Annuity Overview and Principles
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Questions and Answers

Which factor is NOT considered in evaluating a consumer's suitability for an annuity?

  • Marital status (correct)
  • Income
  • Risk tolerance
  • Age

What is the primary characteristic of a Single Premium Immediate Annuity (SPIA)?

  • It begins paying out income within one year of purchase. (correct)
  • It requires multiple premium payments over time.
  • It grows tax-deferred during the accumulation phase.
  • It has higher payments for younger annuitants.

How does the age of the annuitant affect income payments from a Single Premium Immediate Annuity?

  • Older annuitants receive smaller income installments.
  • Younger annuitants typically have larger monthly payouts.
  • Older annuitants receive larger income installments. (correct)
  • The age does not affect the amount of income payments.

What defines a Deferred Annuity?

<p>Income payments start after one year from the date of purchase. (A)</p> Signup and view all the answers

What happens if a deferred annuity is surrendered before age 59½?

<p>Income tax must be paid on the gain along with a 10% penalty. (D)</p> Signup and view all the answers

What distinguishes a Flexible Premium Deferred Annuity (FPDA) from a Single Premium Deferred Annuity (SPDA)?

<p>FPDA allows payments that vary from year to year. (B)</p> Signup and view all the answers

Which description best characterizes the growth of a Deferred Annuity?

<p>It grows tax deferred until income payments begin. (C)</p> Signup and view all the answers

Which of the following factors does NOT influence the amount of annuity income payments?

<p>Owner's employment status (A)</p> Signup and view all the answers

What is a characteristic of a Lump-sum settlement option at annuitization?

<p>All interest accumulated is taxable. (A)</p> Signup and view all the answers

Which annuity option guarantees the highest monthly payment regardless of the annuitant's life span?

<p>Life Only (A)</p> Signup and view all the answers

What happens to the payments in a Joint Life annuity after the first annuitant dies?

<p>Payments cease for all annuitants. (C)</p> Signup and view all the answers

Which annuity option provides a refund to a beneficiary if the annuitant dies before receiving the full benefit?

<p>Refund Life Annuity (A)</p> Signup and view all the answers

What does the Guaranteed Interest rate typically represent in an annuity?

<p>The minimum percentage the company must pay. (D)</p> Signup and view all the answers

What is the primary advantage of an indexed annuity compared to a fixed annuity?

<p>Tied to a familiar index like the Standard and Poor's 500 (D)</p> Signup and view all the answers

How does an insurance company typically handle the initial returns from an indexed annuity?

<p>The company keeps the first percentage of returns and credits the rest (D)</p> Signup and view all the answers

What is a defining characteristic of variable annuities?

<p>They are subject to SEC regulations (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of variable annuities?

<p>Payments are invested in the insurer's general account (A)</p> Signup and view all the answers

What happens to accumulation units upon annuitization in a variable annuity?

<p>They are converted to annuity units (C)</p> Signup and view all the answers

Which best describes how variable annuities provide a hedge against inflation?

<p>They offer investment returns that can increase based on market performance (C)</p> Signup and view all the answers

What additional requirement must an agent meet to sell variable annuities beyond a life insurance license?

<p>Obtain a securities license (C)</p> Signup and view all the answers

What type of units represent ownership interest in the separate account of a variable annuity?

<p>Accumulation units (D)</p> Signup and view all the answers

Which statement accurately describes a fixed annuity?

<p>It has a guaranteed interest rate set by the insurer. (D)</p> Signup and view all the answers

What characterizes a variable annuity?

<p>It invests in equities and has no guaranteed returns. (A)</p> Signup and view all the answers

What is a feature of the pure life annuity option?

<p>It provides the highest monthly benefits but no guarantee of total payout. (C)</p> Signup and view all the answers

Which option is true regarding the life with period certain payout option?

<p>It is similar to pure life but includes a guaranteed term for beneficiaries. (A)</p> Signup and view all the answers

What happens under the cash refund option of refund life annuities?

<p>The total principal is paid out to the beneficiary in a lump sum upon the annuitant's death. (D)</p> Signup and view all the answers

Which of the following statements is true about installment refund annuities?

