costs. Some companies offer a combination annuity and ______________policy. *
Accumulation and Distribution
Annuities have two distinct "phases" or "periods": _____________ and ________________ (or annuitization or liquidation) *
Life Income (Pure or Straight Life)
Once the Annuitants dies any unpaid annity is kept by the insurer.
Corporate owned
with a annuity, a corporate owner of an annuity will name itself as the beneficiary.
qualified
A _______________ annuity is funded with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution from a _________ annuity (contributions and earnings) is subject to ordinary income taxes.
Single Premium Deferred Annuity (SPDA)
A _______________________ (lump sum) is put into an annuity from which the annuitant will draw the benefits at some specified time in the future, more than 1 year from the issue date.
taxable as income
A qualified annuity holds retirement plan assets (either original contributions or rollover contributions) which are made with pre-tax dollars. 100% of the annuity distributions are ____________ as ____________ . *
life insurance
Although annuities are not _____________________, they enjoy the same tax privileges that _____________ does. Growth of an annuity's cash value is tax-deferred until it is distributed. *
surrender charge
An annuity in the Accumulation phase has cash value, and is subject to specific ____________________s. Most annuities permit partial surrenders each year of up to 10% (of the beginning of the policy year value) without a ___________________. *
Nonforfeiture provisions
An annuity owner will not lose the value accumulated up to the point where they stopped paying into the contract. ___________________________give the owner the rights to the accumulation in the contract. The owner has the right to surrender the contract during the accumulation period. Remember, these provisions only apply to deferred annuities since immediate annuities do not have an accumulation period.
Indexed (or Equity Indexed) Annuity
An annuity product with interest rates that are linked to the positive performance of a stock market related (equity) index, such as the Standard & Poor's 500 Index.
single premium annuity
An annuity purchased with a lump sum of money with no additional money to be added later is called a _____________________. *
lump sums of money
Annuities are commonly purchased with ___________________ from an inheritance, insurance claims, and personal injury settlements or other civil judgments. *
mortality table
Annuities are insurance products based on a ______________ .
seniors
Annuities are marketed primarily to _______________, and state laws impose a variety of disclosure requirements and other duties on agents, including the use of illustrations and suitability testing prior to sale. *
Group Annuity
Annuities are usually purchased by individuals. They may also be purchased as part of a structured corporate pension plan referred to as a ________________. A _______________ is a contract between the insurer and the employer and is set up for eligible employees. Each employee receives a certificate. This is a defined benefit plan under IRS rules.
a specific period of time or for life
Annuities may be annuitized for ______________ of the annuitant
death benefit
Annuities provide a __________________to the beneficiary of the contract prior to annuitization. The full amount of the premiums paid is the minimum amount payable if the annuitant dies before the contract is annuitized. *
living benefit
Annuity Pays a __________.
Annuity Certain
Annuity benefit payments are received for a specified period of time or a specified amount of periodic income. If the annuitant dies with time remaining on the period certain or a balance is left in the account, the named beneficiary receives the balance of the payments. An annuity guaranteed to pay out for a specific number of years (such as a typical, state lottery prize) is called a fixed period. If the periodic amount is specified, but not the number of payments needed to pay out (liquidate) the sum in question, then the annuity certain is called a fixed amount. Both forms are often used in settlement options.
Life Income (Pure or Straight Life)
Annuity is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income than any of the other options.
Life Income Period Certain
Annuity is payable for life, or for a specified period of time, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for life of the annuitant. If the annuitant dies prior to the end of the period, certain a beneficiary receives the balance of the payments for the remaining time period.
Life Income with Refund (Installment or Cash Refund)
Annuity is payable for the lifetime of annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not the growth), the balance is refunded to the beneficiary as a lump sum, or cash refund, or in installments, sometimes referred to as the installment refund.
Life Income Joint & Survivor
Annuity is payable to 2 annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. Depending on which option is selected, these options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor,
Joint Life
Annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.
steady income
Annuity provides __________ until death of the annuitant
waived
Annuity surrender charges are generally________________ if the annuitant is hospitalized for an extended period, placed in a nursing facility for at least 30 days, becomes disabled, or dies.
Escape Clause
Bailout Provision is also known as the___________________.
suitability
Before determining the use of an annuity, it is important to determine the ________________of the product to the intended purchaser. _______________describes the steps that must be taken by a producer to ensure that an annuity is addressing a prospective owner's needs and financial objectives at the time of the sale. Additional factors used when determining _____________ include the age, income, risk tolerance, and potential use of the annuity.
Periodic Premium
Continuous premiums paid into the contract. The most common example of a ______________ is a flexible premium.
accumulation period
During the ______________________, if the contract owner and the annuitant are the same person and the designated beneficiary is the annuitant's spouse, the IRS code allows the spouse to assume ownership of the annuity upon the death of the annuitant. All rights of ownership are assumed to include tax deferment.
bailout provision
During the accumulation period, some contracts also offer a _____________________ that allows the owner to withdraw money from the annuity without surrender charges if the crediting rate falls by more than a specific amount. This will enable the policy owner to consider other savings and investment options.
premiums paid or account value
In addition to providing a guaranteed income benefit payout for life, an annuity also has another guarantee if the annuitant dies prior to annuitizing the contract. In this case, the policy has a named beneficiary, just like a life insurance policy, whereby the insurer pays out an amount equal to the ________________________________, whichever is greater
after-tax money
Nonqualified annuities are funded with ___________ and the contributions will not be taxed when withdrawn. Only the gains are taxable as income.*
owner
Only the _________ can surrender an annuity.*
interest crediting rate
The "fixed" portion of a fixed annuity is the_____________________, which may change at the discretion of the insurance company, but not less than the guaranteed minimum. A fixed annuity also promises a fixed payment to the annuitant when the contract is annuitized.
immediate annuity
The _____________________does not have an accumulation period and is used to generate immediate income within a year of the issue date.
Surrender Charges
When a contract is fully surrendered, any _________________ will lessen the contract payout. This is also referred to as a back-end load. ________________ diminish over a stated number of years, set by the insurer, until they disappear.
back-end load
When a contract is fully surrendered, any surrender charges will lessen the contract payout. This is also referred to as a _________________________ .
adopt the annuity
When the owner and annuitant is the same person, a spouse beneficiary is permitted ____________ or to name another annuitant under the Internal Revenue Code if the annuitant dies prior to annuitizing the contract
Life income only
Which of these annuity distribution options promises the largest possible payment to a single annuitant? Life income only Life income with period certain Installment refund Lump sum refund
corporate owned nonqualified
With a _____________________ annuity, Interest or gains are taxable as income in the year earned.