Question 1

What is an Annuity?

Accepted Answer

An Annuity is simply a series of periodic payments, such as $100 per month, paid to an annuitant for life. Usually for retirement income or can be paid to an annuitant and their beneficiary for a minimum “period certain.” (like a 10 year period).

Question 2

An annuity is a suitable investment for an individual with an investment objective of

Accepted Answer

long-term capital appreciation.

Question 3

Who issues annuity contracts?

Accepted Answer

Annuity contracts are issued by life insurance companies.

Question 4

How does the annuity contract holder buy the contract?

Accepted Answer

by paying a lump sum to the life insurance company, called a “single premium” or by paying a series of installment payments called “periodic premiums” or Flexible Premiums.

Question 5

What is an immediate annuity?

Accepted Answer

Immediate Annuity — After the annuitant has deposited their single premium payment, the income payments to the annuitant begin immediately (after the start date) and are paid for a specific period of time or for the life of the annuitant.

Question 6

What is a deferred annuity?

Accepted Answer

Deferred Annuity — income payments do NOT start until a later date in the future, usually when the annuitant retires.

Question 7

What are the two basic types of annuities?

Accepted Answer

Fixed and Variable.

Question 8

What is a fixed annuity?

Accepted Answer

A Fixed Annuity pays the same predetermined dollar amount each period, for example $100 per month.

Question 9

Who bears the investment risk on a fixed annuity?

Accepted Answer

The insurance company.

Question 10

What is a variable annuity?

Accepted Answer

A Variable Annuity pays a fluctuating dollar amount each period, for example $100 in January, $103 in February, $99 in March. The amount paid varies based on the value of the securities that are held in the Separate Account of the insurance company issuing the variable annuity contracts.

Question 11

Who bears the investment risk on a variable annuity?

Accepted Answer

The annuitant (or policy holder in this case) bears the investment risk.

Question 12

Can the variable annuity act as a hedge against inflation?

Accepted Answer

Yes. A fixed annuity does not provide a hedge against inflation because the payments are set. With a variable annuity, your purchasing power is not as vulnerable as with a fixed annuity because your payments fluctuate based on the value of the Separate Account, which provides a Hedge against inflation.

Question 13

What is the tax treatment of earnings on both fixed and variable annuities?

Accepted Answer

On BOTH a Fixed and Variable Annuity, the earnings are tax deferred until annuitization, or unless the holder makes early withdrawals.

Question 14

Are fixed products securities?

Accepted Answer

No.

Question 15

Are variable products securities?

Accepted Answer

Yes.

Question 16

Ins Co Fixed Products -- Where do premiums for life insurance and fixed annuities feed into?

Accepted Answer

the General Account.

Question 17

Ins Co Fixed Products -- Who makes the investment choices in the General Account?

Accepted Answer

the Insurance Company (Company takes the risk).

Question 18

Ins Co Fixed Products -- What benefit does life insurance provide?

Accepted Answer

Fixed Death Benefit.

Question 19

Ins Co Fixed Products -- What benefit does a fixed annuity provide?

Accepted Answer

Fixed Payout.

Question 20

Ins Co Variable Products -- Where do premiums for variable life Insurance and variable annuities feed into?

Accepted Answer

the Separate Account.

Question 21

Ins Co Variable Products -- What is the Separate Account divided into? / Who makes the investment choices in the Separate Account?

Accepted Answer

the Separate Account is divided into Sub Accounts where the client makes the investment choices (Client takes the risk).

Question 22

Ins Co Variable Products -- Can variable products provide a variable payout?

Accepted Answer

Yes.

Question 23

Ins Co Variable Products -- Do most all variable products provide a minimum death benefit?

Accepted Answer

Yes.

Question 24

What are variable annuities?

Accepted Answer

Variable Annuities — are basically made up of an investment portfolio of mutual funds or other professionally managed securities held in a special, tax-deferred account of the insurance company called the Separate Account.

Question 25

Are variable annuities considered to be long-term investments that provide a possible hedge against inflation?

Accepted Answer

Yes. They ARE considered to be long-term investments that MAY provide a POSSIBLE hedge against inflation.

Question 26

Would a variable annuity be suitable for an investor with an investment objective of long-term capital appreciation?

