Life: Chapter 7 – Flashcards
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What happens to interest earned if the annuitant dies before the payout start date?
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It is taxable
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The taxable portion of each annuity payment is calculated using what method?
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Exclusion ratio
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Lisa has recently bought a fixed annuity. What is considered to be a disadvantage of owning this type of annuity?
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During periods of inflation, annuitants will experience a decrease in purchasing power of their payments.
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Fixed period settlement options are considered to be a form of what?
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Annuity
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What is the different between life insurance and annuities?
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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.
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An annuitant dies during the distribution period. What kind of annuity will return to a beneficiary the difference between the annuity value and the income payments already made?
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Refund annuity
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Who assumes the investment risk with a fixed annuity contract and why?
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The insurer because they guarantee the annuitant's principal as well as a guaranteed minimum rate of return, even if the underlying assets underperform the guaranteed rate.
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What annuity requires premium payments that vary from year to year?
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Flexible premium deferred annuity
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Simon has purchased a fixed immediate annuity. his payment amount will be dependent upon principal, interest, and the contract's ________.
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income period
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What is the accumulation period?
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The time at which the funds are being paid into the annuity, which may continue after purchase payments cease because of interest.
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Describe the Funding Method
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Principal is funded either immediately with a single premium or over time with a series of periodic payments
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What is a single premium funded by?
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A single lump-sum premium which creates the principal immediately.
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What are immediate annuities?
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Annuities designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase.
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What are deferred annuities?
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Annuities that accumulate interest earnings on a tax-deferred basis and provide income payments at some specified future date.
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What are surrender charges?
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Charges made by most insurance companies to contract owners for liquidating deferred annuities in the early years of the contract which cover the costs associated with selling/issuing contracts and costs associated to insurer's need to liquidate underlying investments.
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What is the straight life income option?
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An annuity payout option that guarantees income for annuitant's lifetime.
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How are annuitants outlives life expectancy with a straight life income option paid?
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The funds for additional benefit payments will be derived primarily from funds that were not distributed to life annuitants who died before life expectancy.
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What is the cash refund option?
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An annuity payout option which guarantees total annuity fund is paid out; paid in lump sum to beneficiary if annuitant dies.
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Which market index is normally associated with an indexed annuity's rate of return?
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S&P 500
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What is the nonforfeiture value of an annuity before annuitization?
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All premiums paid, plus interest, minus any withdrawals and surrender charges.
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What is the annuitization phase?
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The period when the accumulated value in an annuity is paid out.
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Life income is a settlement option that pays...
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a stated amount to an annuitant, but no residual value to a beneficiary.
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Name three purposes of an annuity.
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1)To liquidate an estate
2)For tax-free growth of principal
3)To distribute accumulated principal
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How soon can the benefit payments begin with a deferred annuity?
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A minimum of 12 months after date of purchase.
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What are variable annuities?
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Based on non-guaranteed equity investments so they shift the investment risk from the insurer to the contract owner.
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Who can sell variable annuities?
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A sales rep. who is registered with FINRA as well as one who holds a state insurance license.
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What are equity indexed annuities (EIA)?
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Fixed annuities that offer the potential for higher credited rates of return than their traditional counterparts but also guarantee the owner's principal.
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When is a 10% penalty tax imposed on withdrawals?
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When they are made before age 59 1/2.
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What is a structured settlement?
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The distribution of funds from the settlement of lawsuits or the winnings of a lottery and other contests.
