Ch 14 Flashcards
The fundamental purpose of an annuity is to…
provide a lifetime income that cannot be outlived
Annuity payments consists of 3 sources:
- Premium payments
- Interest earnings
- Unliquidated principal of annuitants who die early
- An Immediate Annuity pays periodic income payments that are guaranteed and fixed in amount.
- During the _1_ prior to retirement, premiums are credited with interest
- The _2_ is the minimum interest rate that will be credited to the fixed annuity
- The _3_ is based on current market conditions, and is guaranteed only for a limited period
- Accumulation period
- Guaranteed rate
- Current rate
A(n) ___ annuity pays a higher interest rate initially.
Bonus
The ___ period is the period in which funds are paid out, or annuitized.
Liquidation
Some insurers offer a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term. Such an annuity is called a(n)
equity-indexed annuity
Variable annuity owners pay a number of fees and expenses. One expense that is levied is forfeiture of a percentage of the account balance if the annuity is terminated in the early years. This fee is typically seven percent of the account balance in the first year, declining one percent per year for the next six years. This fee is called the
surrender charge
Which of the following statements is (are) true with respect to the Roth IRA?
I. Roth IRA contributions are tax deductible.
II. Roth IRA contributions accumulate income tax free and qualified distributions are not taxable if certain requirements are met.
II only
All of the following statements about traditional IRAs are true EXCEPT
A. A participant must have taxable income during the year in order to make a traditional IRA contribution.
B. Traditional IRA contributions are always tax deductible.
C. Even if an individual is covered by an employer-sponsored pension plan, his or her traditional IRA contribution may be tax deductible if his or her modified adjusted gross income is below a specified level.
D. Distributions from traditional IRAs funded exclusively with pre-tax dollars are taxed as ordinary income.
B
To which of the following distributions from a traditional Individual Retirement Account (IRA) before age 59 1/2 does the 10 percent penalty tax apply?
A. a distribution resulting from the death of the IRA owner
B. a distribution used to pay qualified higher education expenses
C. a distribution in the form of a lump-sum payment
D. a distribution resulting from the disability of the IRA owner
C
Which of the following statements is (are) true with respect to annuities?
I. Annuities are the opposite of life insurance.
II. The fundamental purpose of annuities is to replace lost income in case of premature death.
I only
When selling life annuities, what risk is the insurer pooling?
A) bad investment performance
B) premature death
C) bad expense experience
D) excessive longevity
D
Life annuity payments are made up of all of the following EXCEPT
A) return of premiums.
B) interest earnings.
C) unliquidated principal of annuitants who live too long.
D) unliquidated principal of annuitants who die early.
C
Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)
A) deferred annuity.
B) life annuity with guaranteed payments.
C) immediate annuity.
D) variable annuity.
A
Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it
A) life annuity, no refund.
B) life annuity with period certain.
C) installment refund annuity.
D) cash refund annuity.
B
Which of the following statements is (are) true with respect to a joint-and-survivor annuity?
I. Some joint-and-survivor annuities reduce the income payment after the first annuitant dies.
II. No payments are made after the first annuitant dies.
I only
During the funding period, the premiums paid for a variable annuity are used to purchase
A) annuity units.
B) immediate participation shares.
C) mutual fund shares.
D) accumulation units.
D
Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following annuity payout options will provide Brad with the highest monthly income?
A) life annuity (no refund)
B) life income with payments guaranteed for 5 years
C) life income with payments guaranteed for 10 years
D) installment refund annuity
A
Which of the following statements is (are) true with respect to the cash annuity settlement option?
I. The taxable portion of the distribution is subject to federal and state income taxes.
II. The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds.
Both I and II
Which of the following statements is (are) true with respect to variable annuities?
I. The price at which accumulation units can be purchased fluctuates during the funding period.
II. The value of annuity units fluctuates over time.
Both I and II
Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)
A) account administration fee.
B) investment management fee.
C) front-end load.
D) surrender charge.
D
Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the
A) investment management charge.
B) administrative charge.
C) surrender charge.
D) front-end load.
A
Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the
A) investment management charge.
B) surrender charge.
C) administrative charge.
D) front-end load.
C
Which of the following statements about variable annuities is true?
A) The periodic payments received by the annuitant are fixed.
B) Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement.
C) Insurers offering variable annuities are not permitted to charge administrative fees.
D) Although the value of annuity units fluctuates, accumulation units have a fixed value.
B