The fixed-period immediate annuity has no named beneficiary who will receive the balance of payment due if the annuitant dies before the expiration of the chosen distribution time period.
a) True
b) False
b) False
With a fixed-period immediate annuity, if the annuitant dies during the distribu¬tion period, payments continue to the annuitant's beneficiary until the end of the distribution period.
The immediate annuity payout option for a given age that will produce the highest payment to the annuitant is the straight life annuity.
a) True
b) False
a) True
In the straight-life immediate annuity, the purchaser pays a premium and selects a specific length of time for the insurance company to make the periodic payments.
a) True
b) False
b) False
This statement describes a fixed-period immediate annuity.
A life annuity with a period-certain immediate annuity is one in which the purchaser requests that if the annuitant's death occurs before a certain number of years have passed, then payments are to continue to a named beneficiary until the end of the specified period.
a) True
b) False
a) True
If a joint and 75 percent survivor annuity payment option is chosen and the initial payment is $2,000 per month, after the first annuitant's death, the payments will continue to the survivor at the rate of $1,500 per month.
a) True
b) False
a) True
The life annuity with cash refund assures the purchaser that if the annuitant dies prior to payout of a total dollar amount that is equivalent to the contract's initial deposit, periodic payments will continue until a full refund of the deposit has been paid.
a) True
b) False
b) False
This statement describes the life annuity with installment refund immediate annuity.
The joint and survivor life annuity pays income for the lives of two individuals. After the death of the first annuitant, the insurance company continues to make full payments only until the death of the second annuitant.
a) True
b) False
a) True
The life annuity with installment refund assures the purchaser that if the annuitant dies prior to payout of a total dollar amount that is equivalent to the contract's initial deposit, the payment is likely to be a lump sum equal to the discounted present value of the beneficiary's remaining payments.
a) True
b) False
b) False
This statement describes the life annuity with cash refund immediate annuity.
If a fixed-period immediate annuity pays $1,000 per month income but the purchaser opts for a cost-of-living adjustment (COLA), for the same single premium the payment would normally start at $1,000 but then increase by 3 percent.
a) True
b) False
b) False
For a comparable lump-sum investment made by the annuity owner, the insurance company prices this COLA feature by reducing the payments that would initially be available from a corresponding level-payout annuity. Consequently the income not paid early in the contract years can be used to increase the income in later years.
With a variable annuity, the investment risk lies with the policyowner.
a) True
b) False
a) True
If a low assumed investment return is chosen with a variable immediate annuity, the chance of having higher future payments increases.
a) True
b) False
a) True
Equity-indexed annuities are required to be registered with the SEC but not with the NASD.
a) True
b) False
a) True
Equity-indexed annuities are fixed annuity products that are not required to be registered with either the SEC or the NASD.
The exclusion ratio calculation is the same for all immediate annuities.
a) True
b) False
b) False
The exclusion ratio is calculated differently depending on whether the immediate annuity is either a fixed non-life-contingent or fixed straight life annuity, a fixed life annuity with period-certain or refund guarantee, or a variable immediate annuity.
The advantage of both the variable deferred annuity and the equity-indexed annuity over the fixed-interest annuity is that they are more likely to keep up with inflation because of their link to the financial markets.
a) True
b) False
a) True
Both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are involved in variable annuity sales regulation.
a) True
b) False
a) True
The inflation-adjusted immediate annuity addresses the problem of interest rate volatility.
a) True
b) False
b) False
Interest rate volatility is a result of purchasing the annuity at different times when interest rates may be higher or lower. The inflation-adjusted annuity addresses the purchasing power risk.
If an immediate life annuity allows for a partial lump-sum payment, the value of future income payments will be reduced as a result of a lump-sum payout.
a) True
b) False
a) True
A guaranteed payout option is an increasingly common option offered on deferred variable annuities.
a) True
b) False
a) True
A variable immediate annuity is one approach to address the interest rate volatility concern with immediate annuities.
a) True
b) False
a) True
A client purchases an immediate annuity with a 10-year fixed period and each annual payment equals $10,000. In this example, which of the following statements is correct?
A) A portion of each $10,000 will be considered taxable income to the client.
At the end of 10 years all payments in a 10-year fixed-period annuity cease.
In this case we do not have sufficient information to know how much the annuity exclusion ratio will be.
The 10 percent IRS penalty is not applicable to a 10-year fixed-period annuity.
The three basic reasons people outlive their retirement income are
D) inadequate savings, increased life expectancy, and inflation
Decreasing tax rates, deflation, and increased family size are not valid reasons why people outlive their retirement income.
