Unit 9 Annuities

Question 1

An annuity contract has two phases or periods. The “____” phase is called the accumulation period when principal and periodic deposits grow with credited interest. The “____” os distribution phase is called the annuitization period. Now the contract generates an income stream from its accumulated value.

Can an annuity be used for both phases at the same time?

Answer 1

Pay-In

Pay-Out

No, once the contract is annuitized, no more contributions can be made.

Question 2

The ____ period is when an annuity is being funded, before a payout begins. Life insurance companies issue these contracts and the money paid into the annuity is called the ____. ____ is credited on the accumulated value in the contract and the accumulated contract value grows beyond the contract owner’s deposits.

Answer 2

Accumulation Period

Premiums

Interest

Question 3

During the accumulation period, can the owner take withdrawals?

Can they make other changes to the contract or surrender for cash value?

Answer 3

Yes

Yes

Question 4

The ____ is the “Pay-Out” phase of the contract. Money in the contract is converted into a series of regular income payments that can continue for life or for a stated period of time. When this period starts, the accumulated value ____ to the annuity owner.

Answer 4

Annuitization Period

No longer belongs

Question 5

Can additional premiums be made and withdrawals taken during the annuitization period?

Answer 5

No

Question 6

Can the annuity be surrendered or the contract changed during the annuitization period?

Answer 6

No

Question 7

Name the 4 parties involved in an annuity contract:

Answer 7

1. Contract owner
2. Annuitant
3. Beneficiary
4. Insurer

Question 8

The ____ is the person or the couple who buys the annuity and has certain rights. They have the right to:

1. Name or change the annuitant
2. Name or change the beneficiary
3. Choose the payout option
4. Add more money/take withdrawals
5. Surrender or terminate the agreement

Answer 8

Contract Owner

Question 9

The ____ is similar to the insured in a life insurance policy. They are chosen by the owner to receive the income payments during the annuitization period. This person’s life expectancy is used to determine the amount of the guaranteed payments. This person must be an individual - a natural person - and cannot be a ____ or a ____.

Does this person have the power to make withdrawals, deposits, change the agreement, or terminate the contract?

Do they have to sign the annuity contract?

The contract owner and the ____ are frequently the same person.

Answer 9

Annuitant (insured)

Corporation or a Trust

No

Yes

Annuitant

Question 10

The ____ has no voice in the control or management of the annuity and only benefits upon the death of the contract owner. They can be a natural person or an entity like a trust or corporation.

Answer 10

Beneficiary

Question 11

The ____ is the party that issues the annuity contract. Representing the ____ may be a local bank, a financial planner, a brokerage firm, or an agent/producer.

Answer 11

Insurer

Question 12

True or false: Annuities provide tax-deferred savings for retirment.

Answer 12

True

Question 13

Annuities are often called ____ insurance.

Answer 13

Upside Down Insurance

Question 14

Annuities - Do you have to pay taxes on the interest?

Answer 14

Yes

Question 15

An ____ annuity is structured to provide current income and a ____ contract’s payout is a specific date in the future.

Answer 15

Immediate Annuity

Deferred Contract’s

Question 16

After paying a lump-sum premium, an immediate annuity or ____(SPIA) provides an individual with an income that may begin as soon as 1 MONTH after purchase or may be delayed up to ____. The funds in the contract accumulate on a tax-deferred basis. When payments begin, the portion of each payment that is attributed to interest is subject to taxes; the rest is treated on return of principal and, therefor, is tax free.

Answer 16

Singel premium Immediate Annuity (SPIA)

One Year

Question 17

Deferred annuities do not start an income stream immediately. With deferred annuities, the annuity owner chooses the premium amount and the frequency of premium payments. Accumulated funds may be withdrawn at any time, subject to a possible surrender charge. Lastly, the deferred annuity owner is NOT required to ____ the contract.

