An annuity can be defined as an investment from which a person receives fixed payments for a lifetime or a specified number of years.
a) True
b) False
a) True
The contract owner is the party or parties that serves as the measuring life for the annuity.
a) True
b) False
b) FalseThe annuitant serves as the measuring life in an annuity contract.
A corporation may be selected as the annuitant.
a) True
b) False
b) False
The annuitant must be a living person, not a legal entity.
A client who purchases an annuity with after-tax dollars and wishes payments to begin in 8 months is purchasing a nonqualified deferred annuity.
a) True
b) False
b) False
This client is purchasing a nonqualified immediate annuity. An annuity in which payments to the annuitant begin within one year of the purchase is by definition an immediate annuity.
Medical underwriting is generally not required with an annuity.
a) True
b) False
a) True
One of the most prevalent reasons individuals purchase annuity contracts is to accumulate funds for retirement and then, once in retirement, to manage distribution of those funds.
a) True
b) False
a) True
The death benefits in a life insurance contract are typically received tax free, while the portion of the death benefit attributable to earnings will be subject to income tax from an annuity.
a) True
b) False
a) True
Qualified annuities typically have a lower maximum issue age than nonqualified annuities.
a) True
b) False
a) True
Surrender charges are usually lower with fixed-interest deferred annuity contracts with bonus interest rates than with nonbonus annuities.
a) True
b) False
b) False
Surrender charges are higher in fixed-interest deferred annuities with bonus interest rates in order to discourage replacement of these contracts.
Fixed interest deferred annuities may waive surrender charges at death or upon annuitization.
a) True
b) False
a) True
A free withdrawal amount in a deferred annuity contract is a specified amount that can be withdrawn from the contract each year without incurring a company surrender charge.
a) True
b) False
a) True
Nonqualified deferred annuities purchased after August 13, 1982, are taxed on a first-in, first-out (FIFO) basis
a) True
b) False
b) False
Nonqualified deferred annuities purchased after August 13, 1982, are taxed on a last in, first out (LIFO) basis.
The 10-percent penalty tax for premature distributions from nonqualified deferred annuities does not apply if the distribution is part of a series of substantially equal periodic payments.
a) True
b) False
a) True
Upon the annuitant’s death, a nonspouse beneficiary of a deferred fixed-interest annuity has the option of leaving the values with the insurance company for up to 5 years before they must be distributed.
a) True
b) False
a) True
Under the tax code, the spouse as the beneficiary of a deferred annuity contract may choose not to accept the death benefit and instead may choose to continue the annuity contract with the insurance company.
a) True
b) False
a) True
The IRS permits purchasers of nonqualified deferred annuities who want to replace one policy with another to do so under a Sec. 1035 exchange without making it a taxable event.
a) True
b) False
a) True
At the end of the contract and during the free-look window an equity indexed annuity can typically exchange, renew, annuitize, or surrender the policy.
a) True
b) False
a) True
If an equity-indexed annuity uses the annual reset method, at the policy anniversary the index for the upcoming policy year is set at the ending level of the current policy year.
a) True
b) False
a) True
If the index rate is 10 percent and the asset fee is 3 percent the interest credit in an indexed annuity will be 7 percent.
a) True
b) False
a) True
Participation rates in equity-indexed annuities are one of the insurance company’s strategies to control the amount of interest credited to the contract.
a) True
b) False
a) True
In an indexed deferred annuity, it is not uncommon for the guaranteed account value to start off at 80 to 90 percent of the premium.
a) True
b) False
a) True
An advisor who is already licensed to sell fixed annuities but also wants to sell variable annuities must pass the NASD Series 6 exam to legally do so.
a) True
b) False
a) True
Variable deferred annuities are different from fixed-interest deferred annuities in that the annuity owner assumes the investment risk with variable policies, and the insurance company assumes the risk with fixed-interest annuities.
a) True
b) False
a) True
Variable deferred annuities require that potential owners receive a prospectus.
a) True
b) False
a) True
An annual contract charge is levied against the subaccount in a variable deferred annuity to pay for the fund managers and the fund’s operating expenses.
a) True
b) False
b) False
The fund expense is an asset-based fee charged at the subaccount level for management operations of the various subaccounts. Annual contract charges are designed to offset some of the insurance company’s administrative costs for servicing these contracts.
