Questions and Answers
What does an immediate annuity consist of?
Single premium
What is a beneficiary entitled to if the annuitant dies before receiving payments equal to the contract value?
Installment refund annuity
A _____ annuity pays benefits based on units rather than a stated dollar amount.
Variable
What kind of income does a Straight Life Annuity provide?
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Which of the following statements regarding a tax-sheltered annuity is false?
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What is the type of annuity that can be purchased with one monetary deposit called?
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What is an element of a single premium annuity?
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What type of annuity did P purchase if she funds it with $500/month for 15 years and then receives retirement payments?
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How does an indexed annuity differ from a fixed annuity?
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What type of annuity has a cash value based upon the performance of its underlying investment funds?
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Which type of annuity did P NOT buy if she wants a lifetime income stream beginning at age sixty?
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What is accurate concerning an individual Straight Life Annuity?
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What does a contract owner receive if they terminate an annuity before the income payment period begins?
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What characteristic does a variable annuity have?
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What type of annuity did N purchase if it pays a guaranteed $2,000/month at age 70 for life?
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What is considered to be a characteristic of an immediate annuity?
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Typically, what are equity indexed annuities invested in?
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Variable annuities may invest premiums in which of the following EXCEPT?
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In the scenario where W is a 39-year-old female who just purchased an annuity to provide income for life starting at age 60, which would NOT be acceptable?
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What protection does an individual who purchases a life annuity receive?
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What happens if T, who purchased a single premium Straight Life Annuity, dies?
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Which type of contract liquidates an estate through recurrent payments?
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What type of annuity represents the largest possible monthly payment to an individual annuitant?
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Which of the following is NOT included in an annuity contract?
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What type of annuity does Q own if the payments are no less than $250 quarterly?
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What type of annuity guarantees an income payment for the rest of T's life and also pays to his son if T dies before receiving 20 years of payments?
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What type of annuity is best suited for S if she just received a $500,000 lump sum retirement buyout and wants guaranteed income for life?
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Study Notes
Annuity Types and Features
- Immediate annuity requires a single premium payment and starts benefit payments almost immediately.
- An installment refund annuity continues payments to a beneficiary until total payments equal the initial contract value if the annuitant dies early.
- A variable annuity pays benefits based on fluctuating investment units instead of a fixed dollar amount.
- Deferred annuities allow accumulation of funds over time before starting payouts at a future date.
Financial Products Characteristics
- Straight Life Annuity provides income for the annuitant's lifetime, ensuring the owner cannot outlive the payments.
- Tax Sheltered Annuity (TSA) income is taxable upon withdrawal, contrary to the belief that it is received tax-free.
- A single premium annuity is characterized by a lump sum payment made at the start.
Investment Mechanics
- Indexed annuities offer returns based on a specific market index, allowing potential growth linked to market performance.
- Variable annuities have a cash value linked to investment fund performance, providing various risk/return profiles.
- Equity indexed annuities commonly invest in benchmarks like the S&P 500.
Annuity Purchase Considerations
- Immediate annuities start payments right after purchase, while deferred annuities have accumulation phases before payout.
- A life annuity protects against the risk of outliving one’s savings, securing a lifetime income stream.
- Fixed deferred annuities guarantee specified payments in the future, often appealing for retirement income planning.
Contractual Aspects
- Surrendering an annuity before the income period results in receiving the current contract surrender value.
- A straight life annuity provides the maximum possible monthly payment but ceases after the annuitant's death.
- Annuity contracts do not typically include Accidental Death and Dismemberment (AD&D) riders.
Payment Structures
- Flexible installment deferred annuities allow contributions over time with minimum quarterly payments established.
- Life annuity with a period certain guarantees income for life, with a specified payment period for beneficiaries if the annuitant passes away within that term.
Case Studies
- A 39-year-old wanting retirement income at age 60 should avoid immediate annuities, as they would not align with her income timing needs.
- An individual who received a lump-sum retirement buyout would benefit most from a single premium annuity for immediate income security.
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Description
Test your knowledge on annuities with these flashcards from Chapter 7. Each card provides definitions and key concepts related to immediate annuities and installment refund annuities. Perfect for finance students looking to solidify their understanding of these important financial instruments.
