Flashcards - Ch. 9 - Annuities (2023)

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  1. An annuity which starts paying monthly benefits within a month after issuance is called a(n)

    a. period certain annuity

    b. deferred annuity

    c. fixed annuity

    d. immediate annuity

    immediate annuity

  2. A large corporation pension plan purchased an accumulation annuity contract where all of the participating employees received certificates of participation. What is this contract called?

    a. 403(b) plan

    b. group deferred annuity

    c. group immediate annuity

    d. joint and survivor group plan

    group deferred annuity

  3. Which of these annuity contract features is meant to discourage withdrawals and exchanges?

    a. annuitization

    b. annual fees

    c. withdrawal penalty

    d. surrender charges

    surrender charges

  4. What is another term used for a "pure" life annuity?

    a. annuity certain

    b. immediate annuity

    c. life income

    d. joint annuity

    life income

  5. During the liquidation phase of an annuity contract, to whom are the income benefits normally payable to?

    a. trustee

    b. beneficiary

    c. policyowner

    d. annuitant

    annuitant

  6. The annuitant in a single premium deferred annuity (SPDA)

    a. receives immediate benefit payments

    b. makes only one premium payment

    c. can make tax-free withdrawals until the principal is recovered

    d. is also the beneficiary

    makes only one premium payment

  7. When a deferred annuity is surrendered, who must sign the authorization to do so?

    a. owner

    b. annuitant and beneficiary

    c. annuitant

    d. all parties involved

    owner

  8. A life annuity with period certain is characterized as

    a. guaranteeing benefit payments for a stated period of time after reaching age 65

    b. guaranteeing a minimum interest rate

    c. guaranteeing lifetime benefit payments for two or more people

    d. guaranteeing benefit payments for a stated minimum number of years

    guaranteeing benefit payments for a stated minimum number of years

  9. The main purpose of an annuity is to

    a. provide a tax shelter

    b. create an estate

    c. create a stream of income

    d. provide a death benefit

    create a stream of income

  10. Which of the following is NOT a valid contract exchange?

    a. an annuity exchanged for a life insurance policy

    b. an annuity exchanged for another annuity

    c. a life insurance policy exchanged for another life insurance policy

    d. a life insurance policy exchanged for another annuity

    an annuity exchanged for a life insurance policy

  11. Sarah, age 88, is a life annuitant who has lived beyond her life expectancy. The funds for additional benefit payments will be derived primarily from funds that were

    a. obtained from the state's Guaranty Association

    b. accumulated from the invested principal

    c. given up by the annuitant's refund beneficiary

    d. not distributed to life annuitants who died before life expectancy

    not distributed to life annuitants who died before life expectancy

  12. During an annuity's liquidation phase, the annuitant normally

    a. receives nothing

    b. receives benefit payments at regular intervals

    c. can borrow against the cash value

    d. can increase the premium payout period

    receives benefit payments at regular intervals

  13. Tori has an annuity that pays her a $500 per month income benefit for life or for ten years, whichever is longer. What kind of annuity is this?

    a. fixed life annuity with period certain

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    b. variable life annuity with installment refund

    c. fixed life annuity with cash refund

    d. variable life annuity with period certain

    fixed life annuity with period certain

  14. Ron recently purchased an immediate, straight life fixed annuity. His benefit payments will

    a. discontinue after a stated number of years

    b. remain a constant dollar amount for the duration of the annuity period

    c. pay a lump sum if the annuitant dies

    d. vary according to the underlying investment performance

    remain a constant dollar amount for the duration of the annuity period

  15. When does interest income for a flexible premium deferred annuity get reported for federal income taxes?

    a. Never

    b. After the principal has been exhausted

    c. Upon receiving distributions from the contract

    d. During the accumulation phase

    Upon receiving distributions from the contract

  16. When an annuity contract has been fully surrendered, how will the surrender charges affect the final contract settlement?

    a. final contract settlement will be reduced

    b. final contract settlement will be increased

    c. final contract settlement will not be affected

    d. final contract settlement will be held in escrow until surrender charges are paid

    final contract settlement will be reduced

  17. Which of the following is NOT an intended use of an annuity?

    a. obtain income benefits for a stated period of time for more than one person

    b. accumulate assets on a tax-deferred basis

    c. create immediate lifetime income benefits

    d. create new funds upon the death of a wage-earner

    create new funds upon the death of a wage-earner

  18. A retired couple would like to maximize the income derived from their combined life savings and have it payable until they both die. Which annuity would be their best choice?

