annuities
Paul is 70 years old. At age 65, for $50,000, he purchased a single-premium annuity that pays him $300 per month. If his life expectancy was 25 years when he purchased the annuity, about how much of each payment is subject to tax? $133 $167 $192 $300
The correct answer is (A). The exclusion ratio can be found by dividing the owner's investment in the annuity contract by the expected return. The taxable portion of the payment can be found by subtracting the exclusion ratio from 1 and multiplying the resulting percentage by the payment amount. $50,000 ÷ (25 years × 12 months × $300) = 55.56% 1 − exclusion ratio = 44.44% $300 × 44.44% = $133.32 The taxable portion of the payment is $133.32, or about $133.
Annuities have a variety of features and benefits. Which one of the following types of annuities allows for investment returns that are exposed to the stock market but has a minimum rate of return? An equity-indexed annuity A variable annuity A fixed annuity A single-premium variable annuity
The correct answer is (A).An equity-indexed annuity has the protection of a guaranteed minimum rate of return while still having the potential of earning higher equity returns. A fixed annuity will have a guaranteed rate of return but will not have any participation in the stock market
Hugo owns an annuity. He decides that he no longer has a need for it and wants to exchange it for a life insurance policy. To get the policy he wants, he will need to exchange the annuity and add additional money. Which of the following is correct? He can make the exchange, but it will be taxable to the extent of the value of the annuity. He can make the exchange, but it will be taxable to the extent of the annuity less the additional money he puts into the life insurance policy. He can make the exchange under Section 1035, and it will not be taxable. He can make the exchange, which will not be taxable, but his basis will not reflect any of the investment into the life insurance policy.
The correct answer is (A).An exchange from an annuity to a life insurance policy is not a tax-free exchange under Section 1035
Annuities are financial products that solve a variety of problems. All of the following problems are intended to be mitigated by annuities EXCEPT dying prematurely. running out of money. subjecting earnings to current income tax. maintaining the purchasing power of assets.
The correct answer is (A).Annuities can help lessen superannuation (the risk of outliving funds) and purchasing power (if the annuity is variable). However, an annuity does not reduce the likelihood of dying (mortality)
When determining the percentage of an annuity payment that is subject to tax, the investment in the annuity is divided by the total of the expected payments to be received. Which of the following is the name of the portion that is subject to tax? The inclusion ratio The exclusion ratio The current ratio The working-capital ratio
The correct answer is (A).The exclusion ratio equals the owner's investment in the annuity contract divided by the expected return on the annuity. The resulting percentage is multiplied by the distribution, or payment, received to calculate the portion of the payment that is not subject to income tax.
Lila is a 55-year-old widow with no source of income. Her husband died recently, and she has received insurance proceeds from a policy on his life. She wants to invest in an annuity that will produce income starting today and continuing until she plans to collect Social Security at age 65. She wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Lila based on her objectives? A longevity annuity A 10-year term-certain fixed annuity An immediate single-premium life annuity A deferred fixed annuity
The correct answer is (B).Lila wants the greatest amount of income for the next 10 years. She has no other source of income and must rely on the annuity until she begins collecting Social Security benefits. A term-certain annuity is the best choice for her objectives.
Which of the following accurately describes a variable annuity? A variable annuity offers a fixed rate of return. A variable annuity mitigates the risk of superannuation and inflation. A variable annuity is always a deferred annuity. A variable annuity is always for a single life expectancy.
The correct answer is (B).Option (B) is correct as variable annuities can mitigate the risk of superannuation and mitigate the loss of purchasing power from inflation. Option (A) is incorrect because variable annuities offer a variable rate of return. Option (C) is incorrect as variable annuities can either be deferred or immediate. Option (D) is incorrect as a variable annuity can be for a single life, joint life, or for a guaranteed term.
Sue purchased a single-premium deferred annuity 10 years ago at age 35 for $50,000. Recently, she decided to surrender the annuity for a lump-sum distribution of its $95,000 value. Which of the following statements is correct? She will owe income taxes on $45,000. She will owe income taxes on $95,000. She will owe income taxes and a 10% penalty on $45,000. She will owe income taxes and a 10% penalty on $95,000.
The correct answer is (C). She will owe income tax on $45,000 of the earnings. In addition, the distribution is prior to age 59½ and is subject to the 10 percent early withdrawal penalty on the taxable portion.
Equity-indexed annuities have several different indexing methods. Which of the following is one of them? The oscillation neutrality method The uptick method The high watermark method The trailing 3-year average method
The correct answer is (C).Option (C) is the correct answer. Other methods include the point-to-point method and the annual reset (ratcheting) method. Choices (A), (B), and (D) are not real indexing methods.
Alice, a single 38-year-old, wants to invest in the stock market on a tax-deferred basis from now until she retires. She believes that the stock market will fluctuate up and down over time but that, over the long term, it will be significantly higher than it is today. She does not want to pay for product features that she does not value. What type of annuity is most suitable for Alice? A deferred fixed annuity A single-premium variable annuity A flexible variable annuity An equity-indexed annuity
The correct answer is (C).The equity-indexed annuity allows participation in the stock market while guaranteeing her principal against losses; however, it comes at a cost. A fixed annuity does not expose the investment to the equity market. The single-premium annuity does not accommodate funding over a career.
