Chapter 9: Annuities

Question 1

Define annuity

Answer 1

• Provides income for a specific period if time
• Protects a person against outliving their money
• A way of liquidating and estate
• Primarily for retirement income

Question 2

Annuity vs. Insurance

Answer 2

Insurance: Create a sum of money by periodic payments

Annuity: Liquidate or terminate sum of money by periodic payments of money out of a contract

Question 3

Annuity owner and Annuitant

Answer 3

Annuity owner: Purchaser of the annuity

Annuitant: Receives payments from the annuity

Question 4

Accumulation period

Answer 4

Period if time in which the annuitant makes premium payments to the annuity

Earns interest

Aka Tax-deferred growth

Question 5

Annuity period or Annuitization phase

Answer 5

The time during which the money that has accumulated during the accumulation period is converted into incime payments to the annuitant

Note: If annuitant dies during accum. Period the beneficiary will receive the cash value or total premiums paid, whichever is greater

Question 6

Annuity Funding (2 types)

Answer 6

• Single Payment or Lump Sum

- Periodic Payments, premiums paid in installments over period of time

Question 7

Immediate Annuity

Answer 7

Purchased with one lump sum payment

Payments begin 1 month after purchase

Question 8

Deferred Annuity

Answer 8

• Income payments begin sometime after the first year

- Can be funded with single payment or through periodic payments

Question 9

What are the purpose of Annuity Payout Options?

Answer 9

To determine how policy proceeds will be distributed to beneficiaries

Question 10

Straight Life Income option

Answer 10

• Pay a specific amount for the entire life of the annuitant
• Highest monthly benefits for an individual annuity
• No guarantee that all proceeds will be fully paid out since payments stop after annuitants death
• No residual value

Question 11

Life with Period Certain

Answer 11

• Contingent on annuitant dying

- Guaranteed for lifetime of annuitant and for a period of time to the beneficiary

Question 12

Types of annuity classifications (two)

Answer 12

Fixed annuities: Payments do not vary and minimum rate of interest

Variable Annuities: Hedge against inflation, not a guaranteed payout

Question 13

Two special things to know about Variable annuities

Answer 13

• regulated by sec (securities and exchange commission)

- Agency offering this type of annuity needs to have a securities license in addiction to life insurance license

Question 14

Accumulation Units

Answer 14

Variable annuity premiums are invested and begin to grow

Question 15

Annuity Units

Answer 15

Payout phase of the Variable Annuity

Question 16

Annuity Taxes

Answer 16

A portion of each annuity benefit payment is taxable (tax base) but another portion is not (cost base)

Nontaxable portion is the anticipated return of the principal paid in (known as Cost Base)

Question 17

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

Answer 17

It is taxable

Question 18

During the accumulation period who can surrender an annuity?

Answer 18

The policyowner

Question 19

Which annuity require a premium payment that varies from year to year?

Answer 19

Flexible premium deferred annuity

Question 20

Define cash refund payout option

Answer 20

Returns the difference between the annuity value and the income payments already made to the beneficiary

Question 21

Temporary Annuity Certain

Answer 21

• Payments will be made for a specified number of years

- The annuitants beneficiaries will receive payments if annuitant dies before time period is up

Question 22

Annuity certain

Answer 22

• Guaranteed accumulation or payout

Question 23

Period Certain

Answer 23

Pre-determined number of benefits payments

Question 24

Fixed amount payout option

Answer 24

Fixed payments until the contract value is exhausted

Beneficiary receives remainder when annuitant dies

Question 25

Straight life Income payout option

Answer 25

Guarantees payments for entire life

Question 26

Installment refund option

Answer 26

Remainder of funds goes to beneficiary paid in installments instead if one large sum

Question 27

Joint and full survivor payout option

Answer 27

• Payment annuity to two people.

- When all annuitants die there are no further payouts

Question 28

Which type of annuity stops all payments after death of annuitant?

Answer 28

Life annuity

Question 29

Define Tax-Deferred

Answer 29

Investment earnings such as, interest, dividends or capital gains that accumulate with no taxes until profits are received

Question 30

Define dividends

Answer 30

An amount of money paid regularly

Question 31

How do interest earnings accumulate in a deferred annuity?

Answer 31

On a tax-deferred basis