Answer 17

Annuitize

Question 18

Deferred annuities can be purchased with a single premium deferred annuity (SPDA). Contract owners have two choices for ongoing payments
1. ____
2. ____

Answer 18

1. Periodic Premium Deferred Annuities
2. Flexible Premium Deferred Annuities

Question 19

Withdrawal Penalties and Surrender Charges: A withdrawal from an annuity is taxed differently than annuitized payments. When a withdrawal is taken from an annuity, the earnings, or the growth portion, is taxed as ____ income. Funds continue to be taxed at ordinary tax rates until the account value is reduced to the original investment amount.

If a withdrawal is made prior to age ____, there is an additional ____% penalty on taxable earnings.

Answer 19

Ordinary Income

59.5

10%

Question 20

In order for the annuitant to avoid additional fees from the insurance company for early withdrawal, there is a waiting period called the surrender period. These periods may be as short as ____ years up to 12 or more years. If funds are withdrawn during that time, a surrender charge may apply. Surrender charges are stated in the contract and commonly start at ____%, declining each year.

Answer 20

2 Years

10%

Question 21

The deferred annuity death benefit does not provide a surviving family with a life insurance policy. Rather, the accumulated contract value is paid to a selected beneficiary if the annuity owner dies during the accumulation period. The amount paid as a death benefit is the greater of:
1. ____
2. ____

Answer 21

1. The accumulated value of the annuity
2. The total premiums paid to that point minus any withdrawals

Question 22

Annuity payout options are similar to life insurance settlement options. They fall into two categories:

1. ____ annuities, which have a payment that is guaranteed to last for at least a long as the annuitant lives
2. ____ annuities, which do not

Answer 22

1. Life annuities
2. Temporary annuities

Question 23

Under the ____ option, sometimes called a pure life income, payments stop when the annuitant dies, regardless of when that occurs; one month or 20 years.

The advantage of this option is that it pays the ____ monthly income amount because there are no other contingencies and only the annuitant’s life expectancy was considered to determine the amount of the monthly payout.

This nnuity option is also referred to as:
1. ____ life
2. ____ life
3. life - ____

Answer 23

Life Only Option

Highest

1. Straight life
2. Pure Life
3. Life - No Refund

Question 24

Under the ____ option, if the annuitant dies and the total payments received are less than the amount paid for the annuity, the difference is paid to the beneficiary. The money must be paid either as:
1. A lump sum, called a ____; or
1. A continuation of payments in the same amount as was being paid to the annuitant, called an ____

Answer 24

Life with Refund

1. Cash Refund
2. Installment Refund

Question 25

The ____ otpion also pays an income for as long as the annuitant is alive. in addition, the annuitant selects a payment period, typically 5, 10, or 20 years, and payments are guaranteed to be made for at least that number of years. If the annuitant dies before the end of the selceted period, payments continue to the beneficiary for the rest of the period certain. No payments are made to the beneficiary if the annuitants live past the period certain.

Answer 25

Life with Period Certain

Question 26

With the ____ option, the insurer promises to make payments until the last survivor of two annuitants dies. For example, if the two annuitants were a married couple and the husband died first, payments would continue to the spouse for the rest of her life. Payout is the same or reduced for the survivor - this is decided by the owner.

Answer 26

Joint-Life-and-Survivor Option

Question 27

The ____ annuity option pays income until the death of the first of two or more annuitants. While the monthly payment is greater than other joint annuities, it is not considered suitable as a joint annuity because the survivor is left without an income. Payments stop when first of two annuitants dies.

Answer 27

Joint Life Option

Question 28

Factors Affecting Payment Amount: (4)

Answer 28

1. Annuitant's age 2. Annuitant's gender 3. Length of payment guarantee 4. Assumed interest rate

Question 29

What are the 4 basic types of annuities?

Answer 29

1. Fixed 2. Variable 3. Equity-indexed 4. Market Value Adjusted

Question 30

____ annuity values are guaranteed against loss. Aside from surrender charges that may apply, the value of a fixed annuity will never be less than the amount paid into the contract.

