Chapter 9: Insurance Contracts Flashcards
A(n) ______ is a contract with an insurance company that provides for payments to the ______ over the life of the contract term. These payments are made by the insurance company that issued the contract.
- Annuity
2. Annuitant
The person receiving the payments is known as the ______ and typically receives the payments at retirement, but may annuitize at any time according to the terms of the contract.
Annuitant
The annuity contract specifies that purchasing deposits be made into the contract either in a(n) ______ or through a series of ______.
- Lump Sum
2. Periodic Installments
Most annuities are offered by ______; however, ______ may also offer annuities.
- Insurance Companies
2. Broker/Dealers
To sell annuities, an individual must hold a(n) ______. Individuals selling variable annuities must hold a(n) ______ as well.
- Insurance License
2. Securities Registration
Annuities fall into two categories: ______ and ______.
- Fixed
2. Variable
______ annuities guarantee a certain amount of income based on the purchase payments deposited. The ______ assumes the investment risk of generating the return to support the income payments.
- Fixed
2. Insurance Company
The purchase payments are invested into the ______ of the insurance company for all fixed insurance products.
General Account
______ annuities are not securities because the insurance company assumes all investment risk.
Fixed
In a(n) ______ annuity, the contract holder, or ______, bears the investment risk in the separate account.
- Variable
2. Annuitant
Variable annuities keep purchase payments in a(n) ______, which is a professionally managed portfolio of securities, similar to a mutual fund.
Separate Account
The ______ performance will determine the amount of income the annuitant will receive.
Separate Account
The payments an annuitant receives from a(n) ______ remain constant for the life of the contract. The performance of the insurance company’s (or issuer’s) investment portfolio has ______ effect on the payments made to the annuitant.
- Fixed Annuity
2. No
The annuitant is guaranteed a(n) ______, which is stated in the contract. In other words, the insurance company accepts all ______ and is fully responsible for all gains or losses respective to the annuity contract.
- Minimum Rate of Return
2. Investment Risks
A(n) ______ afford annuitants guaranteed income that they cannot outlive. The annuitant also benefits from ______ of the assets on deposit in the contract through the insurance company.
- Fixed Annuity
2. Professional Management
A disadvantage of a fixed annuity is that the fixed payout does not keep up with ______. As ______ rises, the purchasing power of the fixed payments is eroded.
Inflation
The annuitant’s objective with a(n) ______ is lifetime income that will likely keep up with inflation.
Variable Annuity
With a(n) ______ annuity, the investor must accept the risk that portfolios may decline if market conditions are unfavorable.
Variable
With a(n) ______ annuity contract, the payments made by the issuer to the annuitant vary in dollar amount in accordance with the performance of the ______.
- Variable
2. Separate Account
There is no guarantee with a(n) ______ annuity, and the ______ assumes all investment risks of the portfolio.
- Guarantee
2. Annuitant
Variable annuities and insurance products are investments that are subject to ______ communications rules.
FINRA
Because of the substantial early withdrawal fees, deferred loads and potential tax penalties, it cannot be implied that variables annuities and variable life insurance contracts are ______, ______ investments.
- Liquid
2. Short-Term
The Investment Company Act of 1940 defines the ______ as an account established and maintained by the insurance company in which income, gains, and losses are credited to or charged against the account without regard to other income, gains, or loses of the insurance company.
Separate Account
The ______ account and ______ account are completely independent of each other. Assets in the ______ account cannot be commingled with assets in the ______ account or assets in other mutual funds in the family.
- Separate
- General
- Separate
- General
The ______ in a variable contract is a “pool” of securities, much like a(n) _______. It must be registered under the ______, and its units must be sold with a(n) ______.
- Separate Account
- Mutual Fund
- Securities Act of 1933
- Prospectus
The separate account for a variable annuity must also be registered under the ______, unless the account is used to fund a(n) ______ annuity, in which case the account is exempt under the act.
- Investment Company Act of 1940
2. Tax-Qualified
Assets held in the separate account are managed by a(n) ______ or a(n) ______.
