Annuities

Question 1

This annuity shifts the investment risk from the insurer to the contract owner. These 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. However, there’s no guarantee of the dollar amount of the payments. The payments actually fluctuate according to the value of the securities in the account (primarily the value of common stocks). It invests deferred annuity payments in an insurer’s separate account rather than the insurer’s general account (which allows the insurer to guarantee interest in a fixed annuity). Since these annuities are based on non-guaranteed equity investments (e.g., common stock), a sales representative who wants to sell these contracts must be registered with the Financial Industry Regulatory Authority (FINRA) and must hold a state insurance license.

Answer 1

Variable Annuity

Question 2

This is an annuity income option that pays a guaranteed income for the annuitant’s lifetime, but payments cease upon the annuitant’s death.

Answer 2

Straight Life Annuity

Question 3

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

Answer 3

Single Premium Annuity

Question 4

This is the original sum of money that’s paid into an annuity through premium(s).

Answer 4

Principal

Question 5

This refers to an annuity owner making multiple premium payments to accumulate principal. Typically, after the initial premium, these payments are flexible in regard to both frequency and amount.

Answer 5

Periodic Payment Annuity (Flexible Premium)

Question 6

This is an annuity income option that guarantees a definite minimum period of payments (e.g., 10 years).

Answer 6

Period Certain Annuity

Question 7

This adjustment can be attached to a deferred annuity and 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. Rather than having the annuity’s interest rate linked to an index (as with the equity-indexed annuity), an (blank) annuity’s interest rate is guaranteed to be fixed if the contract is held for the period that’s specified in the policy. The feature applies only if the contract is surrendered before the contract period expires. If it’s not surrendered, the annuity functions in the same manner as a fixed annuity.

Answer 7

Market Value Adjustment

Question 8

This payout option is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. Therefore, if the annuitant dies during the specified period, benefit payments will continue to the beneficiary for the remainder of that period.

Answer 8

Life with Period Certain (or Life Income with Term-Certain) Option

Question 9

This annuity payout option provides for payments to two people. If either person dies, the income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to any person. A full survivor option pays the same (i.e., full) benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit to the survivor. A one-half survivor option pays one-half of the original joint benefit to the survivor.

Answer 9

Joint Life and Survivor Option

Question 10

This type of annuity can only be purchased with a single payment and typically begins paying income within one month of purchase.

Answer 10

Immediate Annuity

Question 11

This is an annuity that provides 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 that’s specified in the contract. With these, the investment risk is assumed by the insurer.

Answer 11

Fixed Annuity

Question 12

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

Answer 12

Exclusion Ratio

Question 13

This is a fixed deferred annuity that offers the traditional guaranteed minimum interest rate as well as an excess interest feature that’s based on the performance of an external equities market index.

Answer 13

Equity Indexed Annuity (EIA)

Question 14

These annuities provide for the postponement of the payment of an annuity until after a specified period or until the annuitant attains a specified age. They may be purchased on either a single-premium or flexible premium basis. They typically don’t begin making income payments for at least one year after the date of purchase.

Answer 14

Deferred Annuity

Question 15

Upon the death of an annuitant, this option provides that, 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 lump-sum to designated beneficiaries.

Answer 15

Cash Refund Option

Question 16

These units are used to make payments to the annuitant. Units are received once the accumulation units are converted to begin the pay-out period. At the time of the initial payout, the (blank) unit calculation is made and, from then on, the number of (blank) units will remain the same for the life of the contract.

Answer 16

Annuity Units

Question 17

This is one to whom an annuity is payable or a person upon whose continued life future payments are dependent.

Answer 17

Annuitant

Question 18

These units represent the value of contributions that are made by the annuitant LESS a deduction for expenses. The value of each unit is a credit to the individual’s account and varies depending on the value of the underlying stock investment.

Answer 18

Accumulation Units

Question 19

During this period, the premiums that an annuitant pays into an annuity are credited as accumulation units. The period may continue during the period between when the premium payments have ceased, and the payout has not yet begun. At the end of the period, units are converted to annuity units.

Answer 19

Accumulation Period

Question 20

This provision states that if an annuity is exchanged for another annuity, a “gain” (for tax purposes) is not realized. This is also true if a life insurance policy or endowment contract is exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows a policy holder to transfer funds from a life insurance, endowment, or annuity to a new annuity policy without being required to pay taxes.

Answer 20

1035 Contract Exchange

Question 21

As defined in this namesake section of the IRS tax code, this is a retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers.

Answer 21

403(b) Plan