Chapter 5 Annuities

All of the following are Payment Options available upon annuitization, except: A. Interest Only B. Life Income Joint and Survivor C. Life Income Period Certain D. Life Income with Refund

A. Interest Only

_____________ means ensuring that an annuity addresses a prospective owner's needs and financial objectives at the time of the sale. A. Suitability B. Planning C. Interviewing D. Advising

A. Suitability

All of the following are ways in which an annuity can be classified based on its premium funding method, except: A. Periodic B. Reinvestment C. Single D. Flexible

B. Reinvestment

Electing a _____________ option for an annuity means that the annuitant will receive an income for life or for a temporary period of time. A. Distribution B. Settlement C. Pay-In D. Funding

B. Settlement

What is the primary purpose of an annuity? A. To create an emergency fund B. To protect against outliving one's income C. To create an estate D. To provide funds upon premature death to surviving family members

B. To protect against outliving one's income

A(n) __________ annuity has its interest credit linked to the positive performance of a stock market index. A. Fixed B. Variable C. Market Value Adjustment D. Equity-Indexed

D. Equity-Indexed

A flexible premium deferred annuity permits all of the following EXCEPT: A. Annuitization at any time. A deferred annuity may not be annuitized as long as there is a surrender charge applicable to the principal value B. Scheduled and unscheduled additions of principal at any time prior to annuitization C. Limited partial surrenders each year not subject to a surrender charge D. Payments to the annuitant beginning within one month of the issuance of the contract

D. Payments to the annuitant beginning within one month of the issuance of the contract

Flexible Premium Deferred Annuity (FPDA)

Flexible 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.

Life Income with Period Certain

Life income to the annuitant or specified period, whichever is longer

Life Income with Refund

Lifetime income to the annuitant, balance refunded to beneficiary upon death of the annuitant

Life Income

Monthly income for the life of the annuitant with no payment to the beneficiary

Joint Life

Payable on more than one life and payments will stop upon the first to die

Single Premium Deferred Annuity (SPDA)

A single premium (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.

Surrender charges typically ____________ over time. A. Decrease B. Increase C. Remain the same D. Vary

A. Decrease

Which of the following gives the owner of a variable annuity the right to withdraw funds without having to annuitize? A. Guaranteed Minimum Withdrawal Benefit B. Retirement Income C. Joint and Survivor D. Group Annuity

A. Guaranteed Minimum Withdrawal Benefit

Instead of waiting to receive her payments over time Jeanne decides to obtain the greatest amount of money out of her annuity immediately. Which option did she choose? A. Lump Sum B. Straight Life Option (Life Income) C. Life Income Period Certain D. Life Income with Refund

A. Lump Sum

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 4%, the effect on this month's income benefit check will be such that it: A. Remains the Same B. All Depends on the Separate Account(s) Selected C. Becomes Higher D. Becomes Lower

A. Remains the Same

___________ are allowed as a way to access the annuity policies values without having to elect a settlement option while still maintaining the policy in force. A. Systematic withdrawals B. Annuitizations C. Surrenders D. Accelerated death benefits

A. Systematic withdrawals

_____________ are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract. A. Systematic withdrawals B. Loans C. Contract waivers D. Premium deferrals

A. Systematic withdrawals

When the owner and annuitant is the same person, a spouse beneficiary is permitted what choice under the Internal Revenue Code if the annuitant dies prior to annuitizing the contract? A. To adopt the annuity as his/her own and become the annuitant or to name another annuitant B. A one-time opportunity to convert the proceeds to a Roth IRA without taxation C. There are no choices, when the annuitant dies, the principal value must be distributed to the beneficiary, who may choose the distribution option if none was selected in advance D. The option to withdraw all funds tax-free in the form of a §1035 exchange to life insurance

A. To adopt the annuity as his/her own and become the annuitant or to name another annuitant

Which of the following annuities typically offers no guarantees? A. Variable B. Indexed C. Fixed D. Bonus Interest Rate Annuities

A. Variable

The __________ is the person on whose life the annuity contract's income benefit is based. A. Beneficiary B. Annuitant C. Owner D. Insured

B. Annuitant

A lump sum of money is placed into an account from which the annuitant will draw periodic benefits beginning more than a year from the date of purchase. This describes a: A. Flexible Premium Deferred Annuity B. Single Premium Deferred Annuity C. Single Premium Immediate Annuity D. Flexible Premium Immediate Annuity

