Chapter 13 Part 7

Question 1

The individual who receives the income generated by the annuity is the

Answer 1

annuitant.

Question 2

The contract owner may designate

Answer 2

anyone she wants as the annuitant, although usually the contract owner and the annuitant are the same person. Income can be provided either immediately or at some point in the future.

Question 3

The majority of annuities are nonqualified. The contract owner invests money in the annuity after

Answer 3

paying taxes, though the money accumulates on a tax-deferred basis. The contract owner docs not pay taxes on increases in his investment until he begins taking money out. A contract owner who withdraws money from an annuity before the age of 59 1/2 may be required to pay a 10% penalty, in addition to being taxed on any increase in the annuity’s value. All taxes due will be paid at ordinary income rates since annuity distributions are not eligible for long-term capital gains treatment

Question 4

Single Premium Immediate Annuity

Answer 4

A single premium immediate annuity begins making income payments to the annuitant shortly after it is purchased-within a year at the latest. Immediate annuities are always single premium. The contract owner makes a single, lump-sum payment in order to fund the annuity

Question 5

Deferred Annuity

Answer 5

“A deferred annuity does not begin making payments to the annuitant until sometime in the future. The payments are deferred-the first one usually does not begin until many years after the contract owner buys the annuity. A deferred annuity may be funded either by a single, lump-sum payment or a series of periodic payments. Today, most annuities sold in the U.S. are
deferred”

Question 6

A fixed annuity is an agreement between an insurance company and a contract owner in which the owner’s premium payments are invested in the insurance company’s

Answer 6

general account. The company guarantees the contract owner a mininmum rate of return over a specific period

Question 7

The company invests these payments in its general account and the contract owner receives the

Answer 7

greater of the current interest rate or the minimum guaranteed rate of return over a specified period

Question 8

The general account is the insurance company’s investment account. The company uses this account to fund its

Answer 8

traditional insurance policies and fixed annuities (not its variable products).

Question 9

If the contract owner later annuitizes the contract, this means

Answer 9

converting it into a stream of income payments. At this point, the company guarantees the owner a fixed-dollar payment (e.g., $500 per month), often for the rest of his life.

Question 10

Since the insurance company must pay the annuitant regardless of how its investments perform,

Answer 10

the insurance company assumes all the investment risk in a fixed annuity

Question 11

A fixed annuity is not a

Answer 11

“security and, therefore, is not covered by securities regulations. Salespersons who offer only fixed annuities and traditional life insurance policies do not require a FINrA regisn·ation.
All annuities are governed by state insurance regulations; therefore, salespersons are required to have a state insurance license”

Question 12

The major drawback of a fixed annuity is that

Answer 12

the fixed-dollar payments received by the annuitant tend not to keep pace with inllation. An income that may seem sufficient today may become inadequate after 20 or 30 years of rising prices.

Question 13

Variable annuities were created to provide investors with more protection against

Answer 13

inflation than traditional, fixed annuities.

Question 14

In a variable annuity, the contract owner has control over how her

Answer 14

payments are invested, at least during the annuity’s accumulation phase (i.e., the period when she is paying money into the annuity).

Question 15

the money paid into a variable annuity is invested in the insurance company’s

Answer 15

separate account. the assets in the separate account are segregated from the company’s general account. In a typical variable annuity, the separate account contains a number of different underlying portfolios (subaccounts). The contract owner may allocate his payments among these different subaccounts according to his investment objectives. the contract owner may also transfer money from one subaccount to another as his investment goals change

Question 16

To satisfy the needs of clients not wanting to take risks, one of the subaccounts may also have a

Answer 16

fixed rate of return, which the company guarantees

Question 17

A contract owner who invests in anything except the fixed-rate subaccount assumes the

Answer 17

investment risk associated with the variable annuity. The insurance company docs not guarantee a minimum rate of return for any of the other subaccounts.

Question 18

variable annuities are classified as

Answer 18

securities and must be registered with the SEC and sold with a prospectus. Their separate accounts and underlying subaccounts must also be registered with the SEC as investment companies

Question 19

A company that sells variable annuities must be a broker-dealer registered with the SEC, and the registered representative who sells variable annuities must have a

Answer 19

state insurance license, plus Series 6 or Series 7 registration. In addition, annuities must be registered with state insurance commissions and state securities Administrators

Question 20

Generally, variable annuities are appropriate only for people with

Answer 20

long-term investment goals who do not anticipate needing access to their money for at least 5 to 7 years and are generally not suited for senior investors. Many of these products impose significant surrender charges on investors who surrender their contracts early