Variable deferred annuity total expense ratios are, on average, higher than those of mutual funds.
a) True
b) False
a) True
Guaranteed minimum income benefits are available to variable deferred annuity owners without charge.
a) True
b) False
b) False
Companies impose a conservative charge for all these guaranteed living benefits found in variable deferred annuities, which is designed to cover the risk and provide a margin of profit.
Both variable deferred annuities and mutual funds typically provide for deferral of taxes until amounts are distributed from the account.
a) True
b) False
b) False
Only variable deferred annuities provide for deferral of taxes until amounts are withdrawn from the account.
A 51-year-old client withdraws $5,000 from his nonqualified deferred annuity worth $47,000 that he purchased 2 years ago with a $40,000 single premium. Which of the following statements regarding this example is correct?
a) The client will have to pay income tax on the $7,000 gain in the annuity. b) The client will have to pay income tax and a 10 percent penalty on the $5,000 withdrawal of the gain in the annuity.
c) The client will not have to pay income tax or a penalty on the $5,000 withdrawal from the gain in the annuity.
d) The client cannot make a withdrawal from the cash value in the annuity until he is aged 59½ or older.
b) The client will have to pay income tax and a 10 percent penalty on the $5,000 withdrawal of the gain in the annuity.
The client will have to pay income tax on the $7,000 gain in the annuity - not correct because the client does not pay income tax on the total gain in the annuity, only on the amount of the gain withdrawn.
c) The client will not have to pay income tax or a penalty on the $5,000 withdrawal from the gain in the annuity - incorrect because the client is required to pay income tax and a penalty on the $5,000 withdrawal.
(D) The client cannot make a withdrawal from the cash value in the annuity until he is aged 59½ or older -incorrect because the client does not have to wait until age 59½ to make withdrawals from a nonqualified deferred annuity.
Assume the following: The S&P 500 Index rose at the rate of 13 percent during the year. The participation rate is 80 percent, the cap is 12 percent, and the asset fee is 3.5 percent (deducted after the cap and after the participation rate). How much interest will the equity-indexed annuity credit?
A) 6.9 percent
Increase in the S&P 500 13%
Times the participation rate × .80 Equals 10.40%
Minus the asset fee -3.50%
Equals the interest credited 6.9%
The 12 percent cap rate is irrelevant in this calculation.
Annuities can be classified according to which of the following three criteria?
A) how the funds are invested, when the payments begin, and how premiums are paid
how the funds are invested, when the payments begin, and the annuitant’s identity - incorrect because the annuitant’s identity is an irrelevant annuity classification criterion.
when the payments begin, the annuitant’s identity, and the contract owner’s identity - incorrect because the annuitant’s identity and the owner’s identity are irrelevant annuity classification criteria.
when the payments begin, the contract owner’s identity, and the beneficiary’s identity - incorrect because the owner’s identity and the beneficiary’s identity are irrelevant annuity classification criteria.
Which of the following can qualify as a 1035 tax free exchange?
I. A life insurance policy exchanged for an annuity contract.
II. An annuity exchanged for another annuity contract.
C) Both I and II
Which of the following statements regarding fees and expenses within variable deferred annuity policies is (are) correct?
I. Mortality and expense charges are assessed to cover the minimum guaranteed interest rates and guaranteed annuity factors in the policy.
II. The majority of variable deferred annuities charge a front-end load.
A) I only
II is incorrect because the majority of variable deferred annuities are back-end loaded.
Which of the following statements concerning surrender charges in a fixed deferred annuity policy is (are) correct?
I. Most policies do not waive surrender charges when the policy is annuitized.
II. Many policies waive surrender charges at the death of the annuitant.
B) II only
I is incorrect because many policies will waive surrender charges when a policy is annuitized.
All the following are rights of the annuity owner EXCEPT
D) payout the death benefit
The insurance company pays out the death benefit to the chosen beneficiary.
Insurance companies use all of the following techniques to control the interest earnings on an equity-indexed annuity EXCEPT
C) surrender charges
Surrender charges are deducted, if applicable, after interest earnings have been calculated in an equity-indexed annuity.