<p>They provide guaranteed payments until the full principal amount is exhausted. (B)</p> Signup and view all the answers

Which is the correct relationship between life insurance and annuities?

<p>Annuities require life insurance plus securities licensing. (C)</p> Signup and view all the answers

What distinguishes guaranteed payments in a fixed annuity from those in a variable annuity?

<p>Fixed annuities ensure monthly payments while variable annuities do not. (C)</p> Signup and view all the answers

What does the cash refund option guarantee upon the death of the annuitant?

<p>A lump-sum refund of the principal paid into the annuity (B)</p> Signup and view all the answers

Which of the following describes a joint life annuity?

<p>Payments stop after the first death among the annuitants (D)</p> Signup and view all the answers

What distinguishes a joint and survivor annuity from a joint life annuity?

<p>It guarantees lifetime payments to survivors (D)</p> Signup and view all the answers

With fixed-period installments in annuities certain, what does the insurer determine?

<p>The amount of payment based on account value and projections (D)</p> Signup and view all the answers

Which of the following best describes single life annuities?

<p>Payments are made based on a single life and may be a lump sum (C)</p> Signup and view all the answers

What payment structure is most commonly associated with the joint and survivor option?

<p>Payments are reduced after the first recipient dies (A)</p> Signup and view all the answers

What is a key difference between cash refund and installment refund options?

<p>Cash refund pays out the principal as one lump sum (B)</p> Signup and view all the answers

Which statement is true regarding annuities certain?

<p>They limit payments to a certain fixed period or amount (B)</p> Signup and view all the answers

What is the primary purpose of an annuity?

<p>To provide income for retirement (C)</p> Signup and view all the answers

How does a fixed-amount installment option work?

<p>It pays a specific amount until funds are depleted (D)</p> Signup and view all the answers

What benefits does a Guaranteed Minimum Withdrawal Benefit (GMWB) option offer?

<p>Guarantees withdrawal of the maximum percentage until the initial investment is recovered (A)</p> Signup and view all the answers

In what scenario might someone choose to purchase a single premium immediate annuity?

<p>After receiving a lump-sum payment from an inheritance or lawsuit (A)</p> Signup and view all the answers

Which of the following is NOT a common use of annuities?

<p>Settling personal debts (A)</p> Signup and view all the answers

Annuities must meet certain criteria to be classified as qualified retirement plans. What is one of those criteria?

<p>They must follow IRS guidelines for tax treatment (D)</p> Signup and view all the answers

How are annuities generally viewed as financial vehicles for retirement?

<p>They provide a predictable income stream (D)</p> Signup and view all the answers

What characteristic distinguishes fixed-period options from other types of annuities?

<p>They pay for a specific time regardless of the annuitant's status (A)</p> Signup and view all the answers

Flashcards

Single Premium Immediate Annuity (SPIA)

A type of annuity purchased with a lump sum payment, providing income payments starting within one year.

Deferred Annuity

Annuity where income payments begin after a set period (e.g., age 65, 10 years).

Single Premium Deferred Annuity (SPDA)

A deferred annuity purchased with a single upfront payment.

Flexible Premium Deferred Annuity (FPDA)

A deferred annuity bought with regular payments, potentially varying each time.

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Consumer Suitability

A producer's responsibility to evaluate a consumer's suitability for an annuity, considering age, income, and other factors.

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Annuity Income Factors

Factors influencing annuity income, such as premium amount, payment frequency, interest rate, annuitant's age and gender.

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Tax-Deferred Growth

The growth of funds in a deferred annuity is not taxed until later payment occurs.

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Premature Surrender Penalty

A penalty for surrendering a deferred annuity prior to the age of 59 ½.

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Fixed Annuity

An annuity where the interest rate and payments are guaranteed for the life of the contract, offering stability and predictable income.

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Variable Annuity

An annuity with payments linked to the performance of underlying investments in a separate account, offering potential for higher returns but carrying investment risk.

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Pure Life Annuity

A life contingency option where payments continue for the lifetime of the annuitant, but stop upon death, offering the highest monthly benefit.

