ANNUITIES (chapter 3) Flashcards
Seg-fund Terminology
Annuity
A contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future
Seg-fund Terminology
Single life annuity
A contract issued to a person naming him or another person as the annuitant to provide a retiree with a monthly payment for as long as he or she lives.
Seg-fund Terminology
Joint life Annuity
Also known as a joint and last survivor annuity, pays an income over the lifespan of two people, usually spouses
Seg-fund Terminology
Instalment refund choice
A payout method in an term annuity that puts the monthly payments into the hands of the beneficiary for the period remaining in the term.
Seg-fund Terminology
Cash refund choice
- Also known as the commuted value
- The beneficiary receive a lump-sum payment that represents the present value of all future payments paid as a cash refund in the term annuity contract.
Seg-fund Terminology
Capital protection guarantee
- Term annuity contract that pays the beneficiary what remains of the original deposit.
- For example, if the contract was funded with $100,000 and $75,000 had been paid out, the beneficiary would
receive $25,000 ($100,000 – $75,000)
Seg-fund Terminology
A term annuity-to-age-90 (T-90)
- Annuity contract option available to those whose registered retirement savings plan (RRSP) is maturing, and the RRSP account must be closed.
- Using some or all of the value in the RRSP to buy a term annuity continues tax deferral on the money.
Seg-fund Terminology
Term annuity-to-age-18 (T-18)
- Annuity contract option available for financially dependent children younger than 18 who receive the proceeds from the RRSP/RRIF of a deceased parent or grandparent.
- The child can receive payments from the annuity until the day before he turns 19.
Seg-fund Terminology
A market-linked return
- A return linked to performance of a market index, such as the S&P/TSX Composite Index
- Mitigates interest risk and inflation risk
Seg-fund Terminology
Market Value Adjustment (MVA)
An adjustment to the value of your annuity surrender or withdrawal amount due to the interest-rate environment at the time of your surrender/withdrawal in comparison to interest rates when you originally purchased the annuity.
What are some advantages of annuity?
(name at least three)
- Straightforward investment concept;
- Income security that can be adapted to the client’s needs and situation;
- Creditor protection;
- Estate planning benefits;
- Annuitant protection (Assuris coverage).
Income security provided by annuities covers different types of income, what are they?
- Lifetime income;
- Spousal income;
- Temporary income.
[Ref. 3.1.2]
An income for a spouse can be created by …
- Single life annuity in which a spouse is named as annuitant;
- Joint annuity in which both spouses may receive annuity income and at the death of one, the surviving spouse continues to receive the annuity payment
TRUE OR FALSE?
An annuitant receives Assuris protection on a payout annuity on the payment in full when it is up to $2,000 per month.
TRUE
- For example, if a promised benefit is a level $1,000 per month, the annuitant continues to receive $1,000 per month.
[Ref. 3.1.5]
TRUE OR FALSE?
When a promised benefit for a payout annuity is more than $2,000 per month, the annuitant receives Assuris protection for the greater of $2,000 per month or 85% of the promised benefit.
TRUE
- For example, if a promised benefit is $5,000 per month, the annuitant would receive $4,250 ($5,000 × 85%)
[Ref. 3.1.5]
TRUE OR FALSE?
Assuris protects an accumulation annuity up to 100% of the contract value up to $100,000
TRUE
- Therefore, if an annuity value is less than $100,000, the policy owner receives all of his deposit value. If the annuity value is greater than $100,000, he receives $100,000.
[Ref. 3.1.5]
There are two core forms of annuities, what are they?
- Payout annuity
- Accumulation annuity
TRUE OR FALSE?
The income stream in a payout annuity is a blend of interest and principal created from the deposit of capital to the contract and is based on the annuity rate applied at the time the contract is issued.
TRUE
TRUE OR FALSE?
Accumulation annuities have the same features of a Guaranteed Investment Certificate (GIC). There is no creditor protection or ability to name a beneficiary
FALSE
Accumulation annuities are similar to a Guaranteed Investment Certificate (GIC) but come with the beneficial features of a life insurance contract, such as the ability to name a beneficiary and creditor protection.
[Ref. 3.1.5]
TRUE OR FALSE?
Annuity may be surrendered for its accumulated value or it may be converted into a payout annuity, which will pay a fixed amount based on this accumulated value.
TRUE
A contract may be issued to a person naming him or another person as the annuitant however, If a person
uses funds in his RRSP or RRIF to buy an annuity, he cannot be named the annuitant.