Which of the following annuity sales are subject to the Senior Protection in Annuity Transactions Model Regulation suitability requirement?
a) annuities in an IRC Sec. 457 plan b) annuities in a nonqualified deferred-compensation arrangement
c) variable annuities
d) structured settlement annuities
c) variable annuities
IRC Sec. 457 plans, nonqualified deferred-compensation arrangements, and structured settlement annuities, respectively, are each exempt from the Senior Protection in Annuity Transactions Model Regulation suitability requirement.
Which of the following statements regarding the assumed investment return (AIR) in a variable immediate annuity is (are) correct?
I. The amount of the first two initial monthly checks will be determined by the AIR..
II. If investment performance equals the AIR payments will remain the same.
a) I only
b) II only
b) Both I and II
d) Neither I nor II
b) Both I and II
Which of the following statements regarding substandard annuities is (are) correct?
I. They require medical underwriting.
II. They provide higher income payments than normal annuities.
C) Both I and II
All the following attributes of a fixed immediate annuity are positive in the eyes of the owner EXCEPT
B) increasing payout amounts
All the following statements concerning immediate fixed annuities are correct EXCEPT
C) With a joint and survivor annuity, payments will continue after the death of the first annuitant only if the annuitant dies before his or her life expectancy.
Payments continue to the second annuitant as long as he or she is alive and regardless of how long the first annuitant lives.
Which of the following is/are considered a type of life-contingent immediate annuity?
I. Fixed-period annuity.
II. Life annuity with period certain.
B) Only II.
I is incorrect. A fixed-period annuity is not contingent upon a life.
Which of the following statement is correct regarding types of annuities?
a) Indexed annuities are the most regulated of the types of deferred annuities.
b) A variable annuity allows the annuity purchaser to participate in the investment of the annuity
funds.
c) Immediate annuities typically accept additional premiums after the first premium has been
paid.
d) A fixed annuity provides a benefit that changes with investment performance.
b) A variable annuity allows the annuity purchaser to participate in the investment of the annuity funds.
Variable annuities are the most regulated of the types of deferred annuities.
Immediate annuities, by their very nature, do not accept additional deposits.
The benefit of a variable annuity will change based upon investment performance.
Which of the following attributes is/are considered positive in the eyes of the owner of a fixed
immediate annuity?
I. Increasing payout amounts.
II. Choice of multiple payout options.
B) Only II.
I is incorrect. Fixed immediate annuities have level payout amounts. The payout amounts do not increase.
Which of the following statements is correct regarding immediate annuities?
a) With a fixed-payment annuity, the purchaser pays a premium and selects the periodic payment
amount the insurance company is to pay.
b) A life annuity with period certain is the least expensive type of life-contingent annuity.
c) A life annuity with cash refund assures that installment payments will continue after the death
of the annuitant, until a full refund of the deposit has been paid.
d) A life-only annuity provides the largest possible payment for a given premium, but contains the highest risk of loss of money.
d) A life-only annuity provides the largest possible payment for a given premium, but contains the highest risk of loss of money.
With a fixed-amount (not fixed-payment) annuity, the purchaser pays a premium and selects the periodic payment amount the insurance company is to pay.
A life-only annuity is the least expensive type of life-contingent annuity.
A life annuity with installment refund assures that installment payments will continue after the death of the annuitant, until a full refund of the deposit has been paid.
All of the following statements regarding the taxation of a post-1986 single-life annuity are correct
EXCEPT:
income-tax-free basis.
d) Once the annuitant reaches their life expectancy, the entire amount of the annuity payment
received will be subject to income taxation.
C) The exclusion ratio is determined by dividing the investment in the contract by the gross premiums paid.
The exclusion ratio is determined by dividing the investment in the contract by the expected return from the contract.
Marybeth, age 70, purchased an immediate annuity from an insurance company for a total
investment of $120,000. She will receive monthly installments of $1,000 for the rest of her life. Her
life expectancy according to IRS tables is 16 years. How much of each monthly payment will be
taxable to Marybeth?
B) $375.
The exclusion ratio must be calculated first. The exclusion ratio is the Total Investment divided by the Expected Return from the contract.
Exclusion Ratio = $120,000 / ($1,000 x 12 x 16) = 62.5%
Therefore, $625 (62.5% x $1,000) will be income tax free, meaning the remaining $375 ($1,000 - $625)
will be taxable.
John, age 65, purchased an immediate variable life annuity, with a total investment of $200,000.
His life expectancy is 20 years according to IRS tables. In the first full year of the contract, he
received a total annuity payment of $12,000. How much of this payment will be income-tax-free for
John?
A) $10,000.
