ANNUITIES (chapter 3)

Question 1

Seg-fund Terminology

Annuity

Answer 1

A contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future

Question 2

Seg-fund Terminology

Single life annuity

Answer 2

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.

Question 3

Seg-fund Terminology

Joint life Annuity

Answer 3

Also known as a joint and last survivor annuity, pays an income over the lifespan of two people, usually spouses

Question 4

Seg-fund Terminology

Instalment refund choice

Answer 4

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.

Question 5

Seg-fund Terminology

Cash refund choice

Answer 5

• 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.

Question 6

Seg-fund Terminology

Capital protection guarantee

Answer 6

• 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)

Question 7

Seg-fund Terminology

A term annuity-to-age-90 (T-90)

Answer 7

• 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.

Question 8

Seg-fund Terminology

Term annuity-to-age-18 (T-18)

Answer 8

• 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.

Question 9

Seg-fund Terminology

A market-linked return

Answer 9

• A return linked to performance of a market index, such as the S&P/TSX Composite Index
• Mitigates interest risk and inflation risk

Question 10

Seg-fund Terminology

Market Value Adjustment (MVA)

Answer 10

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.

Question 11

What are some advantages of annuity?
(name at least three)

Answer 11

• 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).

Question 12

Income security provided by annuities covers different types of income, what are they?

Answer 12

• Lifetime income;
• Spousal income;
• Temporary income.

[Ref. 3.1.2]

Question 13

An income for a spouse can be created by …

Answer 13

• 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

Question 14

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.

Answer 14

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]

Question 15

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.

Answer 15

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]

Question 16

TRUE OR FALSE?

Assuris protects an accumulation annuity up to 100% of the contract value up to $100,000

Answer 16

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]

Question 17

There are two core forms of annuities, what are they?

Answer 17

• Payout annuity
• Accumulation annuity

Question 18

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.

Answer 18

TRUE

Question 19

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

Answer 19

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]

Question 20

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.

Answer 20

TRUE

Question 21

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.

Answer 21

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]

Question 22

What is the duration of an annuity?

Answer 22

• a term (a period of time),
• a lifetime
• The lifetime of two people.

Question 23

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.

Answer 23

TRUE

Question 24

TRUE OR FALSE?

If death of the annuitant occurs during the term, the balance of annuity payments cease.

Answer 24

FALSE

If death of the annuitant occurs during the term, the balance of annuity payments is paid to a beneficiary

Question 25

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?

Answer 25

- Capital protection guarantee - Cash refund choice - Instalment refund choice

Question 26

# *Seg-fund Terminology* Impaired life annuities

Answer 26

- 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.

Question 27

A policy owner has a **3 choice of how to fund, or pay for an annuity**, what are they?

Answer 27

- Lump sum - Transfer of a lump sum - Payments made over a period of time as deposits.

Question 28

What's the difference between differed and immediate annuity?

Answer 28

- Immediate annuity must be funded with a lump sum - Deferred annuity could be funded with a lump sum or a series of deposits

Question 29

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**?

Answer 29

- 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]

Question 30

*TRUE OR FALSE?* Locked-in pension savings accumulated in an **employer-provided or group pension** plan can be transferred *only* to a life annuity.

Answer 30

TRUE

Question 31

*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.

Answer 31

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]

Question 32

**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?

Answer 32

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.

Question 33

*TRUE OR FALSE?* Indexing an annuity increases payments monthly by a percentage selected by the policy owner

Answer 33

FALSE Indexing an annuity increases payments **annually** by a percentage selected by the policy owner. | [Ref. 3.4.4]

Question 34

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?

Answer 34

- Immediate income - Deferred income - Level income - Indexed income - Variable income

Question 35

What are some factors that affect annuity payments? *(Name at least three)*

Answer 35

- Annuity rate - Interest rate - Age of annuitant - Gender of annuitant - Deposit amount - Payment schedule - Length of payment period

Question 36

*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.

Answer 36

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]

Question 37

*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.

Answer 37

TRUE

Question 38

There are two types of guarantees in an annuity, what are they?

Answer 38

- Guarantee period - Guaranteed capital

Question 39

*TRUE OR FALSE?* A life annuity can only be issued with a guarantee option

Answer 39

FALSE - A life annuity can be issued **with or without a guarantee** | [Ref. 3.5.2.1]

Question 40

What's the difference between guarantee period and guaranteed capital?

Answer 40

- 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]

Question 41

*TRUE OR FALSE?* Survivor income is guaranteed for two lifetimes by choice of a joint and last survivor annuity

Answer 41

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]

Question 42

*TRUE OR FALSE?* Annuities are great for flexibility in investments and beneficiary designations when the contract is in force.

Answer 42

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]

Question 43

What are some risks associated with annuities?

Answer 43

- Interest rate risk - Inflation risk - No guarantee period *(for some annuities)*

Question 44

*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.

Answer 44

TRUE

Question 45

*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.

Answer 45

TRUE

Question 46

How does a policyholder of an annuity benefit from interest rate risk and inflation risk?

Answer 46

- 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**

Question 47

*TRUE OR FALSE?* A life annuity contract without a guarantee period risks loss of capital for the contract owner.

Answer 47

TRUE

Question 48

*TRUE OR FALSE?* Accumulation annuity **do not** permit withdrawals. A withdrawal may be made from payout annuities

Answer 48

FALSE - **Payout annuities** *do not* permit withdrawals. - Withdrawals may be made from an **accumulation annuity** | [Ref. 3.6.1]

Question 49

Market Value Adjustments for annuities are based on...

Answer 49

- Time, - Interest rates - Expenses.

Question 50

*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.

Answer 50

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.

Question 51

*TRUE OR FALSE?* A term annuity cannot be surrendered for its commuted value.

Answer 51

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]

Question 52

*TRUE OR FALSE?* Surrender of a life annuity may be possible when annuity payments have not started.

Answer 52

TRUE - *A contract cannot be surrendered after payments from a life annuity start*

Question 53

*TRUE OR FALSE?* Accumulation annuities are subject to accrual taxation annually during the accumulation phase

Answer 53

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]

Question 54

*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.

Answer 54

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]

Question 55

*TRUE OR FALSE?* A deferred annuity purchased with registered funds is taxed during the deferral period.

Answer 55

FALSE A deferred annuity purchased with registered funds is **not** taxed during the deferral period.

Question 56

*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).

Answer 56

TRUE

Question 57

# *Seg-fund Terminology* Withholding tax

Answer 57

The money that an employer deducts from an employee's gross wages and pays directly to the government.

Question 58

# *Seg-fund Terminology* Prescribed annuity

Answer 58

an annuity purchased with non-registered funds that has distinct tax-advantages

Question 59

# *Seg-fund Terminology* Accrual annuity

Answer 59

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.