    a. fixed annuity

    b. survivorship annuity

    c. joint life annuity

    d. joint and survivor annuity

    joint and survivor annuity

  19. The authority to change the beneficiary in an individual annuity lies with the

    a. annuitant

    b. owner

    c. beneficiary

    d. administrator

    owner

  20. Which statement concerning a deferred annuity contract is correct?

    a. the contract cannot be assignable by the owner

    b. requires a single premium payment

    c. the owner can be the beneficiary, annuitant, or neither

    d. benefits start immediately after contract formation

    the owner can be the beneficiary, annuitant, or neither

  21. The surrender charge on many deferred annuity contracts are waived when the

    a. annuitant becomes unemployed

    b. annuitant dies or becomes disabled

    c. contract's interest rate falls below a stated percentage

    d. contract is canceled within the first year

    annuitant dies or becomes disabled

  22. A teacher recently retired at age 63 and has a tax sheltered annuity (TSA). Periodic deposits total $120,000 and the value of the contract is now worth $200,000. How much is taxed if the current value is surrendered today?

    a. $200,000

    b. $80,000

    c. $120,000

    d. $0

    $200,000

  23. What does a fixed life annuity offer protection against?

    a. inflation

    b. premature death

    c. inadequate retirement planning

    d. savings depletion due to longevity

    savings depletion due to longevity

  24. An insurer will typically assess a back-end load on a deferred annuity that is cancelled during the early contract years. What is this back-end load referred to as?

    a. back-end assessment

    b. cancellation fee

    c. surrender charge

    d. tax penalty

    surrender charge

  25. Which of these pays an income to two or more annuitants until the death of the last annuitant?

    a. joint life annuity

    b. deferred survivor annuity

    c. joint and survivor annuity

    d. survivorship annuity

    joint and survivor annuity

  26. When a large sum of money is used to structure monthly payments, which product is typically used?

    a. a 401(k) plan

    b. a 401(b) plan

    c. a deferred annuity

    d. an immediate annuity

    an immediate annuity

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  27. What happens to the cash value of a market value adjusted annuity if it's surrendered prior to the end of the stated guarantee period?

    a. subject to market value adjustment

    b. subject to no adjustments

    c. subject to a surrender charge only

    d. cash value is forfeited

    subject to market value adjustment

  28. John bought a deferred annuity on Mary. John amends the contract years later to name Tom as the recipient of the proceeds if Mary dies. Who is the annuitant for this contract?

    a. John

    b. Mary

    c. Tom

    d. Mary's estate

    Mary

  29. Which event triggers a deferred annuity to start making benefit payments to the annuitant?

    a. when the owner dies

    b. when the contract's cash value exceeds the cost basis

    c. when the contract is annuitized

    d. cash surrender of the annuity

    when the contract is annuitized

  30. A life annuity feature which provides benefit payments for a minimum number of years, no matter when the annuitant dies, is called

    a. fixed period

    b. period certain

    c. installment refund

    d. straight life

    period certain

  31. How do benefit payments fluctuate over time in a variable life annuity?

    a. benefit payments stay fixed

    b. reflects changes in the market value of assets in a separate account

    c. annuitant controls any benefit payment changes

    d. any benefit payment fluctuations have to be approved in writing by the owner

    reflects changes in the market value of assets in a separate account

  32. A single-life annuity only has ONE

    a. annuitant

    b. benefit payment

    c. premium payment

    d. beneficiary

    annuitant

  33. When determining the accumulation value of a deferred annuity, the total is calculated by taking the premiums paid plus interest earned minus

    a. bailout option charge

    b. surrender charges

    c. taxes owed

    d. expenses and withdrawals

    expenses and withdrawals

  34. The exclusion ratio determines

    a. how long an annuitant receives benefit payments

    b. if an annuity is eligible for a 1035 exchange

    c. the interest rate of an annuity

    d. the amount of an annuity payment subject to income tax

    the amount of an annuity payment subject to income tax

  35. Which benefit can be found in an equity indexed annuity, but not in a fixed annuity?

    a. protection against living too long

    b. equity loans

    c. a fixed rate of return

    d. protection against long-term inflation

    protection against long-term inflation

  36. Under which circumstance is the interest rate guaranteed within a market value adjusted annuity?

    a. when the contract has been held for the period specified in the policy

    b. for the entire length of the contract

    c. never

    d. when the cash value has reached a stated minimum amount

    when the contract has been held for the period specified in the policy

  37. When does the owner's contractual rights begin under an individual annuity contract?

    a. time of purchase

    b. when the benefit period begins

    c. when the accumulation period ends

    d. after free-look period expires

    time of purchase

  38. What happens to the purchasing power of benefit payments from a fixed life annuity when the cost of living goes up?

    a. increases

    b. decreases

    c. not affected by inflation

    d. tied to stock index

    decreases

  39. The owner's cost basis for a non-qualified deferred annuity is typically the same as the

    a. annuity's cash value

    b. total premiums paid

    c. benefits payable to the annuitant

    d. interest earned within the annuity

    total premiums paid

  40. Which of the following is associated with an immediate annuity?

    a. tax-free benefit payments

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    b. installment premium payments