Since this is a variable annuity payment, the tax-free portion of each payment is calculated using the
following formula:
Tax-free portion of each annual payment = Total investment divided by Number of years payments will be
made
Therefore, his tax-free portion per payment is $10,000 ($200,000/20)
Which of the following statements is/are correct regarding annuity variations?
I. Annuity/Long-term care combinations combine asset protection and asset accumulation.
II. Impaired risk annuities require the annuitant to undergo medical underwriting.
C) Both I and II.
Which of the following statements is correct regarding variable immediate annuities?
a) With a variable immediate annuity, the insurance company accepts the mortality risk, the expense risk, and the interest rate risk.
b) The main risk of a variable immediate annuity is that the annuity’s purchasing power is being
eroded by inflation.
c) The amount of initial income a variable immediate annuity provides will be greater than the
income offered by a fixed annuity with comparable guarantees.
d) The initial annuity checks received from a variable immediate annuity are based upon an assumed investment return.
d) The initial annuity checks received from a variable immediate annuity are based upon an assumed investment return.
With a variable immediate annuity, the insurance company accepts the mortality risk and the expense risk, but not the interest rate risk.
The main risk of a FIXED immediate annuity is that the annuity’s purchasing power is being eroded by inflation. The main risk of a variable annuity is that the payments may decrease due to poor investment performance.
The amount of initial income a variable immediate annuity provides will be less than the income offered by a fixed annuity with comparable guarantees.
Each of the following represent a traditional source of retirement income EXCEPT:
D) Inheritances.
Inheritances are not considered a traditional source of retirement income.
Which of the following statements is correct regarding retirement trends in the United States?
a) The savings rate in the United States has been increasing steadily over the last 30 years.
b) Over time, individuals are relying more and more on employer sponsored retirement plans to
provide for their retirement.
c) Individual life expectancy has not changed
d) Major studies have confirmed that Americans are saving, at most, one-third of the amount they should be saving to retire comfortably.
d) Major studies have confirmed that Americans are saving, at most, one-third of the amount they should be saving to retire comfortably.
The savings rate in the United States has declined over the last 30 years.
Over time, individuals are relying more and more on personal savings to provide for their retirement.
Life expectancy in the year 1900 was approximately age 47; life expectancy now is approximately age 77.
Which of the following statements is/are correct regarding the characteristics of annuities?
I. A single-premium deferred annuity may be an appropriate vehicle for an individual who has
received a large sum of money that will be used for retirement.
II. Withdrawals from a single-premium deferred annuity must commence when the annuitant
attains age 70½.
A) Only I
II is incorrect. The minimum distribution rules, applicable to qualified plans and IRAs, are not applicable to annuities.
All of the following statements are correct regarding a non-qualified variable deferred annuity
EXCEPT:
D) The annuity will receive a step-up in basis for income tax purposes at the owner’s death.
Annuity products do not receive a step-up in basis for income tax purposes at the owner’s death.
All of the following statements are correct regarding the characteristics of annuities EXCEPT:
exposed to the effects of inflation.
d) Medically underwritten immediate annuities will result in higher payments to the annuitant,
since the payments are based upon a rated-up age.
C) Equity-indexed annuities must be registered with the SEC, and consumers must be given a prospectus before purchasing these products.
Equity-indexed annuities are not required to be registered with the SEC. This is an area of strong criticism
against these types of annuities.
Which of the following is/are features available in variable deferred annuities that are not found in
mutual funds?
I. The ability to purchase one of several guaranteed living benefits riders.
II. Availability of a guaranteed minimum interest account.
C) Both I and II.
Which of the following statements is correct regarding the Senior Protection in Annuity Transactions Model Regulation?
transactions.
d) The regulation applies to all individuals age 60 or older.
A) The regulation establishes standards for both the insurance companies and financial advisors.
The model regulation applies to both fixed and variable annuity products.
Under the regulation, insurance companies are not required to review all producer-solicited transactions.
The regulation applies to all individuals age 65 or older.
What is the value of a variable annuity contract that was issued with a 5% assumed investment return (AIR) and a beginning unit value of $100 if the actual interest rate earned in the first month is 8%?
A) $103.
The actual rate exceeded the assumed rate by 3%. Thus the value is $103.
Which of the following statements is/are correct regarding the assumed investment return (AIR) in
a variable immediate annuity?
I. If the annuity subaccount performance is less than the chosen AIR, future payments will increase.
II. The amount of the first 12 monthly checks will be determined by the AIR.
a) Only I.
b) Only II.
c) Both I and II.
d) Neither I nor II.
d) Neither I nor II.
I is incorrect. The opposite is true. If the annuity subaccount performance is less than the chosen AIR, future payments will decline.
II is incorrect. Only the amounts of the first and second check are determined by the assumed investment return.