Accepted Answer

Yes. Variable annuities are suitable for an investor with an investment objective of long-term capital appreciation.

Question 27

What are the two basic types of "units" in a variable annuity contract?

Accepted Answer

You’re paying into the plan —> you acquire Accumulation Units The plan is paying you —> you are receiving Annuity Units.

Question 28

What happens to the number of units you get when you annuitize?

Accepted Answer

When you annuitize, the number of units you get is “fixed,” BUT the value of those units will fluctuate based on the value of the securities in the Sub Account.

Question 29

What are the returns on a variable annuity directly tied to?

Accepted Answer

Returns in a variable annuity are directly tied to the investments chosen by the contract holder.

Question 30

How are returns measured on a variable annuity?

Accepted Answer

Measuring returns in a variable annuity is as simple as measuring yields on the various investments and separate account (or sub-accounts) that the holder of the contract chooses.

Question 31

Who bears the investment risk of the portfolio of a variable annuity?

Accepted Answer

The contract holder chooses the investments, therefore, they bear the investment risk of the portfolio.

Question 32

How do expenses and fees on a variable annuity [units] compare to that of an investment company shares with similar features?

Accepted Answer

Variable annuities generally have HIGHER expenses and fee.

Question 33

Why do variable annuities have higher expenses and fees than investment companies?

Accepted Answer

Because variable annuities often invest IN investment company shares. In these situations, the investor ends up paying fees associated with BOTH the investment company AND the annuity. This results in higher fees than if the investor would have simply invested in the mutual fund directly.

Question 34

Are tax-deferred earnings a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 35

Is participation in upward fluctuations in the market (which allow the investor to receive higher levels of return than with standard fixed annuities) a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 36

Is the ability to change investments within the annuity with changes in investment objectives or investment strategies a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 37

Is investors having added control over how annuity funds are invested in the market a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 38

Is professional management of the funds a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 39

Is a guaranteed minimum death benefit a benefit of investing in a variable annuity?

Accepted Answer

Yes.

Question 40

Do variable annuities have guaranteed cash values?

Accepted Answer

No. Variable Annuities do NOT have guaranteed cash values.

Question 41

What type of tax dollars are qualified annuities bought with?

Accepted Answer

Qualified annuities are bought with before tax dollars.

Question 42

What is the tax treatment of qualified annuity distributions?

Accepted Answer

All of the distributions from a qualified annuity are taxable.

Question 43

What type of tax dollars are non-qualified annuities bought with?

Accepted Answer

Non-qualified annuities are bought with after tax dollars.

Question 44

What is the tax-treatment of non-qualified annuity distributions?

Accepted Answer

On distribution, only the earnings are taxable. (Bc the annuity was bought with after-tax dollars.)

Question 45

What is the tax treatment of earnings that accumulate both a qualified and non-qualified annuity?

Accepted Answer

In both cases, the earnings accumulate on a tax deferred basis.

Question 46

What is the taxation of an early withdrawal on an annuity?

Accepted Answer

The taxation of an early withdrawal is Last In, First Out (LIFO), meaning that earnings are taxed first, plus a 10% penalty if the annuitant is under 59 1/2.

Question 47

Are predictions and projections allowed on Variable Annuities?

Accepted Answer

No. Predictions and projections are NOT allowed on Variable Annuities.

Question 48

What are Variable Annuities structured like?

Accepted Answer

Variable Annuities are structured like an investment company.

Question 49

Are Variable Annuities registered with the SEC pursuant to the Investment Company Act of 1940?

Accepted Answer

Yes.

Question 50

Annuity Pay Out Options / Choices -- What is the Single Life or Life Annuity pay out option?

Accepted Answer

Single Life or Life Annuity — Annuitants receive regular income payments until they die, regardless of how long they live. This payment option usually provides the highest amount of payment to the annuitant. There are NO beneficiaries. When the annuitant dies, the insurance company keeps any remaining balance of the life annuity.

Question 51

Annuity Pay Out Options / Choices -- What is the Joint and Last Survivor Annuity pay out option?

Accepted Answer

Joint and Last Survivor Annuity — income payments are made while both annuitants are alive, and then the survivor continues to receive payments after the death of the other annuitant. The payment may be 50% to 100% of the original amount paid depending on the plan that was chosen.