    c. lack of an accumulation period

    d. lump-sum benefit

    lack of an accumulation period

  41. The interest paid during an annuity's payout period is considered

    a. nontaxable

    b. taxable as ordinary income

    c. taxable as capital gains

    d. tax-deductible

    taxable as ordinary income

  42. Which of the following contracts offer deferred taxation, flexible payments, a guaranteed interest rate, and death benefits equal to the cash value?

    a. variable life policy

    b. modified life policy

    c. flexible premium fixed annuity

    d. immediate fixed annuity

    flexible premium fixed annuity

  43. Taking a sum of money and decreasing it in size is called

    a. capital gains

    b. capital appreciation

    c. capital liquidation

    d. capital sum

    capital liquidation

  44. Which annuity allows contributions to an IRA?

    a. Single Premium Immediate Annuity (SPIA)

    b. Annuity certain

    c. Deferred

    d. Life with period certain

    Deferred

  45. A single premium deferred annuity sometimes contains a bailout feature. Which statement regarding this feature is correct?

    a. if the interest rate falls below a specified level, the surrender charge is waived

    b. if the interest rate rises above a certain level, the surrender charge is waived

    c. it allows the Life and Health Guaranty Association to bailout the insolvent insurer

    d. a reinsurer will make the remainder of the annuity payments if the original insurance company becomes insolvent

    if the interest rate falls below a specified level, the surrender charge is waived

  46. Which of the following would most likely purchase an immediate annuity?

    a. individual wishing to contribute to a tax-sheltered annuity

    b. individual wanting to accumulate an investment over time

    c. retiree having a lump sum to invest

    d. business needing an immediate tax write-off

    retiree having a lump sum to invest

  47. What determines how much an annuitant is paid for a variable annuity?

    a. varies according to how many outstanding annuity units

    b. payments fluctuate as annuitant gets older

    c. the market value variations of the securities backing it

    d. varies according to the insurer's investments in its general account

    the market value variations of the securities backing it

  48. The administrator for a corporate pension plan bought an accumulation annuity contract for its 2,000 employees. All 2,000 participating employees received certificates of participation. What kind of contract is this?

    a. 403(b) plan

    b. group deferred annuity

    c. group immediate annuity

    d. deferred compensation plan

    group deferred annuity

  49. Which of the following would NOT be appropriate for an immediate annuity?

    a. a lottery winner who opted for a lump-sum payment

    b. a parent saving for a child's college

    c. a beneficiary collecting the face amount of a life insurance policy

    d. someone who just won a large settlement

    a parent saving for a child's college

  50. An annuity's accumulation period may

    a. continue after the purchase payments stop

    b. continue after the benefit payments start

    c. continue after the annuitant dies

    d. continue after the annuity has been surrendered

    continue after the purchase payments stop

  51. The interest credited to the cash values of personally-owned non-qualified annuities is considered

    a. a tax credit

    b. tax-deferred

    c. tax-deductible

    d. tax-exempt

    tax-deferred

  52. The contractual rights which allow the owner of a deferred annuity to surrender the cash value several years before the annuity date are called

    a. nonforfeiture options

    b. settlement options

    c. conversion options

    d. surrender options

    nonforfeiture options

  53. What is the tax treatment of benefit payments for a non-qualified annuity?

    a. benefit payments are always taxable

    b. benefit payments are subject to taxes only prior to age 70 1/2

    c. benefit payments must begin at age 59 1/2 to avoid a penalty

    d. benefit payments received after 70 1/2 are always tax-exempt

    benefit payments are always taxable

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  54. Sylvia purchased an annuity for $100,000 from the proceeds of an inheritance. No further payments are permitted and the income stream begins in 15 years. This contract is a(n)

