Annuities

Question 1

Annuitant

Answer 1

is one to whom an annuity is payable, or a person upon the continuance of whose life further payment depends.

Question 2

Accumulation Period

Answer 2

is when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased but payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units.

Question 3

Accumulation Units

Answer 3

make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is credit to the individual’s account and varies depending on the value of the underlying stock investment.

Question 4

Annuity Units

Answer 4

are the converted accumulation units once variable annuity benefits are to be paid out to the annuitant. At the time of the initial payout the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant.

Question 5

Principal

Answer 5

is the original sum of money paid in to an annuity through premium(s).

Question 6

Single premium Annuity

Answer 6

is an annuity for which the entire premium is paid in one sum at the beginning of the contract period. This can be deferred or immediate.

Question 7

Periodic Payments (Flexible Premium)

Answer 7

describes an annuity owner making multiple premium payments to accumulate principle. Typically, after the initial premium, these payments are flexible with frequency and amount.

Question 8

Immediate annuities

Answer 8

provide for payment of annuity benefit at one payment interval from date of purchase. Can only be purchased with a single payment. Immediate annuities typically begin paying income within one month of purchase.

Question 9

Deferred annuities

Answer 9

provides for postponement of the commencement of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased either on single-premium or flexible premium basis. Deferred annuities typically do not begin making income payments for at least one year after the date of purchase.

Question 10

Straight life annuity

Answer 10

is an annuity income option that pays a guaranteed income for the annuitant’s lifetime, after which time payments stop.

Question 11

Cash refund option

Answer 11

provides that, upon the death of an annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries.

Question 12

Life with Period Certain or life income

Answer 12

with term-certain option is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. The life with period certain option provides income to the annuitant for life but guarantees a minimum period of payments. This, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period.

Question 13

A Joint and full survivor option provides

Answer 13

for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit.

Question 14

Period certain

Answer 14

is an annuity income option that guarantees a definite minimum period of payments. IE: 10 years.

Question 15

Fixed annuities

Answer 15

provide a guaranteed rate of return. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than a minimum specified in the contract. With fixed annuities, the investment risk is on the insurer.

Question 16

Variable annuities

Answer 16

shift the investment risk from the insurer to the contract owner. are similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of the payments; they fluctuate according to the value of an account invested primarily in common stocks. Variable annuities invest deferred annuity payments in an insurer’s separate accounts, as opposed to an insurer’s general accounts (which allow the insurer to guarantee interest in a fixed annuity). Because variable annuities are based on non-guaranteed equity investments (such as common stock), a sales representative who wants to sell such contracts must be registered with the Financial Industry Regulatory Authority (FINRA) as well as hold a state insurance license.

Question 17

Equity indexed annuities

Answer 17

are a fixed deferred annuity that offers the traditional guaranteed minimum interest rate and an excess interest feature that is based on the performance of an external equities market index.

Question 18

Market Value Adjustment

Answer 18

can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual crediting rates to increase or decrease in response to market conditions. Instead of having the annuity’s interest rate linked to an index as with the equity-indexed annuity, an MVA annuity’s interest rate is guaranteed fixed if the contract is held for the period specified in the policy. The market-value adjustment feature applies only if the contract is surrendered before the contract period expires. Otherwise, the annuity functions the same way a fixed annuity does.

Question 19

Exclusion ratio

Answer 19

is a fraction used to determine the amount of annual annuity income exempt from federal income tax. The exclusion ratio is the total contribution or investment in the annuity divided by the expected ratio.

Question 20

1035 Contract Exchange

Answer 20

applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes.

Question 21

Annuities

Answer 21

are ways of providing a stream of income for a guaranteed period of time.

• Simply stated, an annuity is started with a large sum of money that will be paid out in installments over a period of time or until the money is all gone.
• The monthly amount of benefit an annuitant receives is based on factors such as: principle amount, rate of interest the annuity earns, and length of payout period.

Question 22

Contract owner:

Answer 22

The individual who purchases the annuity pays the premiums and has rights of ownership.

• An owner may be the annuitant, the beneficiary, or neither

Question 23

Annuitant:

Answer 23

The income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to the annuitant

Question 24

Beneficiary

Answer 24

The beneficiary is the person who receives survivor benefits upon the annuitant’s death.

Question 25

Accumulation Period

Answer 25

The pay-in period, where the contract owner makes the purchase payments. The accumulation period of an annuity normally may continue after the purchase payments cease.

Question 26

Annuity Period:

Answer 26

This is also called the liquidation period, annuitization period, or pay- out period. This is the time when the money that has accrued during the accumulation period is paid-out in the form of payments to the annuitant.

Question 27

Immediate Annuities:

Answer 27

Purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. It’s purpose is to provide for liquidation of a principle sum.

