Life Chapter 7 Annuity Concepts Quiz

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Questions and Answers

Interest earned on an annuity is non-taxable even if the annuitant dies before the payout start date.

False

What method is used to calculate the taxable portion of each annuity payment?

Exclusion ratio

What is considered a disadvantage of owning a fixed annuity?

During periods of inflation, annuitants will experience a decrease in purchasing power of their payments.

Fixed period settlement options are considered to be a form of what?

Annuity Signup and view all the answers

What is the difference between life insurance and annuities?

Life insurance builds an estate by paying money into the contract. Annuities liquidate an estate by the periodic payment of money out of the contract. Signup and view all the answers

What kind of annuity returns the difference between the annuity value and the income payments already made if the annuitant dies during the distribution period?

Refund annuity Signup and view all the answers

Who assumes the investment risk with a fixed annuity contract?

The insurer Signup and view all the answers

What type of annuity requires premium payments that vary from year to year?

Flexible premium deferred annuity Signup and view all the answers

Simon's payment amount from his fixed immediate annuity will be dependent upon principal, interest, and the contract's ________.

income period Signup and view all the answers

What is the accumulation period in relation to an annuity?

The time at which the funds are being paid into the annuity, which may continue after purchase payments cease because of interest. Signup and view all the answers

Describe the funding method for an annuity.

Principal is funded either immediately with a single premium or over time with a series of periodic payments. Signup and view all the answers

What is a single premium funded by?

A single lump-sum premium which creates the principal immediately. Signup and view all the answers

What are immediate annuities?

Annuities designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase. Signup and view all the answers

What are deferred annuities?

Annuities that accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date. Signup and view all the answers

What are surrender charges?

Charges made by most insurance companies to contract owners for liquidating deferred annuities in the early years of the contract. Signup and view all the answers

What is the straight life income option?

An annuity payout option that guarantees income for the annuitant's lifetime. Signup and view all the answers

How are annuitants who outlive life expectancy paid with a straight life income option?

The funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy. Signup and view all the answers

What is the cash refund option in annuities?

An annuity payout option that guarantees the total annuity fund is paid out; paid in a lump sum to the beneficiary if the annuitant dies. Signup and view all the answers

Which market index is normally associated with an indexed annuity's rate of return?

S&P 500 Signup and view all the answers

What is the nonforfeiture value of an annuity before annuitization?

All premiums paid, plus interest, minus any withdrawals and surrender charges. Signup and view all the answers

What is the annuitization phase?

The period when the accumulated value in an annuity is paid out. Signup and view all the answers

Life income is a settlement option that pays what?

A stated amount to an annuitant, but no residual value to a beneficiary. Signup and view all the answers

Name three purposes of an annuity.

<ol> <li>To liquidate an estate 2) For tax-free growth of principal 3) To distribute accumulated principal.</li> </ol> Signup and view all the answers

How soon can benefit payments begin with a deferred annuity?

A minimum of 12 months after the date of purchase. Signup and view all the answers

What are variable annuities?

Based on non-guaranteed equity investments so they shift the investment risk from the insurer to the contract owner. Signup and view all the answers

Who can sell variable annuities?

A sales representative who is registered with FINRA. Signup and view all the answers

Study Notes

Annuities Overview

Interest earned on an annuity is taxable if the annuitant dies before the payout start date.
The taxable portion of annuity payments is determined using the exclusion ratio.

Annuity Types and Features

Fixed annuities can lose purchasing power during inflationary periods.
Fixed period settlement options are categorized as annuities.
Life insurance builds an estate, while annuities liquidate an estate through periodic payouts.
A refund annuity returns to beneficiaries the difference between the annuity's value and the payments made if the annuitant dies during the distribution period.

Investment Risk and Payment Structures

Insurers assume investment risk with fixed annuity contracts, guaranteeing principal and a minimum return.
Flexible premium deferred annuities require variable premium payments each year.
Payment amounts for fixed immediate annuities depend on principal, interest, and the income period specified in the contract.

Accumulation and Funding

The accumulation period allows interest to accumulate on a tax-deferred basis and can continue after purchase payments stop.
Principal can be funded with a single premium upfront or through a series of periodic payments.
A single premium creates the principal of an annuity immediately.

Types of Annuities

Immediate annuities begin making benefit payments to the annuitant at the first interval after purchase.
Deferred annuities provide income at a specified future date, accumulating interest tax-deferred.
Surrender charges are fees for liquidating deferred annuities early, covering associated costs.

Payout Options

The straight life income option guarantees income for the annuitant's lifetime without a residual for beneficiaries.
If annuitants outlive expectations, payouts continue from funds not distributed to those who died earlier.
The cash refund option guarantees full payout to beneficiaries if the annuitant dies, in a lump sum.

Indexed and Variable Annuities

Indexed annuities often use the S&P 500 as a market index for determining rates of return.
Nonforfeiture value before annuitization equals total premiums paid plus interest, minus withdrawals and surrender charges.
The annuitization phase is when the accumulated value is paid out to the annuitant.

Settlement and Purposes

Life income settlement options assure fixed payments without residual value for beneficiaries.
Key purposes of annuities include liquidating an estate, enabling tax-free growth of principal, and distributing accumulated principal.

Deferred Annuities Details

Benefit payments for deferred annuities can begin a minimum of 12 months after purchase.
Variable annuities are tied to non-guaranteed equity investments, transferring investment risk to the contract owner.
Variable annuities can only be sold by sales representatives registered with FINRA and having appropriate licensing.

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Description

Test your understanding of key concepts related to annuities in Chapter 7 of Life. This quiz covers important aspects such as taxation, exclusion ratios, and disadvantages of fixed annuities. Perfect for reinforcing your knowledge on these financial instruments.