FALSE
A contract may be issued to a person naming him or another person as the annuitant. If a person uses funds in his RRSP or RRIF to buy an annuity, he must be named the annuitant.
[Ref. 3.2.2.1]
What is the duration of an annuity?
- a term (a period of time),
- a lifetime
- The lifetime of two people.
TRUE OR FALSE?
When a term annuity ends, all payments cease because the annuitant has received the entire principal deposited to the contract with the interest earned on that principal.
TRUE
TRUE OR FALSE?
If death of the annuitant occurs during the term, the balance of annuity payments cease.
FALSE
If death of the annuitant occurs during the term, the balance of annuity payments is paid to a beneficiary
A term annuity policy owner may have the choice in his contract between three different methods of paying out the value of the contract if the annuitant dies during the term. What are they?
- Capital protection guarantee
- Cash refund choice
- Instalment refund choice
Seg-fund Terminology
Impaired life annuities
- Also known as enhanced, age-rated, or accelerated annuities.
- A form of life annuity that is issued when the annuitant has a shortened life expectancy due to poor health because of a serious disease or deteriorating condition.
- Once impairment is proven, the annuitant pays less as a premium or receives a higher payment than someone of the same age and gender who does not have a health condition.
A policy owner has a 3 choice of how to fund, or pay for an annuity, what are they?
- Lump sum
- Transfer of a lump sum
- Payments made over a period of time as deposits.
What’s the difference between differed and immediate annuity?
- Immediate annuity must be funded with a lump sum
- Deferred annuity could be funded with a lump sum or a series of deposits
What should an agent do if they receives $10,000 or more in cash in a single transaction or multiple cash transactions of less than $10,000 each that total $10,000 or more within a 24-hour period?
- Agent must submit a Large Cash Transaction report to FINTRAC.
- If the behaviour of an individual is suspicious, then a Suspicious Transaction Report must be submitted regardless of the sum of money involved.
[Ref. 3.3.1]
TRUE OR FALSE?
Locked-in pension savings accumulated in an employer-provided or group pension plan can be transferred only to a life annuity.
TRUE
TRUE OR FALSE?
When a spouse transfers locked-in savings from a registered pension plan, LIRA, or LIF to fund an annuity, he cannot acquire a joint and last survivor life annuity.
FALSE
When a spouse transfers locked-in savings from a registered pension plan, LIRA, or LIF to fund an annuity, he must acquire a joint and last survivor life annuity.
[Ref. 3.3.1.1]
Why is it that when a spouse transfers locked-in savings from a registered pension plan, LIRA, or LIF to fund an annuity, he must acquire a joint and last survivor life annuity?
BECAUSE
It ensures that if the pensioner dies before his spouse, the surviving spouse will continue to receive an income and the spouse can waive the right to the annuity in writing.
TRUE OR FALSE?
Indexing an annuity increases payments monthly by a percentage selected by the policy owner
FALSE
Indexing an annuity increases payments annually by a percentage selected by the policy owner.
[Ref. 3.4.4]
There are about 5 income options that contract owner of a payout annuity must choose on the application when the annuity income payments begin, what are they?
- Immediate income
- Deferred income
- Level income
- Indexed income
- Variable income
What are some factors that affect annuity payments? (Name at least three)
- Annuity rate
- Interest rate
- Age of annuitant
- Gender of annuitant
- Deposit amount
- Payment schedule
- Length of payment period
TRUE OR FALSE?
Guarantees applied to an annuity ensure that all of the initial deposit will be paid out to a beneficiary during the time the guarantee is in place.
FALSE
Guarantees applied to an annuity ensure that some of the initial deposit will be paid out to a beneficiary during the time the guarantee is in place.
- The guarantee period option does not apply to the total amount invested in the contract; rather it safeguards some of the investment
[Ref. 3.4.4]
TRUE OR FALSE?
Guarantees in an annuity contract are an option for a life or joint and last survivor annuity contract if selected by the
policy owner.
TRUE
There are two types of guarantees in an annuity, what are they?
- Guarantee period
- Guaranteed capital
TRUE OR FALSE?
A life annuity can only be issued with a guarantee option
FALSE
- A life annuity can be issued with or without a guarantee
[Ref. 3.5.2.1]
What’s the difference between guarantee period and guaranteed capital?
- The guarantee is the period of which the payout of a life annuity that will be paid to the annuitant which is specified in years, such as 5, 10, or 20 years and the annuitant receives the annuity benefit until his death.