Question 28

Deferred Annuities:

Answer 28

will start providing income payments after the first year. Deferred annuities are usually purchased with either a single lump sum payment known as a Single Premium Deferred Annuity (SPDA) or from monthly payments known as Flexible Premium Deferred Annuity (FPDA). A Fixed Deferred Annuity, for example, pays out a fixed amount for life starting at a future date. Interest credited to the cash values of annuities are deferred until distribution. Other characteristics of deferred annuities include:

• When a deferred annuity is cancelled during the early contract years, the insurer normally will assess a back-end load known as a surrender charge
• The “bailout” feature, sometimes found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below a stated level
• Before a deferred annuity contract can be terminated for its surrender value, the insurer must first obtain authorization from the owner
• The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals

Question 29

Straight Life Income Payout Option:

Answer 29

pays the annuitant a guaranteed income for the annuitant’s lifetime. When the annuitant dies, no further payments are made to anyone. This offers protection against exhaustion of savings due to longevity.

Question 30

Fixed Amount Option:

Answer 30

Under the fixed amount option, the annuitant receives a fixed payment until the contract value is exhausted, regardless of when that will be. If the annuitant dies before the contract is depleted, the beneficiary receives the remainder.

Question 31

Cash Refund Payout Option:

Answer 31

Pays a guaranteed income to the annuitant for life. If the annuitant dies before all the money is gone, a lump-sum cash payment of the remaining funds are paid out to the annuitant’s beneficiary.

Question 32

Installment Refund Payout Option:

Answer 32

Pays a guaranteed income to the annuitant for life. If the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments.

Question 33

Life with Period Certain Payout Option (life income with term certain):

Answer 33

is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. It

provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies.

• For example, if an annuitant has a 20 year period certain and dies after 10 years, the beneficiary will receive payments for another 10 years. Joint and Full Survivor Payout Option: Pays out the annuity to two or more people until the last annuitant dies. If one of them dies, the other will continue to receive the same income payments. There are two additional options made available with a joint and survivor payout:

Question 34

Joint and two-thirds survivor:

Answer 34

Survivor will have payments reduced to two-thirds of the original payment.

Question 35

Joint and one-half survivor:

Answer 35

Survivor will have payments reduced to one-half of the original payment. Period Certain Payout Option: Pays guaranteed income payments for a certain period of time, such as 10 or 20 years, whether or not the annuitant is living.

Question 36

Fixed Annuity:

Answer 36

Provide a guaranteed rate of return. Fixed annuities credit interest at a rate no lower than the contract guaranteed rate.

Question 37

Variable Annuity:

Answer 37

Does not provide a guaranteed rate of return, because of the investment risk. The cash value is based on the results of these investment funds. A statement must be provided to the owner of the annuity at a minimum of once per year. Variable annuities can be classified as either immediate or deferred. Insurers that deal with variable annuities are subject to dual regulation by the SEC and the state’s Office of Insurance Regulation

Question 38

Accumulation Units:

Answer 38

In a variable annuity, the value of the accumulation units varies depending on the value of the stock investment that is a part of a variable annuity.

Question 39

Annuity Units

Answer 39

At the time the variable annuity is to be paid out to the annuitant, the accumulations are converted into annuity units. These payouts can vary from month to month depending on the investment results. The number of units doesn’t change, but the value does. The amount of each variable annuity benefit paid to an annuitant varies according to the market value of the securities backing it.

Question 40

Equity Indexed Annuities

Answer 40

A type of fixed annuity that offers the potential for a higher return than a standard fixed annuity. They are sometimes tied to the Standard and Poor’s 500 or the Composite Stock Price Index.

Question 41

Single-life annuities:

Answer 41

Characterized by having only one annuitant.

Question 42

Tax-sheltered annuities

Answer 42

Limited exclusively for employees of religious, charity, or educational groups.

• Also called 403(b) plans
• Accumulation payments often come from voluntary salary reductions
• The annuitant may have an individual account contract

Question 43

Income Tax Treatment of Annuity Benefits:

Answer 43

Annuity benefit payments consist of principal and interest. The portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owner’s “cost basis”. The portion of the annuity benefits that is interest earned on the principal is taxable as ordinary income. Interest income must be reported for federal income tax purposes upon receiving distributions or income benefits from the contract.

Question 44

Partial Withdrawal

Answer 44

is taken from an annuity before age 59 1/2 the withdrawal is considered 100% interest, and is therefore taxable as ordinary income.

Question 45

1035 Exchange:

Answer 45

Applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy.

Question 46

Qualified Annuity Plans

Answer 46

a qualified plan is a tax-deferred arrangement established by an employer to provide retirement benefits for employees. The plan is qualified because of having met government requirements. A qualified annuity is an annuity purchased as part of a tax-qualified individual or employer-sponsored retirement plan, such as an individual retirement account (IRA). A qualified deferred annuity in the accumulation phase may be used to fund an IRA and permit continued contributions within the maximum limits set by the IRS. IRA funds that have been annuitized no longer permit contributions.