Module 8

  1. 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
  2. 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.
  3. 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.
  4. 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.
  5. Medical underwriting is generally not required with an annuity.

    a) True
    b) False
    a) True
  6. 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
  7. 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
  8. Qualified annuities typically have a lower maximum issue age than nonqualified annuities.

    a) True
    b) False
    a) True
  9. 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.
  10. Fixed interest deferred annuities may waive surrender charges at death or upon annuitization.

    a) True
    b) False
    a) True
  11. A free withdrawal amount in a deferred annuity contract is a specified amount that can be withdrawn from the contract each year without incurring a company surrender charge.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
  12. 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.
  13. 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
  14. 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
  15. 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
  16. 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
  17. 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
  18. 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
  19. 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
  20. 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
  21. 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
  22. 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
  23. 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
  24. Variable deferred annuities require that potential owners receive a prospectus.

    a) True
    b) False
    a) True
  25. 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.
  26. Variable deferred annuity total expense ratios are, on average, higher than those of mutual funds.

    a) True
    b) False
    a) True
  27. 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.
  28. 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.
  29. 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.
  30. 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?




    B) 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.
  31. 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.
  32. 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
  33. 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.
  34. 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.
  35. All the following are rights of the annuity owner EXCEPT




    B) payout the death benefit

    The insurance company pays out the death benefit to the chosen beneficiary.
  36. 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.
  37. Which of the following statements is correct regarding the parties to an annuity contract?




    D) . The beneficiary of the annuity has no legal right in the contract before the annuitant’s death.

    If a corporation (or other non-natural person) owns an annuity, all tax deferral in the annuity contract will be lost and current earnings will be taxable.

    An annuitant must be a living person, and not a legal entity, because a legal entity has no measuring life.

    The insurance company has an obligation to invest the owner’s premium payments responsibly and credit earnings on interest to the funds placed in the annuity, depending on the particular type of contract.
  38. All of the following represent criteria for which an annuity can be classified EXCEPT:




    C) Contract owner’s identity.

    • Annuities can be classified by the following criteria:
    •  When payments begin (immediate or deferred).
    •  How the funds are invested (fixed, indexed, or variable).
    •  How premiums are paid (single or flexible).
    •  Qualified or nonqualified.
  39. Which of the following is/are rights of an annuity owner?

    I. Payout the death benefit.
    II. Surrender the policy.




    B) Only II.

    I is incorrect. The insurance company is responsible for paying out the death benefit of the annuity, AFTER the annuity owner’s death.
  40. Which of the following statements is correct regarding types of annuities?




    C) A variable annuity allows the annuity purchaser to participate in the investment of the annuity funds.

    Variable annuities are the most regulated of the three types of deferred annuities.

    Immediate annuities, by their very nature, do not accept additional deposits.

    A qualified annuity is an annuity that accepts pretax dollars from an employer-sponsored retirement program or IRA.
  41. All of the following are correct regarding the distinctions between an annuity contract and a lifeinsurance policy EXCEPT:




    D) An annuity contract has a net amount at risk, whereas a life insurance policy does not.

    An annuity has no net amount at risk, whereas life insurance does. The insurance company does not suffer a financial loss at the death of the annuitant.
  42. Which of the following statements is/are correct regarding annuities?

    I. Fixed-interest deferred annuities compete for money that would otherwise be invested intaxable mutual funds.

    II. One of the most prevalent reasons individuals purchase annuity contracts is to accumulatefunds for retirement.




    B) Only II.

    I is incorrect. Fixed-interest deferred annuities, which guarantee principal and some interest, compete for money that would otherwise be invested in such vehicles as savings accounts or certificates of deposit.
  43. All of the following statements concerning fixed-interest deferred annuities are correct EXCEPT:




    D) Bonus annuities feature lower surrender charge percentages and shorter surrender charge periods.

    Bonus annuities feature higher surrender charge percentages and longer surrender charge periods.
  44. Which of the following statements is correct regarding the characteristics of annuities?




    C) When annuities are used for qualified plan money, tax deferral is redundant.

    Annuities are guaranteed only by the insurance company that issued the annuity, and not by the FDIC.

    Some deferred annuities charge a nominal annual contract maintenance fee.

    The time period for the surrender charge may begin on the original date of the contract, or it may be measured from the date of each deposit.
  45. Which of the following statements is correct regarding the issue age requirements of annuities?




    D) If a minor owns an annuity contract, he or she can generally rescind the contract uponreaching the age of majority.

    • The insurance company is more interested in the age of the annuitant, rather than the owner, when issuing an annuity contract. This is because the annuitant is the measuring life for the
    • payment of the annuity.

    Qualified annuity contracts typically carry a maximum issue age of 70, because distributions generally must begin by age 70½.

    There is no such penalty.
  46. All of the following statements are correct regarding the amount of interest an annuity productearns EXCEPT:




    C) The accelerated interest rate is the amount of extra interest granted to new purchasers offixed-interest deferred annuities.

    • The bonus (not accelerated) interest rate is the amount of extra interest granted to new purchasers of
    • fixed-interest deferred annuities.
  47. The maximum amount of money that a contract owner can withdraw from an annuity contract eachyear (before the end of the surrender charge period) without incurring a surrender charge is referred to as the:




    D) Free-corridor amount.