- If the annuitant dies before the end of the guarantee period, his beneficiary receives a payment from the contract This provides a guarantee on capital.
- Term annuity is guaranteed for its entire term: the annuitant receives the annuity benefit and if he dies during the term, a beneficiary receives the difference between the sum invested and the amount paid to the annuitant.
[Ref. 3.5.2.1]
TRUE OR FALSE?
Survivor income is guaranteed for two lifetimes by choice of a joint and last survivor annuity
TRUE
- However, a guarantee period can be added to the contract to again provide the assurance that a certain amount will be paid out from of the amount invested.
[Ref. 3.5.2.2]
TRUE OR FALSE?
Annuities are great for flexibility in investments and beneficiary designations when the contract is in force.
FALSE
- Annuities are unchangeable. Once the contract is finalized including naming of a beneficiary, no further decisions are required. unchangeable.
- The lack of flexibility hampers flexibility to acquire funds for unforeseen expenses.
[Ref. 3.6.1]
What are some risks associated with annuities?
- Interest rate risk
- Inflation risk
- No guarantee period (for some annuities)
TRUE OR FALSE?
If a term annuity is issued when interest rates are high, its owner could find a reduced benefit if he renews his annuity when interest rates have fallen.
TRUE
TRUE OR FALSE?
Interest rate risk can be managed during a period of low interest rates by using investment capital to buy a series of annuities instead of buying a single annuity.
TRUE
How does a policyholder of an annuity benefit from interest rate risk and inflation risk?
- By spreading investment capital into
two or three annuities, acquired over a number of years, the policy owner may be able to benefit if interest rates rise. - Inflation risk can be managed by acquiring an indexed annuity
TRUE OR FALSE?
A life annuity contract without a guarantee period risks loss of capital for the contract owner.
TRUE
TRUE OR FALSE?
Accumulation annuity do not permit withdrawals. A withdrawal may be made from payout annuities
FALSE
- Payout annuities do not permit withdrawals.
- Withdrawals may be made from an accumulation annuity
[Ref. 3.6.1]
Market Value Adjustments for annuities are based on…
- Time,
- Interest rates
- Expenses.
TRUE OR FALSE?
Any annuity funded by the transfer of locked-in funds from a registered pension plan, a locked-in retirement account (LIRA), or a life income fund (LIF) can be surrendered.
FALSE
Any annuity funded by the transfer of locked-in funds from a registered pension plan, a locked-in retirement account (LIRA), or a life income fund (LIF) cannot be surrendered.
TRUE OR FALSE?
A term annuity cannot be surrendered for its commuted value.
FALSE
A term annuity may be surrendered for its commuted value. This means the annuity can be cancelled and the future annuity payments taken in a lump sum.
[Ref. 3.6.3.2]
TRUE OR FALSE?
Surrender of a life annuity may be possible when annuity payments have not started.
TRUE
- A contract cannot be surrendered after payments from a life annuity start
TRUE OR FALSE?
Accumulation annuities are subject to accrual taxation annually during the accumulation phase
TRUE
- Unless they are held in a registered account
- The accumulated value is only received through withdrawal or surrender, or by conversion at maturity to a life annuity, which then issues payments
[Ref. 3.7]
TRUE OR FALSE?
When an annuity is purchased with taxable registered funds, such as by transfer from a registered retirement savings plan (RRSP), the entire payment received by the annuitant is taxed as income in the following year it is received.
FALSE
When an annuity is purchased with taxable registered funds, such as by transfer from a registered retirement savings plan (RRSP), the entire payment received by the annuitant is taxed as income in the year it is received.
[Ref.3.7.1]
TRUE OR FALSE?
A deferred annuity purchased with registered funds is taxed during the deferral period.
FALSE
A deferred annuity purchased with registered funds is not taxed during the deferral period.
TRUE OR FALSE?
Withholding tax is applied to payments when annuities have been purchased with funds transferred from a registered pension plan, LIF, LIRA, or deferred profit sharing plan (DPSP).
TRUE
Seg-fund Terminology
Withholding tax
The money that an employer deducts from an employee’s gross wages and pays directly to the government.
Seg-fund Terminology
Prescribed annuity
an annuity purchased with non-registered funds that has distinct tax-advantages
Seg-fund Terminology
Accrual annuity
An annuity that is taxed on interest earned in the policy from the purchase date to the policy anniversary, and then annually on each policy anniversary.