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Life with Guaranteed Minimum Annuity

A life contingency option where payments continue for life and any remaining principal is paid out to the beneficiary, offering a guaranteed minimum payout.

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Life with Period Certain Annuity

A life contingency option where payments are guaranteed for the annuitant's lifetime, and for a predetermined period of time for the beneficiary.

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Installment Refund Annuity

A type of refund life annuity where guaranteed installments continue to the beneficiary until the full principal amount is paid out after the annuitant's death.

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What are the differences between Fixed and Variable Annuities?

Fixed annuities provide guaranteed interest rates and payments, while variable annuities offer potential for higher returns based on investment performance in a separate account.

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Why might someone choose a Pure Life Annuity over a Life with Guaranteed Minimum?

Individuals who prioritize maximizing monthly income may choose a Pure Life Annuity, accepting the risk of not receiving the full principal amount if they die early. Those seeking guaranteed minimum payouts might prefer the Life with Guaranteed Minimum option.

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Indexed Annuity

An annuity that offers a guaranteed minimum interest rate and ties its return to a specific index, like the S&P 500. It aims to offer potential growth with less risk than variable annuities.

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Indexed Annuity: Interest Rate Crediting

The insurance company keeps a portion of the initial returns earned on the index, with the remaining excess credited to the annuitant's account. For example, if the index earns 12%, the company may keep 4% and credit the client with 8%.

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Variable Annuity: Separate Account

Unlike fixed annuities, the payments you make into a variable annuity go into a 'separate account,' which is not part of the insurance company's general investments and has fewer restrictions.

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Variable Annuity: No Guaranteed Interest

With a variable annuity, the insurance company does not guarantee any minimum interest rate. Your return is tied to the performance of the investments in the separate account.

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Variable Annuity: Regulation

Variable annuities are classified as securities and are regulated by both the Securities and Exchange Commission (SEC) and state insurance regulators. Agents selling them need both securities and life insurance licenses.

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Variable Annuity: Accumulation Units

Your premium payments in a variable annuity purchase accumulation units in the fund, similar to buying shares in a mutual fund. Accumulation units represent ownership interest in the separate account.

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Variable Annuity: Annuity Units

Upon annuitization, your accumulation units are converted into annuity units. The income you receive is based on the value of these annuity units, which fluctuate.

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Cash Refund Annuity

An annuity where the beneficiary receives a lump-sum payment of the original principal minus any benefit payments already made to the annuitant upon the annuitant's death.

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Single Life Annuity

An annuity that provides payments based on the life expectancy of one person.

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Multiple Life Annuity

An annuity that covers two or more lives, with payments continuing until the last person covered dies.

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Joint Life Annuity

A multiple life annuity where payments are made to two or more people until the first person dies, then payments stop.

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Joint and Survivor Annuity

A multiple life annuity that guarantees payments to the surviving recipient(s), usually with a reduced payment after the first recipient dies.

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Fixed Period Annuity

An annuity that provides payments for a fixed period of time, regardless of the annuitant's lifespan.

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Annuity Certain

A short-term annuity with a fixed period of benefits, ending when the fixed period or the fixed amount liquidated is reached.

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Fixed-Period Option

An annuity that pays for a specific time period, regardless of the annuitant's lifespan.

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Fixed-Amount Option

The annuitant determines the payment amount, and the insurer calculates the payment duration based on the account's value and future earnings.

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Annuity's Main Use

The primary purpose of an annuity is to provide income during retirement.

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Lump-Sum Settlements

Annuities can efficiently handle large sums of money received from inheritances, lottery winnings, legal settlements, business sales, or pension distributions.

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Retirement Annuities & Tax Benefits

Annuities used for retirement often meet IRS standards to receive favorable tax treatment.

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Guaranteed Minimum Withdrawal Benefit (GMWB)

A feature in some retirement annuities that allows the annuitant to withdraw a predetermined maximum percentage of their investment annually to recover their initial contribution.

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Annuities for Education Funds

Annuities can be used to save tax-deferred funds for college expenses.

