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Insurance Sales Exam > Chapter 6: Annuities > Flashcards

Chapter 6: Annuities Flashcards

1
Q

What provides lifelong income that you can’t outlive (opposite of life insurance)?

A

Annuities

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2
Q

Three components of how annuities work:

A

A sum of money is paid out in equal installments over a period of time, until the original sum of money is depleted.
Since the sum of money is invested with the insurer, it will earn interest.
That interest is paid out to the annuitant.

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3
Q

The amount of each annuity payment is based on three factors:

A

The amount of the original sum of money (the principal),
The duration of the payout period, and
The assumed interest rate.

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4
Q

What happens if an annuitant dies prior to the payout period?

A

A death benefit is paid to a beneficiary in an amount equal to the funds plus interest

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5
Q

What are the two phases of an annuity?

A

Accumulation (you put money in) and annuity phase (money paid back to you)

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6
Q

Annuity payments are made ________ (4), and each payment is comprised of ____ (2).

A

Monthly, quarterly, semiannually, or annually
Principal (not taxable) and interest (taxable)

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7
Q

Annuities only pay benefits for how long?

A

Until the annuitants death

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8
Q

Annuities are defined as:
Select one:
a. The creation of an estate
b. The systematic liquidation of an estate
c. Income replacement
d. A plan to pay medical expenses

A

B

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9
Q

The person who owns the annuity and pays the premiums is the:
Select one:
a. Contract owner
b. Annuitant
c. Beneficiary
d. Annuity

A

A

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10
Q

Annuities protect against:
Select one:
a. The risk of prolonged life
b. The risk of premature death
c. The risk of accident or sickness
d. The risk of disability

A

A

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11
Q

How do annuities provide guaranteed income for life?
Select one:
a. By systematically liquidating an estate
b. By paying monthly disability income benefits
c. By paying a lump-sum death benefit
d. None of the above

A

a

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12
Q

All of the following statements are true regarding the accumulation period in an annuity, EXCEPT:
Select one:
a. The accumulation period is the pay-in period.
b. During the accumulation period, the contract owner makes premium payments into the annuity.
c. During the accumulation period, the principal earns compound interest.
d. Premiums are paid with pre-tax dollars.

A

D

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13
Q

The person who receives annuity payments is the:
Select one:
a. Insurer
b. Contract owner
c. Beneficiary
d. Annuitant

A

D

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14
Q

Marty purchases an annuity for his younger brother, Jacob. If Jacob is the person who will be receiving annuity payments, which of the following statements is true?
Select one:
a. Marty is the contract owner and annuitant.
b. Jacob is the contract owner and annuitant.
c. Marty is the annuitant and Jacob is the contract owner.
d. Marty is the contract owner and Jacob is the annuitant.

A

D

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15
Q

Which of the following statements is true regarding the taxation of premiums and interest in annuities?
Select one:
a. Principal (premiums) is paid with pre-tax dollars; interest is taxable income during the payout phase.
b. Principal (premiums) is paid with after-tax dollars; interest is not taxable income during the payout phase.
c. Principal (premiums) is paid with pre-tax dollars; interest is not taxable income during the payout phase.
d. Principal (premiums) is paid with after-tax dollars; interest is taxable income during the payout phase.

A

D

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16
Q

Four components of annuity classification

A

Funding Method
Date Income Payments Begin
Payout Options
Investment Configuration

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17
Q

Two ways to fund principal to an annuity?

A

Single Premium Lump Sum
Series of Periodic Payments

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18
Q

Two types of Single Premium annuities?

A

SPIA (Immediate Annuity) - payments to annuitant start immediately
SPDA (Deferred Annuity) - payments are delayed for a specified time (money grows tax deferred)

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19
Q

TorF: Annuities funded by periodic premiums may have LEVEL or FLEXIBLE premiums

A

True

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20
Q

What is it called when you have an annuity in which both the premium amount and frequency of payments are flexible?

A

Flexible Premium Deferred Annuity (FPDA)

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21
Q

TorF: Flexible Premium Deferred Annuities still have a guaranteed amount of payout.

A

False

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22
Q

5 components of determining Annuity Premiums

A

Age
Sex
Interest rate
Income amount and payment guarantee
Loading Costs

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23
Q

In this case where a single premium must be used for purchase, and the payout period must begin within one year, we have a _________.

A

Single Premium Immediate Annuity

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24
Q

What informs contract owners what portion of each annuity payment is taxable?

A

The exclusion Ratio

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25
Q

TorF: The surrender charge for an annuity is greatest in the early contract years, and usually decreases to zero after 10 or 15 years.

A

True

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26
Q

TorF: Some annuities have a free withdrawal feature that allows the contract owner to withdraw a certain amount each year (typically 10%) without incurring a surrender charge.

