Chapter 5 - Annuities

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 6 more years of payments B 10 more years of payments C The undistributed balance D Nothing

A. 6 more years of payments

The period of time over which a single sum or periodic deposits grow within an annuity is referred to as the: A Accumulation Period B Benefit Period C Growth Period D Savings Period

A. Accumulation Period **The pay-in phase of an annuity is called the Accumulation Period or Phase. The pay-out phase is the Annuity Period or Phase.

A characteristic of a fixed annuity is that the: A Interest rate credited in the account varies based on the performance of the separate account B Separate account has investment options C Monthly income benefits are fixed and level D Annuitant cannot be changed

C. Monthly income benefits are fixed and level.

Only the _________ can surrender an annuity. A Insurer B Annuitant C Owner D Beneficiary

C. Owner

The annuity settlement option that pays out the highest monthly income for as long as the annuitant lives, and leaves no residual value upon the annuitant's death, is the: A Joint Life Option B Life Income Joint and Survivor Option C Life Income with Refund Option D Life Income Option

D. Life Income Option

The annuity __________ option selected can provide a temporary or lifetime payment. A Investment B Interest C Accumulation D Settlement

D. Settlement **

The insurer generally assumes the investment risk in all of the following annuities, except: A Fixed B Guaranteed C Indexed D Variable

D. Variable

When comparing life insurance to an annuity, an annuity: A Guarantees a death benefit upon the insured's death B Creates a lump sum benefit to be paid upon the annuitant's death C Provides tax-free payments for the lifetime of a beneficiary D Protects against the annuitant living too long

D. Protects against the annuitant living too long

qualified vs. nonqualified annuities?

A qualified annuity is funded with pre-tax dollars. The entire distribution from a qualified annuity (contributions and earnings) is subject to ordinary income taxes. A non-qualified 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.

Life Income (pure or straight life) payment option?

The annuity benefit 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.

Unless an exception applies, a tax penalty is assessed for withdrawals from annuities of tax-deferred earnings prior to age ______. A 55 B 62 C 65 D 59 1/2

59 1/2

A contract that is designed to accumulate value over time with the intent to provide a stream of income over the lifetime of an individual is called _________.

An annuity

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

Annuitant

what is an annuity?

-provides steady income until death of annuitant -liquidates an estate -pays a living benefit -protects against living too long -contract

Which of the following annuities would potentially be the most negatively impacted by the overall stock market falling in value? A Variable B Guaranteed C Fixed D Indexed

A. Variable **In order to achieve the goal of wealth accumulation while offsetting the effects of inflation, most if not all of a Variable Annuity separate account investments are based off the stock market. None of the other annuities would lose value if the stock market 'crashed'.

A Variable Annuity is different from a Fixed Annuity because it must be sold with which of the following documents? A A copy of the insurer's business formation documents B A prospectus C Regulator approved sales literature D A copy of the producer's licensing exam test score

B. A prospectus **A prospectus is a disclosure document that provides the prospective buyer with information about all fees, charges, expenses, and risks. It must be provided by the producer prior to sale of the variable annuity.

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 Becomes Lower B Remain the Same C Becomes Higher D All Depends on the Separate Account(s) Selected

B. Remain the same **If the actual return is lower than the AIR, the monthly annuity payment will be reduced. If the actual return is equal to the AIR, the monthly annuity payment will remain the same as the previous month. If the actual return is greater than the AIR, the monthly annuity payment will increase from the previous month.

All of the following are TRUE regarding a Variable Annuity, except: A Premiums paid during the accumulation period are invested into a separate account(s) B The number of annuity units received upon annuitization, and the unit value, remain level C 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 D Upon annuitization, accumulation units are converted into annuity units, which generate income based on the value of the units

B. The number of annuity units received upon annuitization, and the unit value, remain level. **With Variable Annuities, upon annuitization, the number of units remains level, but the unit values fluctuate based upon the separate account(s) selected.

A flexible premium deferred annuity permits all of the following EXCEPT: A Scheduled and unscheduled premiums may be payable at any time prior to annuitization B Accumulated values in the account are not taxable until they are withdrawn C A lump sum payment can be used to purchase the annuity D Annuitization is allowed at any time after 1 year

C. A lump sum payment can be used to purchase the annuity. **A flexible premium annuity is not founded with a lump sum payment.

