Questions and Answers
What term describes the amount based on principal, interest, and the contract's surrender charge?
income period
How do interest earnings accumulate in a deferred annuity?
Under a non-qualified annuity, when is interest taxed?
exclusion ratio has been calculated
Who assumes the investment risk with a fixed annuity contract?
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Which settlement option pays a stated amount to an annuitant, but no residual value to a beneficiary?
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Which type of annuity stops all payments upon the death of the annuitant?
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What determines the annuity payments for the annuitant?
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Fixed period settlement options are considered to be a form of what?
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What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made?
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Which of these is NOT a purpose of an annuity?
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What is considered a disadvantage of owning a fixed annuity?
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An annuity is primarily used to provide what?
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If the annuitant dies before the annuity start date, what will be given to the beneficiary?
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What happens to interest earned if the annuitant dies before the payout start date?
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Kathy's annuity is currently experiencing tax-deferred growth. What phase is this annuity in?
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Which market index is normally associated with an indexed annuity's rate of return?
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When does the annuitant typically begin receiving benefit payments if the annuity was purchased with a single premium?
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Study Notes
Annuities Overview
- Annuities are financial products primarily used to provide retirement income.
- They can be classified into fixed immediate and deferred annuities, with differing payment structures and tax implications.
Fixed Immediate Annuity
- Payments depend on principal, interest, and the contract's surrender charge.
- Income period is defined by the duration over which payments are made.
Deferred Annuity
- Interest earnings accumulate on a tax-deferred basis until distributions are taken.
- Taxes are assessed upon distribution rather than at the time of contribution.
Non-Qualified Annuities
- Interest is taxed after the exclusion ratio is calculated, which determines taxable and non-taxable portions of payments.
Investment Risk in Fixed Annuities
- The insurer assumes all investment risk, guaranteeing the annuitant a minimum return regardless of underlying asset performance.
Settlement Options
- Life Income: Pays a stated amount to the annuitant without residual value for beneficiaries.
- Life Annuity: Stops all payments upon the death of the annuitant.
- Refund annuities return the difference between total payments made and the amount invested after the annuitant's death.
Annuity Characteristics
- Annuity payments are based on the annuitant's life expectancy.
- Fixed period settlement options are classified as an annuity.
Estate Considerations
- Annuities are primarily intended for liquidation of an estate rather than creation.
Disadvantages of Fixed Annuities
- During inflation, purchasing power of fixed payments declines due to unchanged payment amounts.
Beneficiary Provisions
- If the annuitant dies before the start date, beneficiaries receive premiums paid plus interest earned, ensuring a financial benefit.
Tax Implications
- Interest earned prior to the payout start date is taxable, regardless of beneficiary designation.
Phases of Annuity
- In the accumulation period, annuities grow tax-deferred until the annuitant retires.
Indexed Annuities
- Rate of return is typically linked to market indices such as the S & P 500.
Immediate Annuity Payments
- Benefit payments from an immediate annuity purchased with a single premium typically begin within one month.
Additional Notes
- It's crucial for annuitants to understand payment structures, tax implications, and risks associated with different types of annuities to make informed decisions.
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Description
This quiz focuses on key concepts related to annuities, including fixed immediate annuities and interest accumulation in deferred annuities. It serves as a valuable resource for those studying financial products and their characteristics. Challenge your understanding and retention of annuity terms and definitions.