A

True

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27
Q

Other than lump sum, what 6 other payout options for annuities exist?

A

Straight life
Cash refund
Installment refund
Life with period certain (Guaranteed Term)
Joint and survivor
Period certain (Fixed Period)

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28
Q

What payout option pays large annuity payments for the life of the annuitant, and forfeits the balance to the insurer upon their death?

A

Straight Life Income Option (also called life only or pure life)

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29
Q

What payout option allows the balance of the annuity to go to a beneficiary upon the death of the annuitant?

A

Cash Refund Option (smaller annuity payments to annuitant)

30
Q

What payout option is similar to the cash refund option, BUT instead of payout being a lump sum, payouts continue to the beneficiary?

A

Installment Refund Option

31
Q

What payout option offers a guaranteed payment period, such as 10 or 20 years?

A

Life with Period Certain Option (Guaranteed Term) - payments for a certain period of time go to annuitant, until their death, upon which payments continue to beneficiary until end of period

32
Q

What payout option pays annuity benefits to multiple annuitants?

A

Joint and Survivor Option

33
Q

Two types of Joint and Survivor Options?

A

Joint and 2/3 survivor annuity
Joint and 1/2 survivor annuity

34
Q

What payout option provides income for a fixed period, such as 10 or 15 years?

A

Period Certain Option (Fixed Period)

35
Q

What are the 9 factors that determine the amount of each annuity payment?

A

Annuity cash accumulation
Payout guarantees, if any
Annuity payment frequency
Loading
The assumed interest rate
The annuitant’s age
The annuitant’s sex
The more cash value available at the time of annuitization, the larger the annuity payment

36
Q

Which annuity payout option has a distinct beginning and ending?
Select one:
a. Cash
b. Lump-sum
c. Life annuity
d. Period certain

A

D

37
Q

Collin buys a fixed deferred annuity. Upon annuitization, he chooses the life annuity with period certain payout option. Collin will receive $3,000 each month with a 15-year certain period. If Collin dies after seven years, how much will his beneficiary receive?
Select one:
a. $0
b. $252,000
c. $288,000
d. $540,000

A

C

38
Q

Which of the following is not true about the impact of the annuitant’s sex on the premium payments?

Select one:
a. Men live more dangerously so their premiums are higher.
b. Women live longer than men, so their premiums are higher.
c. Both of the above.
d. Neither of the above.

A

A

39
Q

Premiums for a joint and survivor life annuity are based on the annuitants’:

Select one:
a. Ages only
b. Sex only
c. Ages and sex
d. Ages, sex and geographic location

A

C

40
Q

Which of the following statements regarding the amount of each annuity payment is true?
Select one:
a. The younger the annuitant is, the higher the annuity payment.
b. Fixed annuities have variable annuity payments.
c. Variable annuities have fixed annuity payments.
d. Women typically receive lower annuity payments.

A

D

41
Q

What are the two types of refund life annuity payout options?
Select one:
a. Single life and multiple lives
b. Cash refund and installment refund
c. Life annuity with period certain and straight life
d. Fixed period installment and fixed amount installment

A

B

42
Q

Alex purchases a single premium immediate annuity on March 1. If he elects monthly annuity payments, when will he receive his first annuity payment?
Select one:
a. March 15th
b. March 31st
c. April 1st
d. May 1st

A

C

43
Q

This annuity does not guarantee a life income, but pays a specific amount to the annuitant periodically:
Select one:
a. Fixed period installment annuity
b. Fixed amount installment annuity
c. Temporary annuity certain annuity
d. Market value adjusted annuity

A

B

44
Q

ABC Insurer sells a $500,000 single premium immediate annuity to four different people. Who receives the largest check?
Select one:
a. 18-year old female
b. 25-year old male
c. 60-year old female
d. 60-year old male

A

D

45
Q

What type of premium is used to purchase an immediate annuity?
Select one:
a. Single
b. Flexible
c. Level
d. Increasing

A

A

46
Q

Nick is single and retired at the age of 55. He does not have any dependent family members. Nick wants to purchase an annuity that will give him the largest monthly income. What annuity would you recommend to him?
Select one:
a. Straight life annuity
b. Life annuity with period certain
c. Refund life annuity
d. Joint and survivor life annuity

A

A

47
Q

Of the following, who will receive the largest monthly annuity benefit from a $100,000 single premium immediate annuity?
Select one:
a. Woman, age 40
b. Man, age 40
c. Woman, age 70
d. Man, age 70

A

D

48
Q

In which of the following types of annuities does the payment period begin immediately after the annuity is purchased?
Select one:
a. SPIA
b. SPDA
c. Deferred
d. None of the above

A

A

49
Q

Lucas purchased an annuity for himself. He begins to receive annuity payments. If the amount of premium in the annuity has not been paid out upon his death, then his grandson will receive the balance. What type of annuity does Lucas have?