The period of time from the first deposit into an annuity to the selection of a settlement option is considered the ___________ period. A Annuity B Annuitization C Accumulation D Deferred

C. Accumulation **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. Accumulation periods are found within deferred annuities.

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

C. Life Income Only **A life income only option provides the largest possible payment since the insurer has no risk of paying income to a beneficiary. There is a greater possibility that the insurer will pay income beyond the life of the annuitant if any of the other options are selected.

Under an annuity with a Joint Life Payment Option, what will the survivor receive upon the death of the first annuitant? A The undistributed balance B The same amount they were receiving together C Nothing D The remaining period certain

C. Nothing **The Joint Life Payment Option ceases all distributions at the first death of any of the annuitants. This would not be the case if a Life Income Joint and Survivor Option were chosen.

Susan, age 65, inherits a substantial sum of money and wants to have the money distributed to her over the rest of her life starting next month. Which product offered by the life insurance industry will allow her to accomplish her objective? A Flexible Premium Deferred Annuity B Single Premium Deferred Annuity C Single Premium Immediate Annuity D Flexible Premium Immediate Annuity

C. Single Premium Immediate Annuity **A Single Premium Immediate Annuity involves payment of a single sum to the insurer with periodic payments commencing within one year of deposit of the sum.

Deferred annuities are normally purchased to defer ___________. A Withdrawals of any principal B Withdrawals of any earnings C Taxes on any policy earnings D Earnings on any deposits

C. Taxes on any policy earnings

What is an annuitant, in regard to an annuity policy? A The person who has all of the rights in the contract B The party who receives any residual policy benefits C The party whose life the policy's benefits are based on D The issuer of the policy

C. The party whose life the policy's benefits are based on/

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

D. Systematic withdrawals

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

D. The actual rate of interest credited will be based on the state-published interest rate index.

What is an annuitant, in regard to an annuity policy? A The party who receives any residual policy benefits B The person who has all of the rights in the contract C The issuer of the policy D The party whose life the policy's benefits are based on

D. The part whose life the policy's benefits are based on

All of the following are characteristics of a variable annuity, except: A Premiums made into the annuity purchase accumulation units B Each month the payment will increase, decrease, or remain the same as the previous month's payment based on the actual return as compared to the assumed interest rate (AIR) C Designed to protect against inflation D The separate account provides for a guaranteed minimum return

D. The separate account provides for a guaranteed minimum return.

All of the following are true regarding annuities, except: A They are used primarily to provide a steady stream of income B They can liquidate an estate C They are designed to protect against outliving one's income D They are similar to life insurance

D. They are similar to life insurance

Life Income period certain payment option?

The annuity benefit 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.

What is a variable annuity?

Variable annuities are regulated by the SEC and State insurance departments. Annuity payments and cash values fluctuate according to the investment experience of the separate account the contract owner has designated. Payments are based on "units" rather than dollars. While not guaranteed, variable annuities may act as a hedge against inflation. This protects against the purchasing power risk of a fixed payment annuity by providing income that trends toward keeping pace with inflation.

what is the annuity period (pay-out)?

begins once the policyowner elects to convert a deferred annuity into an income benefit payment. -Can provide a temporary or lifetime payment. -Lump sum vs. Annuitization

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 Higher B Becomes Lower C All Depends on the Separate Account(s) Selected D Remains the Same

A. Becomes Higher

Susan, age 65, inherits a substantial sum of money and wants to have the money distributed to her over the rest of her life starting next month. Which product offered by the life insurance industry will allow her to accomplish her objective? A Single Premium Immediate Annuity B Single Premium Deferred Annuity C Flexible Premium Immediate Annuity D Flexible Premium Deferred Annuity

A: single premium, immediate annuity **A Single Premium Immediate Annuity involves payment of a single sum to the insurer with periodic payments commencing within one year of deposit of the sum.

What is an Indexed annuity?

An annuity product with interest rates that are linked to the positive performance of a related index, such as the Standard & Poor's 500 Index. The contract offers safety of principal with guaranteed minimum returns.