Question 52

Annuity Pay Out Options / Choices -- What is the Joint Life pay out option?

Accepted Answer

Joint Life — payments last as long as both annuitants are alive, and stop upon the death of EITHER annuitant. This option is rarely used.

Question 53

Annuity Pay Out Options / Choices -- What is the Life Annuity-Period Certain pay out option?

Accepted Answer

Life Annuity-Period Certain — the annuitant will receive regular payments until death, but IF the annuitant dies before a chosen period has expired, the beneficiary will receive payments UNTIL the period certain ends (e.g. 10 years measured from the date of the contract). We DO have a beneficiary. The beneficiary will receive payments until the period certain ends.

Question 54

Annuity Pay Out Options / Choices -- What is the Refund Annuity pay out option?

Accepted Answer

Refund Annuity — if the income payments of the annuitant do not equal the premiums that were paid in, the balance of the account is paid to a beneficiary of the annuity either in payments or in a lump sum.

Question 55

Annuity Pay Out Options / Choices -- What is the Immediate Annuity pay out option?

Accepted Answer

Immediate Annuity — the annuity contract bought with a single payment and a specified payout plan begins right away/immediately.

Question 56

Annuity Pay Out Options / Choices -- What is the Deferred Annuity pay out option?

Accepted Answer

Deferred Annuity — annuity whose contract provides that payments will be postponed until a certain number of periods or years have elapsed. Example: Payments to an annuitant will only begin with the annuitant reaches age 70. Maybe you are in your 30s or 40s and you buy a deferred annuity, and you don’t plan to take your annuity payments until you are 70 years of age.

Question 57

What is a Traditional Equity Indexed Annuity?

Accepted Answer

Traditional Approach: a). Traditionally, an equity indexed annuity provided payments linked to a specific stock index, like the S&P 500. If the index increased in value, the contract holder would be credited with at least PART of the gain (with a cap to how much they would receive). If the index declined in value, then the contract holder would be debited at least part of the decrease in value.

Question 58

What are all contract holders guaranteed on Traditional Equity Indexed Annuities?

Accepted Answer

All contract holders are guaranteed a minimum value on their annuity.

Question 59

Are Traditional Equity Indexed Annuities considered to be securities? Why?

Accepted Answer

Yes. Due to the ability to increase/decrease in value, these products were treated as “securities” and had to be supervised like any other securities transaction. So your Traditional Equity Indexed Annuities WERE considered to be securities.

Question 60

What is the Modern Approach to Equity Indexed Annuities?

Accepted Answer

Modern Approach: a). Recent developments in the equity indexed annuity markets have created new products which are structured LIKE fixed annuities, with fixed-interest rates, but ALSO have a fluctuating interest rate which is linked to an index. b). For exam purposes, these products fall somewhere between a fixed annuity, and a variable annuity.

Question 61

Are most equity indexed annuities considered to be securities in today's market?

Accepted Answer

No, but they must be registered with each state's insurance commission. c). In today’s market, most equity indexed annuities are NOT considered to be securities, but must be registered with each state’s insurance commission.

Question 62

What is Point-to-Point indexing?

Accepted Answer

Point to point means that the level of credited interest is based on the difference in an index value over some period of time -OR- a percentage of the difference in an index value over some period of time.

Question 63

Indexed Annuities can measure the movement of the index in three distinct ways:

Accepted Answer

1) . Annual Reset 2) . High Water Mark 3) . Point-to-Point

Question 64

Valuation / Computation on Modern Index Annuities -- What is Annual Reset?

Accepted Answer

Annual Reset — Beginning of the year to the end of the year, the annuitant locks in gains EVERY YEAR that the index is positive. So with annual reset, we measure from the beginning of the year to the end of the year, and if index went up in value, that gets locked in for the annuitant.

Ch 07(4) Inv Vehicle Characteristics | Insurance-Based Products Flashcards

Detail different types of annuities & life insurance.

Brainscape's Knowledge GenomeTM

Ch 07(4) Inv Vehicle Characteristics | Insurance-Based Products Flashcards

Detail different types of annuities & life insurance.

Brainscape's Knowledge Genome^TM