Select one:
a. Straight life
b. Period Certain
c. Cash Refund option
d. Joint and survivor life

A

C

50
Q

All of the following are true of the life with period certain annuity payout option, EXCEPT:
Select one:
a. The annuitant is provided with guaranteed income for life.
b. Payments are guaranteed for a minimum number of years.
c. Any balance in the annuity fund after the period certain ends is refunded to a beneficiary.
d. The life with period certain option does not guarantee the full value of the annuity will be paid out.

A

C

51
Q

Two types of classifications of annuities? and a third one also

A

Fixed - fixed interest rate
Variable - variable interest rate
Equity Indexed Annuities?

52
Q

TorF: Fixed annuities may not be sufficient to offset the effects of inflation

A

True

53
Q

TorF: Variable Annuities have variable interest rates and fixed benefits

A

False (variable benefits too)

54
Q

TorF: Variable annuities have potential for great loss or gain. Risk is borne upon the contract owner

A

True

55
Q

Accumulation Units

A

The separate account has a certain total number of accumulation units.
In the most basic terms, the value of each accumulation unit can be calculated by dividing the value in the separate account by the insurer’s total number of accumulation units.
The number of accumulation units a contract owner has directly correlates to the portion of the separate account owned by the contract owner.
The value of each accumulation unit varies daily, so while the number of accumulation units a contract owner has may stay the same, the total dollar value of a contract owner’s accumulation units may vary daily.
Part of the premium paid is used to cover sales fees and taxes, so the net premium purchases accumulation units.

56
Q

What is dollar cost averaging?

A

Dollar cost averaging is an investment strategy where the contract owner invests the same amount of money at regular intervals over a lengthy period of time, instead of trying to guess the market highs and lows.

57
Q

What are fixed annuities that provide a guaranteed minimum interest rate (usually 3 or 4%), tied to an equity index, with an accumulation period between 5 and 7 years?

A

Equity Indexed Annuities

58
Q

What is a fixed annuity, if surrendered prior to annuitizaation, the contract owner will incur a surrender fee and an adjustment to the surrender value will be made based on the market value?

A

Market Value Adjusted Annuity

59
Q

In addition to a life insurance producer license, producers selling variable products must have a(n):
Select one:
a. Annuity license
b. Series 6 or 7 license
c. Accident and health license
d. Property and casualty license

A

B

60
Q

Which annuity provides a guaranteed minimum rate of return?
Select one:
a. Single premium immediate annuity
b. Single premium deferred annuity
c. Fixed annuity
d. Variable annuity

A

C

61
Q

What accounting unit is used during the annuity phase of a variable annuity?
Select one:
a. Accumulation unit
b. Annuity unit
c. Premium unit
d. Contract unit

A

B

62
Q

Which of the following is characteristic of fixed annuities?
Select one:
a. Variable interest rates during the pay-in period
b. Fixed interest rates during the payout period
c. Annuity payment amounts are flexible.
d. Premiums are invested in the insurer’s separate account.

A

B

63
Q

Which of the following fixed annuities has a minimum rate of return and a current rate of return that is connected to the S&P 500?
Select one:
a. Fixed annuity
b. Market value adjusted annuity
c. FPDA
d. Equity indexed annuity

A

D

64
Q

This annuity is regulated as a securities product and agents selling this product must have a securities license:
Select one:
a. SPDA
b. Equity indexed annuity
c. Fixed annuity
d. Variable annuity

A

D

65
Q

The value of each accumulation unit varies:
Select one:
a. Daily
b. Monthly
c. Semiannually
d. Annually

A

A

66
Q

For which of the following annuities must an agent have a securities license in order to sell?
Select one:
a. Variable annuity
b. Equity indexed annuity
c. SPDA
d. Fixed annuity

A

A

67
Q

Variable annuities have:
Select one:
a. Variable interest rates and benefits
b. Fixed interest rates and benefits
c. Fixed premiums
d. Level benefits

A

A

68
Q

What is a disadvantage of fixed annuities?
Select one:
a. Knowing the exact amount of each annuity payment
b. Potential for higher interest earnings
c. Earning potential may not be enough to offset the effects of inflation
d. Investment in the insurer’s separate account, which has the potential for higher yields

A

C

69
Q

TorF: Premiums for personal life insurance policies are paid using post-tax dollars, so the proceeds are tax free if received in a lump sum.

A

True

70
Q

What do you call the amount of earnings paid out after the insurance companies covers all other costs?

A

Divisible Surplus and Dividends (distributed to policyholders)

71
Q

TorF: Dividends paid out are not

A

Insurance Sales Exam (44 decks)

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