All of the following statements are correct regarding an annuity, EXCEPT: A The accumulation value grows tax-deferred B An immediate annuity must start providing income within 3 years of the first premium payment C Annuity premiums can be made in single or periodic payments D An annuity can be characterized by immediate or deferred income

B. An immediate annuity must start providing income within 3 years of the first premium payment **within one year of the first premium payment.

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 Life Income Period Certain B Lump Sum C Life Income with Refund D Straight Life Option (Life Income)

Lump Sum

Immediate vs. Deferred annuity?

The immediate annuity does not have an accumulation period and is used to generate immediate income within a year of the issue date. A deferred annuity will pay periodic benefits starting at some specified time in the future. Annuitization can occur at any time, but benefits from a deferred annuity are not payable for at least 1 year from the issue date.

what is a deferred annuity normally purchased for?

to defer taxes on any contract earnings. Ideal for accumulating a retirement fund. tax-deferred growth: Withdrawals prior to age 59 ½ are subject to income tax and generally a 10% tax penalty as well. Systematic withdrawals are allowed as a way to access the policies values without having to elect a settlement option.

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 Single C Periodic D Flexible

D. Flexible **With a flexible premium, 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.

At the time of her retirement at age 62, Jolene chose a Life Income Payment Option to have her annuity distributed. Five years later, when her health declines, she needs the distribution to be increased. How is this accomplished? A By adding a Cost of Living Rider B By adding an increase of benefits rider C By adding a disability income rider D She cannot change the distribution once commenced

D. She cannot change the distribution once commenced.

Life Income Joint and Survivor Payment option?

The annuity benefit is payable in one payment to 2 or more annuitants until the last surviving annuitant dies. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or a reduced benefit, such as 2/3 or 1/2 of the original amount, 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.

All of the following factors are used to determine the monthly benefit payment of an annuity, except: A Accumulated account value B Annuitant's medical history C Age of annuitant D Annuity payment option selected

B. Annuitant's medical history **The monthly annuity payment is based on several factors, including the accumulated value, interest rate, age and gender of annuitant and the payment option selected. Since there are no insurability requirements, the annuitant's medical history is not a factor.

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

B. Interest Only

Which of the following will receive the smallest monthly income benefit check if an annuity is annuitized? A 65 year old male B 65 year old female C 50 year old female D 50 year old male

C. 50 year old female The younger ages receive the smaller payments because they can be paid out for a longer period of time. Females also receive smaller income checks due to a longer life expectancy.

Annuities may be funded with either a lump sum or a ______ premium basis. A Life B Variable C Flexible D Indexed

C. Flexible

Jill wants to know how much to put into her annuity in order to receive the greatest benefit payment amount. Which of the following will provide her with the largest monthly income regardless of the settlement option selected? A $750,000 B $500,000 C $250,000 D $1,000,000

D. $1,000,000 **All other factors being equal, the larger the premium deposit, the larger the benefit payment.

If an annuity is purchased in December and monthly benefits begin in January of the following year, what type of annuity is it? A Variable Retirement Annuity B Flexible Premium Tax Sheltered Annuity C Single Premium Fixed Annuity D Single Premium Immediate Annuity

D. Single premium Immedaite Annuity **The question addresses when the actual receipt of benefits from an annuity begins. When benefits begin within a year of the issue date, this is referred to as 'immediate'.

Fixed (Guaranteed) Annuity?

During the accumulation period, the insurer guarantees a minimum fixed interest rate. At annuitization, benefits are paid as a min level fixed amount.

Life Income with Refund (installment or cash refund) payment option?

The annuity benefit is payable for the lifetime of the 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, cash refund, or in installments, sometimes referred to as the installment refund.

Joint Life payment option?

The annuity is payable to 2 or more named annuitants while both are living. Upon the death of the first annuitant, the benefits stop.

What is the accumulation (pay-in) period?

The period of time from the first deposit to the start of the annuity payout is considered the accumulation period, during which taxes are deferred. Accumulation periods are only found within deferred annuities, not immediate annuities. The accumulation period ends when the owner elects to annuitize, or begin to receive income payments.