Questions and Answers
How are annuities given favorable tax treatment?
Which of these will have the highest monthly payout upon annuitization?
Which settlement option pays out a stated amount to an annuitant, but no residual value to a beneficiary?
Maria would like an annuity that provides a guaranteed accumulation or payout. This type of annuity she is seeking is called:
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Fixed annuities provide each of the following except:
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What is the nonforfeiture value of an annuity before annuitization?
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Simon has purchased a fixed annuity. His payment amount will be dependent upon principal, interest, and the contract's:
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When does an immediate annuity begin making payments?
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Which of the following annuity payout options makes no additional payments regardless of when the annuitant dies?
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Which of the following is an annuity that is linked to a market-related index?
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Which of these statements regarding the annuitant is correct?
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Which type of annuity stops all payments upon the death of the annuitant?
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An immediate annuity has been purchased with a single premium. When does the annuitant typically begin receiving payments?
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Who assumes the investment risk with a fixed annuity contract?
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Which of the following is considered to be the period when the accumulated value in an annuity is paid out?
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Study Notes
Annuities Overview
- Annuities are financial products designed to provide a stream of income, typically used for retirement funding.
- Tax treatment of annuities benefits the policyholder, where gains are taxed at distribution rather than during the accumulation phase.
Types of Annuities
- Straight Life Annuity: Offers the highest monthly payout option upon annuitization, providing income for the lifetime of the annuitant only.
- Annuity Certain: Guarantees specific accumulation or payout amounts and does not depend on the life of the annuitant.
Payment Structures
- Life Income: Provides payments to the annuitant for life, but no remaining value is passed to beneficiaries after death.
- Life Only Option: Makes no additional payments after the annuitant's death, providing payments only while the annuitant is alive.
- Immediate Annuity: Begins payments after the first premium has been paid, typically starting within one month.
Fixed Annuities Characteristics
- Guaranteed Interest: Fixed annuities ensure a predetermined interest rate is applied to the invested funds.
- Nonforfeiture Value: Calculated as total premiums paid plus interest, minus any withdrawals and surrender charges, providing value if the annuity is surrendered.
- Investment Risk: The insurer assumes all investment risk associated with fixed annuity contracts.
Payment Options and Risk
- Settlements: Various payout options exist including fixed period, installment refund, and cash refund, each having different implications for beneficiaries.
- Equity Indexed Annuity: Linked to a market-related index, allowing for potential growth tied to market performance.
Key Terms
- Annuitization Phase: The period when the accumulated value in an annuity is converted into periodic payments to the annuitant.
- Accumulation Phase: The initial period where funds are contributed to the annuity and grow until payouts begin.
Annuity Assignments and Rights
- The annuitant's life expectancy significantly influences the calculation of annuity payments, as longer life expectancy results in lower payment amounts per period.
- Only the annuitant has the authority to surrender the contract, emphasizing their rights and ownership.
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Description
Test your knowledge on annuities with these flashcards. The quiz covers topics such as tax treatment of gains and types of annuitization. Enhance your understanding and retention of key concepts in financial planning.