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Assessing Annuity Suitability

Agents must evaluate whether a recommended annuity product aligns with the applicant's financial needs and resources.

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Life Only Annuity

Provides guaranteed income for life, but payments stop at death. Any remaining funds belong to the insurance company.

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Refund Life Annuity

Ensures a lifetime income for the annuitant, with a beneficiary receiving any remaining balance upon their death. The refund can be as installments or a lump sum.

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Study Notes

Annuity Overview

  • Annuities are contracts providing income for a specific period or for life.
  • They protect against outliving money and are a way of accumulating and liquidating an estate.
  • Annuities are sold by insurance companies and their agents.
  • They are not life insurance.

Key Terms

  • Deferred: Withheld or postponed until a future time or event.
  • IRS: Internal Revenue Service; US government agency collecting taxes.
  • Life contingency: Dependent on whether the insured is alive.
  • Liquidation of an estate: Converting assets to cash.
  • Natural person: A human being.
  • Qualified plan: Retirement plan matching IRS guidelines.
  • Suitability: Assessment of an insurance product's appropriateness.

Annuity Principles and Concepts

  • Annuities provide income for a specified period or for life.
  • Annuities protect against outliving money.
  • Annuities are offered by life insurance companies.
  • Agents who sell annuities are licensed.
  • Annuities don't pay face value upon death (opposite of life insurance).

Parties to an Annuity

  • Owner: Purchaser of the annuity contract, who has rights to the policy.
  • Annuitant: Receives the payments from the annuity; must be a natural person.
  • Beneficiary: Receives the annuity assets if the annuitant dies.

Accumulation Period vs. Annuity Period

  • Accumulation period (pay-in period): Time when the owner pays into the annuity.
  • Annuity period (pay-out period): Conversion of accumulated funds to a stream of income payments.

Insurance Aspects of Annuities

  • Annuities are not life insurance and don't pay a face amount on death.
  • Annuities use mortality tables with a longer life expectancy than life insurance.
  • Deferred annuities grow tax-deferred.

Consumer Protection

  • Producers are responsible for assessing consumer suitability.
  • Factors include age, income, financial situation, needs, risk tolerance, and tax status.

Immediate vs. Deferred Annuities

  • Immediate annuities: Lump sum payment, income payments start within a year.
  • Deferred annuities: Single lump sum or periodic payments; income begins sometime after purchase.

Deferred Annuities

  • Purchased with lump sum or periodic payments.
  • Income payments start sometime after one year from the date of the purchase.
  • Offer tax-deferred growth.
  • Surrender charges: Applied to early withdrawals.
  • Nonforfeiture law: Guarantees a surrender value if the policy is surrendered before annuitization.

Annuity Products – Investment Options

  • Fixed annuities: Provide guaranteed minimum interest rates, income payments don't vary, and guaranteed payment amounts and payment periods.,
  • Equity indexed annuities: Invest in equities, and rates are linked to indexes.
  • Variable annuities: Invest in securities, rates are not guaranteed but have the opportunity for higher returns.

Annuity Benefit Payment Options

  • Life contingency options: Payments continue as long as the annuitant lives (or for a guaranteed period).
  • Refund life annuities: Principal amount is returned if the annuitant dies before the policy's expiration (e.g. cash refund or installment refund).
  • Certain period option: Payments continue for the life of the annuitant and for a specified number of years regardless of death.

Uses of Annuities

  • Retirement income: Popular use for qualified retirement plans,
  • Estate liquidation: Converting assets to a stream of income,
  • Education funding: Accumulating funds for educational expenses,
  • Long term care needs: Used to pay for long term care insurance premiums.

Important Considerations Regarding Annuities

  • Suitability of these products must be determined for the client's specific needs.
  • Annuities can be complex financial instruments
  • A thorough understanding of the various features and aspects is critically important for consumers making decisions regarding annuities.

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Annuities Chapter 6 PDF

Description

Explore the fundamentals of annuities, including their purpose of providing income and protecting against outliving money. Understand key terms like deferred, IRS regulations, and life contingencies. This quiz will test your knowledge of annuity concepts and their importance in financial planning.

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