5.0 Annuities Basics

Question 1

annuity

Answer 1

contract that provides income for a specified period of years, or for life.

• protects a person against outliving his or her money.
• not life insurance, but accumulation of money and the liquidation of an estate
• marketed by life insurance companies.
• licesned life insurance agents are authorized to sell some types of annuities

Question 2

Life contingency

Answer 2

dependent upon whether the insured is alive

Question 3

IRS what would do they do?

Answer 3

Internal Revenue Service -a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

Question 4

mortality tables

Answer 4

indicate number of individuals in a specified group starting at a certain age and their life expectancy

(ex group: males, females, smoker, nonsmokers

Question 5

What are the annuity phases?

Answer 5

accumulation period annuitization period

Question 6

difference between accumulation period and annuitization period

Answer 6

Accumulation period

• payments in, to insurer Annuitization period
• payments out, to insured

Question 7

who are the parties of annuities

Answer 7

Owner Annuitant beneficiary

Question 8

annuitant

Answer 8

insured; policy issued on annuitant’s life; must be a person

Question 9

beneficiary (annuity)

Answer 9

will receive any amount contributed to annuity (plus any gain) if annuitant dies during accumulation period

Question 10

Owner

Answer 10

has all rights to policy (usually annuitant); can be corporation or trust

Question 11

What are the types of annuities

Answer 11

Fixed Annuities Varaible Annuities Indexed Annuities (fixed or equity indexed)

Question 12

fixed annuities

Answer 12

guaranteed, fixed payment amount; premiums in general account

Question 13

variable annuities

Answer 13

payment not guaranteed; premiums are in separate account, and invested in stocks and bonds

Question 14

Indexed Annuities

Answer 14

interest rate tied to an index; earn higher rate than fixed annuities, not as risky as variable annuities or mutual funds

Question 15

Know

Answer 15

Question 16

two types of premium payments

Answer 16

single

periodic

Question 17

single premium payment

Answer 17

ONE lump-sum payment. The principal is created immediately (used for both immediate and deferred annuities).

Question 18

periodic flexible premium payment

Answer 18

multiple payments; annuity principal fund is created over time (used for deferred annuity only)

Question 19

two types of income payments

Answer 19

immediate

deferred

Question 20

Immediate Income Payment

Answer 20

purchased with a single premium. Income payments start within one year from the date of purchase

Question 21

Deferred Income Payment

Answer 21

purchased with either lump sum or periodic-payments premium. Benefits start sometime after one year from the date of purchase (often used to accumulate funds for retirement).

Question 22

Settlement options

Answer 22

• lump sum
• life only
• refund life annuity
• joint life
• joint and survivor life with period certain
• annuities certain

Question 23

Lump-sum

Answer 23

at annuitization, and all interest accumulated is taxable. Additional 10% penalty can be imposed prior to annuitant’s reaching 59 1/2.

Question 24

life only

Answer 24

insured cannot outlive income. Any monies not paid out are retained by company at insured’s death. Pays highest monthly amount

Question 25

Refund Life Annuity

Answer 25

• guaranteed lifetime income. If annuitant dies,balance is “refunded” to beneficiary.
• Installment option gives beneficiary payments until purchase amount is paid out.
• Cash refund gives refund of balance of original annuity purchase amount minus payments made to annuitant

Question 26

Joint Life

Answer 26

2 or more annuitants receive payments until first death, then payments cease

Question 27

Joint and Survivor

Answer 27

income for 2 or more that cannot be outlived.Often used with period certain. When one annuitant dies, the other receives either 1/2 or 2/3 of the original payment amount

Question 28

Life with Period Certain

Answer 28

specific monthly payment for life and a specific period of time (e.g. Life plus 10-year certain). If annuitant dies before payment period is up, payment goes to beneficiary

Question 29

Annuities Certain

Answer 29

payment guaranteed for fixed period or until certain fixed amount paid. NO LIFE option

Question 30

Different interest rates

Answer 30

Guaranteed Current

Question 31

Guaranteed

Answer 31

company must pay this minimum percentage. Typically around 3%.

Question 32

Current

Answer 32

exceeds guaranteed rate. Paid to annuitant when acompany’s own investment is better than expected.