B. Single Premium Deferred Annuity

While life insurance may accumulate money that a person could use in retirement, none promise the same long term benefit of a non-qualified annuity, which is ________________. A. Tax-free payments for the lifetime of a beneficiary B. Tax-free money for college education or other qualified expenses C. A stream of income the annuitant cannot outlive D. Tax-deferred growth of principal

C. A stream of income the annuitant cannot outlive

A "Joint and ½ Survivor" distribution option means which of the following statements is correct? A. There are two annuitants named in the policy and each contributes one-half of the monthly premium or the lump sum that establishes the annuity B. The annuitant receives a full share of the annuity payment and the spouse receives an additional one-half of that C. When one of the joint annuitants dies, the survivor's continuing payments will be one-half of the total payment both were receiving D. The annuitant receives a full share of the annuity payment each month, and the beneficiary receives a one-half share of the payment

C. When one of the joint annuitants dies, the survivor's continuing payments will be one-half of the total payment both were receiving

Life Income Joint and Survivor

Payable on more than one life; upon death of the annuitant, payment continue to survivor

Life Insurance

Provides a benefit upon death of the insured Creates an estate Pays a death benefit Protects against premature death Owner, insured, beneficiary Policy

Annuity

Provides steady income until death of the annuitant Liquidates an estate Pays a living benefit Protects against living too long Owner, annuitant, beneficiary Contract

Lump Sum

The annuitant has the option of cashing out the annuity in a lump sum instead of electing to receive a stream of income. There could be tax consequences and tax penalties depending upon when this occurs.

Annuitization

The election to receive payments from the annuity for life or for a specified period depending on the settlement option selected.

nonqualified annuity

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.

qualified annuity

funded with pretax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. The entire distribution (contributions and earnings) is subject to ordinary income taxes.

All of the following are TRUE regarding a Variable Annuity, except: A. The number of annuity units received upon annuitization, and the unit value, remain level B. The contract owner bears the investment risk and receives the return actually earned on invested assets, less any charges assessed by the insurer and investment managers C. Premiums paid during the accumulation period are invested into a separate account(s) D. Upon annuitization, accumulation units are converted into annuity units, which generate income based on the value of the units

A. The number of annuity units received upon annuitization, and the unit value, remain level

To encourage annuity holders to leave funds in the policy until retirement, insurance companies can assess a(n) __________ for withdrawals. A. Tax penalty B. Fine C. Interest penalty D. Surrender charge

D. Surrender charge

If the annuity policyowner and annuitant are the same person and the designated beneficiary is the annuitant's spouse, what happens if the annuitant dies during the accumulation phase? A. If the annuitant dies prior to age 59 1/2, then the spouse pays tax plus an additional 10% tax on all of the proceeds B. The spouse receives the death benefit subject to taxation of the deferred earnings C. If the annuitant dies after age 70 1/2, then the payout is entirely income tax free D. The IRS code allows for the surviving spouse to become the new owner and tax deferral continues

D. The IRS code allows for the surviving spouse to become the new owner and tax deferral continues

How can an annuity help fund college for a child or grandchild in an tax-efficient and effective manner? A. Use the interest only option B. Choosing a life only settlement option C. By cashing out the annuity and using the proceeds to pay off the college bill in one lump sum D. Through systematic withdrawals or proper settlement option selection

D. Through systematic withdrawals or proper settlement option selection

F has an annuity with $50,000 of cash value. F needs life insurance but does not currently have it in his budget to pay for it. What is another option for F to consider to obtain the much needed life insurance F needs? A. See if the insurer will allow for a delayed payment plan B. Borrow money from F's employer and pay it back over time C. Much like buying a house, use the policy as collateral for a loan to acquire it D. Use some of the annuity funds either through systematic withdrawal or a settlement option to pay the life insurance premiums

D. Use some of the annuity funds either through systematic withdrawal or a settlement option to pay the life insurance premiums

If an annuity uses units instead of dollars to determine the value of the policy, then it is a(n) _________ annuity. A. Fixed B. Guaranteed C. Indexed Annuity D. Variable

D. Variable

Annuity MechanicsSingle Premium Immediate Annuity (SPIA)

A single premium (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.

