Chapter 5: Annuities

Annuity

- Issued as a contract - Pays a living benefit - Protects against living too long - Liquidates an estate - Provides steady income until death - Owner, annuitant, beneficiary

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

A) Protects against the annuitant living too long Annuities protect against an annuitant living too long by providing a stream of income the annuitant cannot outlive. Annuities do not provide tax-free payments or guarantee a death benefit. Annuities liquidate an estate and life insurance creates an estate.

All of the following are characteristics of a variable annuity, except: A) Premiums made into the annuity purchase accumulation units B) Designed to protect against inflation C) The separate account provides for a guaranteed minimum return D) 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) The separate account provides for a guaranteed minimum return A variable annuity does not provide for any minimum guarantees.

Life Income

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

Life Insurance

- Creates an estate - Owner, insured, beneficiary - Pays a death benefit - Issued as a policy - Protects against premature death - Provides a benefit upon death

Joint Life

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

Life Income Joint and Survivor

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

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 _________. A) An annuity B) Variable life insurance C) Whole life insurance D) Term insurance

A) An annuity Annuities are designed to provide a stream of income for the lifetime of an individual. Life insurance policies such as whole life, variable life, and term insurance are designed to provide death benefits.

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

A) Monthly income benefits are fixed and level A fixed annuity provides for a fixed level benefit payment to the annuitant when the contract is annuitized.

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

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) Annuitization is allowed at any time after 1 year C) Accumulated values in the account are not taxable until they are withdrawn D) A lump sum payment can be used to purchase the annuity

D) A lump sum payment can be used to purchase the annuity A flexible premium annuity is not funded with a lump sum payment.

All of the following statements are correct regarding an annuity, EXCEPT: A) 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 C) The accumulation value grows tax-deferred D) Annuity premiums can be made in single or periodic payments

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

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

C) 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.

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

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.