Chapter 7 Review (Life): Annuities

Question 1

Life insurance protects against the risk of premature death. Annuities protect against the risk of

Answer 1

living too long.

Question 2

Annuities are ways of

Answer 2

providing a stream of income for a guaranteed period of time.

Question 3

Annuities are ways of

Answer 3

providing a stream of income for a guaranteed period of time.

Question 4

The income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to the _____.

Answer 4

annuitant

Question 5

The person who receives survivor benefits upon the annuitant’s death.

Answer 5

Beneficiary

Question 6

The pay-in period of an annuity where purchase payments are being made, which can continue even after payments cease.

Answer 6

Accumulation period

Question 7

Also called the liquidation period, annuitization period, or pay-out period. Now, money is being paid-out in the form of payments to the annuitant.

Answer 7

Annuity Period

Question 8

Two annuity payment options:

Answer 8

1. Single payment (lump sum)
2. Periodic payments (flexible premiums) paid over a period of time.

(You CANNOT make installment payments and get paid immediately.)

Question 9

Interest credited to the cash values of annuities are

Answer 9

deferred until distribution.

Question 10

A back-end load an insurer may assess when a deferred annuity is cancelled during the early years of an annuity contract.

Answer 10

Surrender charge

Question 11

The _____ _____ waives the surrender charges when the interest rate falls below a stated level. Sometimes found in single premium deferred annuity contracts.

Answer 11

Bailout feature

Question 12

This pays the annuitant a guaranteed income for the annuitant’s lifetime. When they die, no further payments are made to anyone.

(This offers protection against exhaustion of savings due to longevity.)

Answer 12

Straight Life Income Payout Option

Question 13

Fixed payments paid to the annuitant until the contract value is exhausted. The beneficiary receives the remainder if the annuitant dies with funds left in the annuity.

Answer 13

Fixed Amount Option

Question 14

Pays a guaranteed income to the annuitant for life. If the annuitant dies before all the money is gone, a lump-sum cash payment of the remaining fund are paid out to the annuitant’s beneficiary.

Answer 14

Cash Refund Payout Option

Question 15

Pays a guaranteed income to the annuitant for life. If the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments.

Answer 15

Installment Refund Payout Option

Question 16

Is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. It provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies.

Answer 16

Life with Period Certain Payout Option (life income with term certain)

Question 17

This is taken from an annuity before age 59 1/2 the withdrawal is considered 100% interest, and is therefore taxable as ordinary income.

A 10% tax penalty is applied if a distribution is received before the annuitant reaches age 59 1/2. After this age, withdrawals do not incur the 10% penalty tax, but are taxable as ordinary income.

Answer 17

Partial Withdrawal

Question 18

The payments on Q’s annuity are no less than $250 quarterly. Which of the following annuities does Q own?

Answer 18

Flexible Installment Deferred

Question 19

The type of annuity that can be purchased with one monetary deposit is called a(n):

Answer 19

Immediate annuity

Question 20

The annuity that represents the largest possible monthly payment to an individual annuitant is a(n):

Answer 20

Straight Life annuity.

(The straight life annuity pays the largest monthly benefit to a single annuitant because it is based only on life expectancy, but it creates a risk that the annuitant may die early and forfeit much of the value of the annuity to the insurance company.)

Question 21

All of the following statements regarding a Tax Sheltered Annuity (TSA) are true EXCEPT:

Answer 21

Income derived from the TSA is received income tax-free.

(Upon retirement, payments received by employees from the accumulated savings in tax-sheltered annuities are treated as ordinary income.)