- Board of Managers
2. Board of Directors
The insurance company’s investment manager maintains a different ______ for the general account vs. the separate account.
Objective
The ______ is fundamentally invested in long-term debt instruments, with the primary objective of providing a(n) ______ to fund the guarantees made by the insurance company on its fixed insurance and annuity products.
- General Account
2. Stable Return
The investment policies of the separate accounts are detailed in the ______. Many of the separate accounts have a(n) ______-oriented objective and invest mainly in common stocks.
- Prospectus
2. Growth
There are several ______ within the separate account of a variable annuity. Each ______ is a separately managed account with its own investment policy, which are detailed in the prospectus.
- Subaccounts
2. Subaccount
One way that annuities are classified is by when their annuity payments begin: ______ and ______.
- Immediate
2. Deferred
A(n) ______ annuity can be funded only with a single lump sum payment because the contract begins making payments to the annuitant on the first interval after the deposit is received.
Immediate
With a(n) ______ annuity, payout to the annuitant begins ______ payment period after a lump sum deposit into the contract.
- Immediate
- One*, **
- one month after deposit if monthly payment
- one year after deposit if annual payment
A(n) ______ annuity is either purchased with a single, lump sum or is purchased through periodic payments. Payout is delayed until the contract is ______ at some point in the future. This period may be several years, often at retirement.
- Deferred
2. Annuitized
A deferred annuity purchased with a single, lump sum payment is known as a(n) ______.
Single Premium-Deferred Annuity
A deferred annuity purchased with period payments is known as a(n) ______.
Flexible Premium-Deferred Annuity
A deferred annuity has a(n) ______ that may apply if the owner decides to surrender the annuity prior to annuitization. If a deferred annuity is surrendered prior to owner’s age 59 1/2, ______ must be paid on the gain, in addition to a(n) ______ penalty on the taxable portion.
- Surrender Value
- Income Tax
- 10%
Most annuities are funded with ______ dollars, establishing the investor’s cost basis. However, the real benefit is that the contract value of annuities grows ______ and annuitants are not required to pay taxes on the amount above their ______ until the payout period begins or until the contract is surrendered for its accumulated ______.
- After-Tax
- Tax-Deferred
- Cost Basis
- Cash Value
The value of a variable annuity is expressed in ______, with the ______ values determined by the performance of the separate account.
Unit(s)
The value of the portfolio in the separate account is recalculated ______ at the close of the New York Stock Exchange.
Each Business Day
The ______ begins with the date on which the annuity contract becomes effective and continues until the payout period of begins.
Accumulation Period
The ______ is the accounting measure used to identify the contract owner’s interest in the separate account during the accumulation period.
Accumulation Unit
During the time that the owner is depositing money into the contract, the annuity’s valuation is expressed in a(n) ______ number of ______.
- Increasing
2. Accumulation Units
The value of each accumulation unit is directly related to the performance of the ______. As the value of the ______ increases or decreases, the value of each accumulation unit increases or decreases in proportion to the number of total units issued in the ______.
Separate Account
Accumulation units are purchased at the separate account’s ______, after deducting any sales charges or other fees. New accumulation units are purchasing using ______ in the same manner as mutual fund shares are acquired.
- Net Asset Value (NAV)
2. Forward Pricing
The ______ begins at the conclusion of the accumulation period.
Annuity Period
The accounting measure used in the determination of the payment amounts to an annuitant during the payout, or _____, is referred to as a(n) ______.
- Annuity Period
2. Annuity Unit
At at the beginning of the annuity period, the annuitant has two choices:
- Withdraw the value of all ______ in a lump sum.
- Purchase ______ with the ______ so that periodic payments can begin.
- Accumulation Units
- Annuity Units
- Accumulation Units
The exchange of accumulation units into annuity units is accomplished on the ______. The exchange rate is a combination of factors that consider the annuitant’s ______, ______, ______ selected, and the ______.
- Date of Annuitization
- Age
- Life Expectancy
- Settlement Option
- Assumed Interest Rate (AIR)
The following procedure converts accumulation units into annuity units:
- Calculate the annuitant’s interest in the ______ by multiplying the number of accumulation units by the current value per unit.