Answer 30

Fixed Annuity

Question 31

Fixed annuities are supported by the insurer's ____; the investment risk is borne by the insurer. The assets in the ____ are conservatively invested typically in debt securities and other fixed-rate investments that provide a steady return for many years.

Answer 31

General Account General Account

Question 32

During a ____ annuity's accumulation period, accumulated values earn a current rate of interest that is competitive with prevailing rates on other interest-bearing investments. The current rate is generally declared at the beginning of the year and guaranteed for the year.

Answer 32

Fixed

Question 33

During the ____ period, fixed annuities provide a level payment amount. Annuitants can count on getting a specified dollar amount of income on a regular basis.

Answer 33

Annuity Period

Question 34

____ annuities have the potential to keep pace with inflation because they are supported by investments (stocks and bonds). Historically stocks have tended to rise faster than the cost of living; however, there is no guarantee that they will always do so. These annuities have investment risk because values are not guaranteed against loss.

Answer 34

Variable Annuities

Question 35

The assets that support variable annuities are kept in a SEPARATE ACCOUNT where the investment risk is borne by the annuity owner. The owner makes the various investment choices called ____, which resemble mutual funds.

Answer 35

Sub-Accounts

Question 36

The accumulated values of variable annuities are expressed as ____ units, similar to shares purchased in a mutual fund. The value of an ____ unit is found by dividing the total value of the separate account by the number of existing ____ units.

Answer 36

Accumulation Units

Question 37

When the annuity period begins, the accumulation units are converted to ____ units. From that point on, the number of these units stays the same throughout the annuity period; however, the value of this unit varies with the value of the investments in the separate account. If the value of the separate account goes up, the amount of the annuity payment increases and vice versa.

Answer 37

Annuity Units

Question 38

Variable annuities are regulated as insurance products and are also regulated as securities. This is called ____. To sell variable annuities, a producer must have a life insurance license, a ____ certification (in certain states), and both a federal and state ____. Insurers must register their separate accounts with the ____ and comply with certain requirements for selling securities. An important provision requires producers to provide customers with a ____ - a document containing a detailed description of the product being offered - before beginning a sales presentation.

Answer 38

Dual Regulation Special Variable Annuities Certification Securities Registration Securities and Exchange Commission (SEC) Prospectus

Question 39

____(EIAs) is a type of tax-deferred annuity whose credited interest is linked to an equity index - typically the S&P 500. It guarantees a minimum interest rate, typically between ____% and ____%, if held to the end of the surrender term and protects against a loss of principal. EIA returns may be higher than fixed annuities, however, they will not be as high as ____ annuities. EIAs are a form of fixed annuities and, therefore, the guarantees in the contract are backed by the insurer's ____ account (not a separate account).

Answer 39

Equity-Indexed Annuities 1% and 3% Variable Annuities General Account

Question 40

Market Value Adjusted Annuities: A fixed annuity with a market value adjustment feature, also referred to as a ____, offers the flexibility of various guarantee terms combined with the potential for higher interest rates than traditional fixed investments. The guarantee terms range from shorter term to longer term and typically credit higher interest rates for longer term commitments. A guaranteed fixed rate is declared for the length of each guarantee term.

Answer 40

Modified Guaranteed Annuity

Question 41

Market Value Adjusted Annuities: The guaranteed rate is valid only if the investment is held ____. Investments may be split amongst several guarantee terms to match various time horizons when funds may need to be accessed. Withdrawals made before maturity of the guarantee term may be subject to a contingent deferred sales charge (CDSC) and/or a ____ (MVA). Typically, the length of the CDSC schedule matches the duration of the guarantee term.

Answer 41

Until Maturity Market Value Adjustment (MVA)

Question 42

Flexible premium annuities are designed to be used for funding ____; a tax-favored retirement savings plan set up through a bank, securities firm, or insurance company.

Answer 42

Individual Retirement Accounts

Question 43

Annuities can be used for both individual and group applications. Employer-sponsored retirement plans may be funded with ____. The retirement plan owns the group annuity, and the retirement plan document describes the benefits to which employees are entitled.

Answer 43

Group Annuities