Chapter 7

Question 1

What happens to interest earned if the annuitant dies before the payout start date?

Answer 1

It is taxable

Question 2

The taxable portion of each annuity payment is calculated using what method?

Answer 2

Exclusion ratio

Question 3

Lisa has recently bought a fixed annuity. What is considered to be a disadvantage of owning this type of annuity?

Answer 3

During periods of inflation, annuitants will experience a decrease in purchasing power of their payments.

Question 4

Fixed period settlement options are considered to be a form of what?

Answer 4

Annuity

Question 5

What is the different between life insurance and annuities?

Answer 5

Life insurance builds an estate by paying money into the contract. Annuities liquidate an estate by the periodic payment of money out of the contract.

Question 6

An annuitant dies during the distribution period. What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made?

Answer 6

Refund annuity

Question 7

Who assumes the investment risk with a fixed annuity contract and why?

Answer 7

The insurer because they guarantee the annuitant’s principal as well as a guaranteed minimum rate of return, even if the underlying assets underperform the guaranteed rate.

Question 8

What annuity requires premium payments that vary from year to year?

Answer 8

Flexible premium deferred annuity

Question 9

Simon has purchased a fixed immediate annuity. his payment amount will be dependent upon principal, interest, and the contract’s ________.

Answer 9

income period

Question 10

What is the accumulation period?

Answer 10

The time at which the funds are being paid into the annuity, which may continue after purchase payments cease because of interest.

Question 11

Describe the Funding Method

Answer 11

Principal is funded either immediately with a single premium or over time with a series of periodic payments

Question 12

What is a single premium funded by?

Answer 12

A single lump-sum premium which creates the principal immediately.

Question 13

What are immediate annuities?

Answer 13

Annuities designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase.

Question 14

What are deferred annuities?

Answer 14

Annuities that accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date.

Question 15

What are surrender charges?

Answer 15

Charges made by most insurance companies to contract owners for liquidating deferred annuities in the early years of the contract which cover the costs associated with selling/issuing contracts and costs associated to insurer’s need to liquidate underlying investments.

Question 16

What is the straight life income option?

Answer 16

An annuity payout option that guarantees income for annuitant’s lifetime

Question 17

How are annuitants outlives life expectancy with a straight life income option paid?

Answer 17

The funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy.

Question 18

What is the cash refund option?

Answer 18

An annuity payout option which guarantees total annuity fund is paid out; paid in lump sum to beneficiary if annuitant dies.

Question 19

Which market index is normally associated with an indexed annuity’s rate of return?

Answer 19

S&P 500

Question 20

What is the nonforfeiture value of an annuity before annuitization?

Answer 20

All premiums paid, plus interest, minus any withdrawals and surrender charges.

Question 21

What is the annuitization phase?

Answer 21

The period when the accumulated value in an annuity is paid out.

Question 22

Life income is a settlement option that pays…

Answer 22

a stated amount to an annuitant, but no residual value to a beneficiary.

Question 23

Name three purposes of an annuity.

Answer 23

1) To liquidate an estate
2) For tax-free growth of principal
3) To distribute accumulated principal

Question 24

How soon can the benefit payments begin with a deferred annuity?

Answer 24

A minimum of 12 months after date of purchase.

Question 25

What are variable annuities?

Answer 25

Based on non-guaranteed equity investments so they shift the investment risk from the insurer to the contract owner.

Question 26

Who can sell variable annuities?

Answer 26

A sales rep. who is registered with FINRA as well as one who holds a state insurance license.

Question 27

What are equity indexed annuities (EIA)?

Answer 27

Fixed annuities that offer the potential for higher credited rates of return than their traditional counterparts but also guarantee the owner’s principal.

Question 28

When is a 10% penalty tax imposed on withdrawals?

Answer 28

When they are made before age 59 1/2.

Question 29

What is a structured settlement?

Answer 29

The distribution of funds from the settlement of lawsuits or the winnings of a lottery and other contests.