    a. equity indexed annuity

    b. single premium immediate annuity

    c. single premium deferred annuity

    d. fixed period immediate annuity

    single premium deferred annuity

  55. Which statement is INCORRECT concerning a tax-sheltered annuity (TSA)?

    a. participants make payments from salary reductions

    b. normally used by charitable, educational, and religious organizations

    c. also known as 403(b) plans

    d. annual investment gains are included in participant's gross income

    annual investment gains are included in participant's gross income

  56. A business may purchase an annuity for all of the following reasons EXCEPT

    a. structuring a liability settlement payment

    b. informally funding a non-qualified deferred compensation plan

    c. accumulating assets on a tax-deferred basis

    d. providing a pension to employees

    informally funding a non-qualified deferred compensation plan

  57. How are monthly life annuity benefit payments treated under a tax sheltered annuity (TSA)?

    a. taxed as a capital gain during the accumulation period

    b. taxed as ordinary income during the accumulation period

    c. taxed as ordinary income in the year received

    d. received tax-free to all recipients

    taxed as ordinary income in the year received

  58. Which of the co-annuitants listed below would receive the largest monthly benefit payments in a joint and 100% survivor annuity?

    a. ages 70 and 72

    b. ages 60 and 80

    c. ages 71 and 73

    d. ages 69 and 71

    ages 71 and 73

  59. When a sum of money undergoes capital liquidation, that sum will

    a. increase in value

    b. remain the same indefinitely

    c. decrease in size

    d. create tax deductions

    decrease in size

  60. Who typically makes the purchase payments in an individual annuity?

    a. owner

    b. trustee

    c. insurer

    d. beneficiary

    owner

  61. The owner of a single premium deferred annuity is entitled to do all of these EXCEPT

    a. make additional payments into the annuity

    b. choose the length of the payout period

    c. choose who will be the recipient of the annuity payments

    d. cash surrender the contract

    make additional payments into the annuity

  62. An annuitant is paid $495 per month until the contract value is exhausted at some undetermined date in the future. Which type of annuity payout option is this?

    a. fixed amount

    b. straight life

    c. period certain

    d. installment refund

    fixed amount

  63. An individual, age 45, would like to help pay for his daughter's college expenses in 10 years. Which annuity would be appropriate for this individual?

    a. joint and survivor annuity

    b. deferred annuity

    c. 403(b) plan

    d. immediate annuity

    deferred annuity

  64. When compared to a fixed annuity, a variable annuity has what distinguishing feature?

    a. flexible premiums according to a stock index

    b. investment risk is assumed by the purchaser

    c. investment risk is assumed by the insurer

    d. payout option can be changed after the accumulation phase

    investment risk is assumed by the purchaser

  65. What is the effect of the market value adjustment in a market value adjustment annuity?

    a. transfer the tax liability to the owner

    b. allows owner to periodically adjust the investment risk

    c. transfers some of the investment risk to the policyowner

    d. no effect

    transfers some of the investment risk to the policyowner

  66. Interest is credited to a fixed annuity no lower than the

    a. variable contract rate

    b. contract guaranteed rate

    c. current rate of inflation

    d. prime rate

    contract guaranteed rate

FAQs

How are monthly life annuity benefit payments treated? ›

All monthly payments are taxed as ordinary income. If the annuity is a qualified plan, all of the monthly income payments will be subject to taxes. Only the interest will be taxed if the annuity is a non-qualified plan.

What determines how much annuitant is paid for a variable annuity? ›

The amount that is paid depends on the age of the annuitant (or ages, if it's a two-life annuity), the amount paid into the annuity, and (if it's a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected pay-out period.

What does a fix life annuity offer protection against? ›

A fixed life annuity provides protection against the depletion of assets as a result of longevity. The funds for future benefit payments will be drawn primarily from funds that were not distributed to life annuitants who died before their lives expectancy had expired.

What is the tax treatment of benefit payments for nonqualified annuity? ›

Nonqualified variable annuities don't entitle you to a tax deduction for your contributions, but your investment will grow tax-deferred. When you make withdrawals or begin taking regular payments from the annuity, that money will be taxed as ordinary income.

Who should not buy an annuity? ›

Don't have sufficient savings to cover premiums.

Buying an annuity could mean laying out $50,000 or more to cover the premium. If purchasing an annuity would drain your liquid savings and put you at risk of having to borrow to pay for unexpected expenses, it may not be worth it.

Do beneficiaries pay taxes on annuities? ›

Annuities are taxed as ordinary income when inherited. The proceeds of inheritance are taxable. If a beneficiary opts to receive the money all at once, they must pay taxes immediately. This is only if you take a lump sum.

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