With a Life Income Payment Option, what happens at the annuitant's death? A. All payments cease B. The estate is paid the total remaining balance C. The beneficiary starts receiving benefits D. Payments continue until the principal is paid out

A. All payments cease

What is "fixed" in a fixed annuity? A. The interest crediting rate B. The beneficiary C. The annuitant D. The investment option in the separate account

A. The interest crediting rate 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.

Which product, offered by insurers is specifically designed to allow an individual's savings to be distributed to him/her periodically over his/her entire life, regardless of how long he/she lives? A. Variable Life Insurance B. Annuities C. Participating Whole Life D. Universal Life Insurance

B. Annuities

Which of the following Annuities can it be said that it has 'upside potential, but no downside risk' when it comes to the stock market overall? A. Market Value Adjustment B. Indexed C. Variable D. Fixed

B. Indexed

W and Y are annuitants of an annuity. W dies and Y receives 1/2 of the amount coming into their household when both were alive. They must have elected which of the following settlement options? A. Joint Life B. Joint and 1/2 Survivor C. Life with Period Certain D. Life with Installment Refund

B. Joint and 1/2 Survivor

A contract that is designed to accumulate value over time with the intent to distribute the funds over the lifetime of an individual is called _________________. A. An endowment B. Whole life insurance C. An annuity D. Variable life insurance

C. An annuity

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 5%, the effect on this month's income benefit check will be such that it: A. Becomes Lower B. Remains the Same C. Becomes Higher D. All Depends on the Separate Account(s) Selected

C. Becomes Higher

X is 57 years old, and planning for their retirement. They do not know what their cash flow will look like over the next 10 years, but wants to fund an annuity to provide retirement income. Which of the following premium funding methods would be best for X to consider? A. Variable B. Periodic C. Flexible D. Single

C. Flexible contributions may be made as often and in whatever amount the contract owner desires. However, most insurers do set a minimum and a maximum dollar amount they will accept.

If an annuity lifetime benefit is selected, in most cases it is a/an _________ election. A. Revocable B. Poor C. Irrevocable D. Excellent

C. Irrevocable

Which of these annuity distribution options promises the largest possible payment to a single annuitant? A. Life income with period certain B. Installment refund C. Life income only D. Lump sum refund

C. Life income only

What is different about a corporate owned nonqualified annuity compared to an individually owned nonqualified annuity? A. Interest or gains are taxable as capital gains, not ordinary income B. Interest or gains are taxable as income in the year earned C. It does not provide a death benefit guarantee of principal to the beneficiary D. It earns a rate of interest limited by the IRC

B. Interest or gains are taxable as income in the year earned Corporate owned annuities must be associated with a qualified retirement plan for the corporation to avoid current income taxation. There are no interest rate limitations for annuities in the IRC. All annuities provide a death benefit guarantee prior to annuitization; a corporate owner of an annuity will name itself as the beneficiary.

All of the following are benefits an annuity can provide that other investment or savings products cannot, except: A. Guaranteed minimum withdrawal benefit B. Income benefit payments that cannot be outlived C. Tax-free distributions D. Guaranteed minimum death benefit

C. Tax-free distributions Annuities can be used simply as funding vehicles or can be used to provide benefits that other investments cannot, such as a guaranteed minimum death benefit, a guaranteed minimum interest rate, an income benefit payment that cannot be outlived, or other various benefits and riders. But annuity distributions are not tax-free.

All of the following are traits of a Fixed Annuity, except: A. The insurer bears any investment risk B. The purchasing power of a fixed dollar benefit amount decreases as the cost of living increases C. The actual rate of interest credited will be based on the state-published interest rate index D. The insurer's general account assets guarantee the fixed annuity contract

C. The actual rate of interest credited will be based on the state-published interest rate index is based on the insurer's general account assets.

An individual purchased a fixed annuity with flexible premiums. When she annuitized the policy, she chose the Life Income 10-Year Certain option. What would the beneficiary receive if the annuitant dies 4 years after the annuity payout began? A. Nothing B. The undistributed balance C. 10 more years of payments D. 6 more years of payments

D. 6 more years of payments

What must an insurance producer have in order to market variable annuities? A. A copy of the current prospectus to give to a customer prior to or at the time of the first appointment B. A variable contracts insurance agent license issued by his/her resident state's regulator C. A good business reputation and no convictions listed in 18 U.S.C. 1033, the Federal Violent Crime Control and Law Enforcement Act D. A securities license as a variable contracts and investment company representative in addition to a life agent license

D. A securities license as a variable contracts and investment company representative in addition to a life agent license

All of the following are correct regarding an annuity, EXCEPT: A. An annuity can be immediate or deferred B. An annuity can be paid with a single premium or periodic premium C. The accumulation in an annuity grows tax-deferred D. An immediate annuity must start providing income within 3 years of the first premium payment

D. An immediate annuity must start providing income within 3 years of the first premium payment