- Calculate the first ______ based on actuarial tables.
- Calculate the value of ______ based on the value of each annuity unit.
- Separate Account
- Monthly Payment*
- Future Payments**
*For example, if the annuity contract is worth $100,000 and the actuarial rate is $5 per $1,000 in the account, the first monthly payment is $500 (100 units x $5 per unit)
**For example, assume that each annuity unit is worth $2.50 at the time of the first monthly payment. In order for the annuitant to receive $500, 200 annuity units must be liquidated ($500 / $2.50 per annuity unit = 200 annuity units). At this time, the number of annuity units is fixed. Each future monthly payment will be the redemption value of 200 annuity units.
The investment portfolio of the variable annuity is assigned a(n) ______ as an assumption of a reasonable rate of return on the investments in the ______.
- Assumed Interest Rate (AIR)
2. Separate Account
The ______ is not guaranteed; it is merely a reference. The registered representative is prohibited from making a statement that can be interpreted by the client as a guarantee.
Assumed Interest Rate (AIR)
The ______ is part of the annuity contract and is used to calculate the amount of each annuity payment over time.
Assumed Interest Rate (AIR)
Even though the number of annuity units is established, the value of each unit will fluctuate in direct relation to the performance of the ______ and the ______. Future payments may be more, less, or the same as the preceding payment.
- Separate Account
2. Assumed Interest Rate (AIR)
A variable annuity performance rate is compared to ______ (%), but payment is compared to the ______’s amount ($).
- Assumed Interest Rate (AIR)
2. Previous Month
An insurance company assigns the AIR to the______ when the account is ______. Once the AIR is set, it will not change for the remainder of the contract.
- Separate Account
2. Annuitized
AIR is not determined until the contract is ______ and will not affect the ______ during the ______.
- Annuitized
- Accumulation Unit
- Accumulation Period
The selection of the annuity ______ is made at the beginning of the payout period and cannot be changed once payments have begun.
Settlement Option
______: Annuitants receive payments as long as they live. Upon the annuitant’s death, all payments end.
Straight-Life / Life Only / Life Income
The ______ settlement option gives annuitants the highest periodic payment but carries the most risk.
Straight-Life Annuity
______: With this settlement option, annuity payments will be made for a minimum period of time (usually 10 to 15 years). If the annuitant dies before the end of the ______, the beneficiary will continue to receive payments for the remaining years of the ______.
- Life Annuity with Period Certain
- Period
- Period Certain
______: With this settlement method, periodic payments are made to the annuitant for a specified number of years (usually 10 or 15). If the annuitant dies before the end of the period, the remaining payments due will be made in a lump sum or in installments to the named beneficiary. There is no life guarantee with this option.
Period Certain / Fixed Period
______: This option provides periodic payments during the annuitant’s lifetime. If the annuitant dies prior to receiving an amount equal to the value of the annuity units, the remaining portion will be paid in a lump sum or installments to the beneficiary.
Unit Refund Life Annuity
______: With this option, payments are made to 2 people. If one annuitant dies, payments continue to be made to the surviving annuitant. All payments cease when the remaining person dies.
Joint and Last Survivor Life Annuity
Contract owners of variable annuities have ______ with regarding to the separate account.
Voting Rights
______ are for election of members of the board, changes in investment policies of the separate account, and other issues as defined in the Investment Company Act of 1940. The ______ are similar to mutual funds, except the votes are based on the number of units instead of shares.
- Voting Privileges
2. Voting Rights
The annuity company guarantees that it will make payments as long as the annuitant lives through a(n) ______. The insurance company deducts a(n) ______ from the separate account to protect itself against an annuitant outliving their expected mortality.
- Mortality Guarantee
2. Mortality Expense Risk Fee
Annuity companies are required to project their administrative expenses for annuity contracts. The ______ establishes the maximum they can charge for the contract. The annuity company is responsible for any increase in expenses beyond the amount guaranteed in the contract.
Expense Guarantee