Ch. 7

Question 1

403(b) plan (TSA)

Answer 1

a retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers
Income derived from the TSA are treated as ordinary income and are income taxed

Question 2

1035 contract exchange

Answer 2

A 1035 contract exchange refers to a tax-free exchange of one life insurance policy, endowment policy, or annuity contract for another, as permitted under Section 1035 of the U.S. Internal Revenue Code

Question 3

Accumulation period

Answer 3

The segment of time where contributions are made to the annuity. This can be done in one lump sum or with payments (premiums) over time

Question 4

Annuitization phase

Answer 4

The period of time when the annuitant starts to receive income payments from the annuity

Question 5

Accumulation units

Answer 5

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

Question 6

Annuitant

Answer 6

The individual who receives the payments from an annuity. The annuitant is usually the same person who purchased the annuity, but it can also be a different individual designated by the purchaser

Question 7

Annuity units

Answer 7

Annuity Units 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 8

Cash refund option

Answer 8

if the annuitant (the person who owns the annuity) dies before receiving a certain amount of payments, the remaining funds will be returned to the beneficiary or their estate

Question 9

Equity indexed annuity

Answer 9

Equity indexed annuities 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. Lower floor than fixed annuity but can have a higher ceiling

Question 10

Deferred Annuity

Answer 10

provide for postponement of the payment of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased on either a 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 11

exclusion ratio

Answer 11

The Exclusion ratio 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 12

Fixed Annuity

Answer 12

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 13

Immediate annuity

Answer 13

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

Question 14

Joint life & survivor option

Answer 14

provides 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 15

Life with period certain annuity (life income with term-certain option)

Answer 15

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. Thus, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period

Question 16

Market value adjustment

Answer 16

a type of fixed annuity that includes a feature designed to adjust the contract’s value based on changes in interest rates

Question 17

Period certain annuity

Answer 17

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

Question 18

Periodic payment annuity (flexible premium)

Answer 18

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

Question 19

Principal

Answer 19

the original sum of money paid into an annuity through premium(s)

Question 20

Single premium annuity

Answer 20

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

Question 21

Straight life annuity

Answer 21

provides guaranteed payments to the annuitant for the rest of their life. Payments continue as long as the annuitant is alive, but upon their death, the payments stop, and no further benefits are paid to any beneficiaries

Question 22

Variable annuity

Answer 22

shift the investment risk from the insurer to the contract owner. Variable annuities 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 the account invested, primarily in common stocks

Question 23

Annuity period

Answer 23

Begins once the contract owner starts receiving income

Question 24

Qualified Annuity

Answer 24

funded with pre-tax dollars. The entire distribution from a qualified annuity is taxable as ordinary income when withdrawn because no taxes have been paid on the contributions or earnings

Question 25

Nonqualified annuity

Answer 25

Funded with after-tax dollars. The principal is not taxed but the part that gains interest is taxed

Question 26

Level premium annuity

Answer 26

characterized by level or constant annual payments to fund the annuity. For example, a 35-year-old purchases a level premium annuity with an annual premium of $1,200. The contract owner will pay that level amount each year until retirement at age 65. At that time, he will begin to receive monthly income payments. This type of annuity is also referred to as an annual premium annuity

Question 27

Flexible premium annuity

Answer 27

characterized by periodic premiums that may be in variable amounts each year. In this case, the contract owner will contribute an amount with which he’s comfortable each year. These premiums are paid until the contract owner wants to begin receiving income after retirement. As long as a minimum payment is made, the contract owner is permitted to determine the amount he can afford to contribute each year. The future income benefit will be based on the total amount of funds saved once the plan is annuitized (i.e., when income payments begin)

Question 28

Installment refund option

Answer 28

will pay the beneficiary the same monthly income benefit that the annuitant was receiving until the remaining principal is depleted

Question 29

Individual or single life annuity

Answer 29

An individual or single life annuity is the most common form of an annuity. It is a pure life annuity, covering one life, with no survivorship (beneficiary). It provides income to the recipient, once it commences, for life with no refund paid to the annuitant’s family upon his or her death

Question 30

Joint life annuity

Answer 30

type of multiple life contract that’s designed to pay benefits to two or more annuitants at the same time. However, all benefits will end once the first annuitant dies

Question 31

Long term care rider on annuity

Answer 31

allow the annuity holder to access funds early or receive increased payouts if they need long-term care, such as nursing home care or assisted living. This rider provides financial support and helps protect other savings from being depleted by high care costs

Question 32

Guaranteed minimum withdraw benefit (GMWB) rider

Answer 32

ensures the annuity holder can withdraw a specified amount of money annually, regardless of the annuity’s market performance. This rider provides a guaranteed income stream, offering protection against market downturns and helping to secure financial stability during retirement

Question 33

Guaranteed minimum income benefit (GMIB) rider

Answer 33

guarantees the annuity holder a minimum level of income, regardless of how the underlying investments perform. After a specified waiting period, the GMIB allows the holder to convert their annuity into a guaranteed stream of income, even if the account value has decreased due to poor market performance

Question 34

Guaranteed minimum accumulation benefit (GMAB) rider

Answer 34

guarantees the annuity holder a minimum account value after a specific period, typically 10 years, regardless of the market performance of the underlying investments. If the actual account value is lower than the guaranteed minimum at the end of the period, the insurer will make up the difference

Question 35

Market value adjusted annuity (MVA)

Answer 35

shifts some (but not all) of the investment risk from the insurer to the contract owner since the annuity account value will fluctuate with the changes in market interest rates

Question 36

Tax-sheltered annuity