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Questions and Answers
Which factor is NOT considered in evaluating a consumer's suitability for an annuity?
Which factor is NOT considered in evaluating a consumer's suitability for an annuity?
What is the primary characteristic of a Single Premium Immediate Annuity (SPIA)?
What is the primary characteristic of a Single Premium Immediate Annuity (SPIA)?
How does the age of the annuitant affect income payments from a Single Premium Immediate Annuity?
How does the age of the annuitant affect income payments from a Single Premium Immediate Annuity?
What defines a Deferred Annuity?
What defines a Deferred Annuity?
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What happens if a deferred annuity is surrendered before age 59½?
What happens if a deferred annuity is surrendered before age 59½?
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What distinguishes a Flexible Premium Deferred Annuity (FPDA) from a Single Premium Deferred Annuity (SPDA)?
What distinguishes a Flexible Premium Deferred Annuity (FPDA) from a Single Premium Deferred Annuity (SPDA)?
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Which description best characterizes the growth of a Deferred Annuity?
Which description best characterizes the growth of a Deferred Annuity?
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Which of the following factors does NOT influence the amount of annuity income payments?
Which of the following factors does NOT influence the amount of annuity income payments?
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What is a characteristic of a Lump-sum settlement option at annuitization?
What is a characteristic of a Lump-sum settlement option at annuitization?
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Which annuity option guarantees the highest monthly payment regardless of the annuitant's life span?
Which annuity option guarantees the highest monthly payment regardless of the annuitant's life span?
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What happens to the payments in a Joint Life annuity after the first annuitant dies?
What happens to the payments in a Joint Life annuity after the first annuitant dies?
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Which annuity option provides a refund to a beneficiary if the annuitant dies before receiving the full benefit?
Which annuity option provides a refund to a beneficiary if the annuitant dies before receiving the full benefit?
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What does the Guaranteed Interest rate typically represent in an annuity?
What does the Guaranteed Interest rate typically represent in an annuity?
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What is the primary advantage of an indexed annuity compared to a fixed annuity?
What is the primary advantage of an indexed annuity compared to a fixed annuity?
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How does an insurance company typically handle the initial returns from an indexed annuity?
How does an insurance company typically handle the initial returns from an indexed annuity?
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What is a defining characteristic of variable annuities?
What is a defining characteristic of variable annuities?
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Which of the following is NOT a characteristic of variable annuities?
Which of the following is NOT a characteristic of variable annuities?
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What happens to accumulation units upon annuitization in a variable annuity?
What happens to accumulation units upon annuitization in a variable annuity?
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Which best describes how variable annuities provide a hedge against inflation?
Which best describes how variable annuities provide a hedge against inflation?
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What additional requirement must an agent meet to sell variable annuities beyond a life insurance license?
What additional requirement must an agent meet to sell variable annuities beyond a life insurance license?
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What type of units represent ownership interest in the separate account of a variable annuity?
What type of units represent ownership interest in the separate account of a variable annuity?
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Which statement accurately describes a fixed annuity?
Which statement accurately describes a fixed annuity?
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What characterizes a variable annuity?
What characterizes a variable annuity?
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What is a feature of the pure life annuity option?
What is a feature of the pure life annuity option?
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Which option is true regarding the life with period certain payout option?
Which option is true regarding the life with period certain payout option?
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What happens under the cash refund option of refund life annuities?
What happens under the cash refund option of refund life annuities?
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Which of the following statements is true about installment refund annuities?
Which of the following statements is true about installment refund annuities?
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Which is the correct relationship between life insurance and annuities?
Which is the correct relationship between life insurance and annuities?
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What distinguishes guaranteed payments in a fixed annuity from those in a variable annuity?
What distinguishes guaranteed payments in a fixed annuity from those in a variable annuity?
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What does the cash refund option guarantee upon the death of the annuitant?
What does the cash refund option guarantee upon the death of the annuitant?
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Which of the following describes a joint life annuity?
Which of the following describes a joint life annuity?
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What distinguishes a joint and survivor annuity from a joint life annuity?
What distinguishes a joint and survivor annuity from a joint life annuity?
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With fixed-period installments in annuities certain, what does the insurer determine?
With fixed-period installments in annuities certain, what does the insurer determine?
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Which of the following best describes single life annuities?
Which of the following best describes single life annuities?
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What payment structure is most commonly associated with the joint and survivor option?
What payment structure is most commonly associated with the joint and survivor option?
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What is a key difference between cash refund and installment refund options?
What is a key difference between cash refund and installment refund options?
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Which statement is true regarding annuities certain?
Which statement is true regarding annuities certain?
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What is the primary purpose of an annuity?
What is the primary purpose of an annuity?
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How does a fixed-amount installment option work?
How does a fixed-amount installment option work?
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What benefits does a Guaranteed Minimum Withdrawal Benefit (GMWB) option offer?
What benefits does a Guaranteed Minimum Withdrawal Benefit (GMWB) option offer?
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In what scenario might someone choose to purchase a single premium immediate annuity?
In what scenario might someone choose to purchase a single premium immediate annuity?
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Which of the following is NOT a common use of annuities?
Which of the following is NOT a common use of annuities?
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Annuities must meet certain criteria to be classified as qualified retirement plans. What is one of those criteria?
Annuities must meet certain criteria to be classified as qualified retirement plans. What is one of those criteria?
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How are annuities generally viewed as financial vehicles for retirement?
How are annuities generally viewed as financial vehicles for retirement?
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What characteristic distinguishes fixed-period options from other types of annuities?
What characteristic distinguishes fixed-period options from other types of annuities?
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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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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.
