Annuities Flashcards

Questions and Answers

What annuity payout option provides for lifetime payments to the annuitant but guarantees a certain minimum term of payments, whether or not the annuitant is living?

Straight life income

Installment refund option

Life with period certain (correct)

Joint and survivor

Considering the two contracts, Darlene would receive death benefits totaling?

$25,000 (correct)

$30,800

$15,000

$40,000

When a cash value life insurance policy is converted into an annuity in a nontaxable transaction, that event is generally known as?

A 1035 exchange (correct)

A modified endowment

A rollover

A pension enhancement

What annuity payout option did Albert select if the insurance company agrees to pay the difference to Albert's daughter if he dies before the annuity has paid back as much as he put into it?

A cash refund Signup and view all the answers

Which of the following statements regarding equity index contract factors is most CORRECT?

Cash values of equity index contracts typically grow at a minimum interest rate Signup and view all the answers

The interest credited to an equity indexed annuity is tied to increases in?

A specific equity or stock index Signup and view all the answers

Which of the following is a fair comparison between life insurance and annuities?

Both life insurance and annuities use mortality tables Signup and view all the answers

In a cash refund option, if the annuitant dies before the annuity fund is depleted, where does the balance go?

Beneficiary Signup and view all the answers

Which one of the following is not characteristic of an annuity?

Annuities are concerned with how soon one will die Signup and view all the answers

The purpose of the exclusion ratio is to?

Allocate principal and interest, so to properly determine taxable and non-taxable amounts that are paid to annuitants Signup and view all the answers

Logan accumulated $60,000 in his annuity. He is receiving $600/month, each unit is worth $3. How many units does he receive each month?

200 units Signup and view all the answers

Premium paid for a variable annuity less expenses equal which of the following?

Accumulation units Signup and view all the answers

An immediate annuity contract provides for?

Liquidation of a principal sum Signup and view all the answers

An insured bought an annuity for $80,000. The insured died after receiving only $50,000. The balance is paid in a lump sum to the insured's beneficiary. This is known as the?

Cash Refund option Signup and view all the answers

Classification of Variable Annuities includes?

Immediate and deferred Signup and view all the answers

During the payout period of an annuity, the interest portion of the payment is?

Taxed as ordinary income Signup and view all the answers

The dollar value of an annuity unit is based on?

The total number of annuity units in circulation Signup and view all the answers

The monthly amount of benefit an annuitant receives is based on all of the following factors EXCEPT the?

Exclusion ratio applied Signup and view all the answers

Variable annuity sales are subject to which of the following regulations?

SEC and state regulation Signup and view all the answers

Which forms of payment can be used to purchase an annuity?

Single payment or a series of payments Signup and view all the answers

All of the following statements regarding annuities are correct EXCEPT?

Generally, annuity contracts issued today require fixed, level funding payments Signup and view all the answers

Joanna and her husband, Tom, have a $40,000 annuity that pays them $200 a month. When Joanna dies, the annuity payments cease. This is an example of?

A joint and full survivor annuity Signup and view all the answers

In a straight life income option, if the annuitant dies before the annuity fund is depleted, where does the balance go?

Insurer Signup and view all the answers

All of the following under a 1035 Exchange are allowable EXCEPT?

Fixed annuity exchanged for a whole life policy Signup and view all the answers

Variable annuity payouts are adjusted based upon which of the following?

Annuity units Signup and view all the answers

The benefit paying period of an annuity is called?

The annuity period Signup and view all the answers

All of the following are true of an accumulation period of an annuity EXCEPT?

It does not occur in a deferred annuity Signup and view all the answers

Which of the following statements regarding annuity payout options is NOT correct?

In a cash refund annuity, the annuitant's beneficiary always receives an amount equal to the beginning annuity fund plus all interest Signup and view all the answers

What period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate regular benefit payments?

Annuity period Signup and view all the answers

Study Notes

Annuities Overview

Annuity payout options include several types, such as "life with period certain," guaranteeing payments for a set time regardless of the annuitant's lifespan.
A straight life annuity provides lifetime income but ceases payments upon the annuitant's death, with no benefits extending to beneficiaries.

Death Benefits and Annuities

Upon annuitant's death, a beneficiary typically receives the full face value of associated life insurance policies.
The cash refund option ensures beneficiaries receive a lump-sum payment if the annuitant dies before receiving the equivalent of their initial investment.

1035 Exchange and Tax Regulations

A 1035 Exchange allows tax-free transfers between annuity contracts or between life insurance and annuity contracts (with specific restrictions).
Interest earned during the payout period of an annuity is taxed as ordinary income, impacting the total net payment received.

Annuity Units and Payments

Variable annuities come in immediate and deferred forms and are influenced by accumulation units and annuity units, determining monthly payments based on investment performance.
The dollar value of an annuity unit is calculated based on the total number of units, providing a method to measure periodic benefit levels.

Characteristics and Payout Options

Annuities help manage financial risk, particularly the risk of outliving one’s retirement savings, and involve life insurance principles such as mortality tables for calculations.
Key payout options include:
- Joint and full survivor annuity: Payments continue for the surviving spouse.
- Cash refund option: Provides remaining balance to beneficiaries if the annuitant passes before full investment is returned.

Regulations and Purchase Methods

Variable annuity sales are subject to dual regulation by the SEC and state insurance regulations, ensuring compliance with financial standards.
Annuities can be funded through a single lump-sum payment or a series of payments, providing flexibility in investment.

Accumulation and Annuity Periods

The accumulation period refers to the time during which investment payments grow and accumulate interest, while the annuity period denotes when payments begin post-accumulation.
During the accumulation period, contributions are made by the contract holder and earn tax-deferred interest until the payout phase begins.

Misconceptions about Annuities

Not all annuity contracts require fixed, level funding payments; they can also accommodate flexible premium payments.
A cash refund option ensures the beneficiary receives the remaining balance of the initial investment, not necessarily the full investment plus interest.

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Description

Test your knowledge of annuity payout options with these flashcards. Learn the differences between various types of annuities, including life with period certain and installment refund. Perfect for students and professionals looking to enhance their understanding of financial products.