    • The free-corridor amount is the maximum amount of money that a contract owner can withdraw from the
    • contract each year before the end of the surrender charge period without incurring a surrender charge.
  48. All of the following statements regarding the taxation of an annuity are correct EXCEPT:




    D) An annuity contract owned by a corporation will be eligible for tax-deferred accumulation.

    Annuities owned by non-natural persons are not eligible for tax-deferred accumulation.
  49. All of the following exchanges are income tax free under Internal Revenue Code Section 1035EXCEPT:




    C) Exchange of a fixed annuity for whole life insurance policy.

    Exchanging an annuity for a life insurance policy is not afforded protection under Section 1035.
  50. Which of the following statements is/are correct regarding death benefits payable from an annuity contract?

    I. If the annuitant dies before annuity payments have begun, a non-spouse beneficiary mustdistribute the contract within 10 years of the annuitant’s death.

    II. If the annuitant dies before annuity payments have begun, a spouse beneficiary can keep thecontract in force in their own name, and specify a new beneficiary.




    B) Only II.

    • I is incorrect. With a non-spouse beneficiary, the annuity must either be distributed 1) within five years of
    • the death of the annuitant, or 2) as an annuity based on the life expectancy of the beneficiary.
  51. All of the following statements are correct regarding annuity riders EXCEPT:

    a) A long-term care benefit rider generally provides the owner of the contract access to cashvalues if the annuitant has to enter a long-term care facility.
    b) A disability rider will waive surrender charges if the owner is totally disabled and unable towork due to injury or illness.
    c) A qualified plan rider may be written to allow funds from a qualified plan, such as a 401(k)plan, to be transferred into an otherwise non-qualified annuity. d) A terminal illness rider is usually helpful to those individuals who were already ill at the timethe annuity was issued.
    d) A terminal illness rider is usually helpful to those individuals who were already ill at the time the annuity was issued.

    The insurance company may have a provision that if the annuitant becomes terminally ill within the first 12 months of the contract; the owner will not be able to activate this provision.
  52. All of the following statements are correct regarding an indexed annuity EXCEPT:




    C) Similar to a variable annuity, an indexed annuity can only be sold by a registered representative.

    Indexed annuities can be sold by a non-registered representative, unlike a variable annuity.
  53. An indexed annuity that provides incremental protection on growth by locking in the previous year’s anniversary value is referred to as a(n):



    B) Annual reset indexed annuity.

    A point-to-point indexed annuity is an indexed annuity that uses an indexing method that credits interest earnings by measuring from one particular index point to a second particular index point.

    A high-water mark indexed annuity is an indexed annuity that uses a crediting method in which the growth in the index is credited by comparing the index point at the end of each policy year to the last highest anniversary point within each contract term.

    There is no such annuity.
  54. Which of the following statements is/are correct regarding indexed annuities?

    I. The participation rate is the proportionate amount of the percentage change that is used to determine the actual interest rate that will be credited to an equity-indexed annuity for the contract term.

    II. The asset fee is the amount assessed by an insurance company on indexed annuities, which is applied against the growth in the index and reduces the amount of interest the insurercredits to the annuity.




    C) Both I and II.
  55. Which of the following statements is correct regarding deferred annuity contracts?




    B) Almost every deferred annuity contract provides some refund benefit if the annuitant dies during the accumulation period.
  56. Which of the following statements is/are correct regarding the characteristics of annuities?

    I. Surrender charges are typically higher when a fixed-interest deferred annuity has a bonusinterest rate.

    II. Qualified annuities typically have a higher maximum issue age than nonqualified annuities.




    A) Only I.

    II is incorrect. Qualified annuities typically have a lower maximum issue age than nonqualified annuities
  57. Which of the following statements is correct regarding variable annuities?




    • D) Variable annuities were designed to protect purchasing power and provide benefits that adjust with changing investment performance.
    • At present most variable annuities are issued on a deferred basis.
    • The value of accumulation units reflects realized and unrealized gains and losses.
    • The majority of variable annuities are back-end loaded.
  58. All of the following statements regarding variable deferred annuities are correct EXCEPT:




    C) The total expense ratio is commonly used to compare the expenses for variable deferredannuities to those for fixed-interest deferred annuities.

    The total expense ratio is commonly used to compare the expenses for variable deferred annuities to those for regular mutual funds.
  59. Which of the following statements is/are correct regarding benefits from a variable deferredannuity?

    I. The rising floor benefit guarantees that the owner may take back the premium after a specifiednumber of years if the investment is more than the account value.

    II. The guaranteed minimum accumulation benefit guarantees that the value of the annuity can bestepped up to a certain amount on a specified date.




    B) Only II.

    I is incorrect. The guaranteed minimum return of premium benefit guarantees that the owner may take back the premium after a specified number of years if the investment is more than the account value. The rising floor death benefit is a death benefit in a variable deferred annuity in which the benefit is equal to the larger of the account value or the premiums paid plus interest.
Author
SAngell3
ID
94055
Card Set
Module 8
Description
Module 8
Updated