NWM exam: Annuities with 100% correct questions and answers

annuity a contract that provides income for a specified period of years, or for life. an __________ protects a person against outliving his or her money. these are not life insurance but rather a vehicle for the accumulation of money and the liquidation of an estate. payments actually STOP upon the death of the annuitant (the one who receives it) owner the purchaser of the annuity contract, but not necessarily the one who receives the benefits. the owner of the annuity has ALL of the rights, such as naming the beneficiary and surrendering the annuity. the owner of an annuity may be a corporation, trust or other legal entity annuitant the person who receives benefits or payments from the annuity, whole life expectancy is taken into consideration, and for who the annuity is written. the annuitant and the contract owner do NOT need to be the same person, but most often are. the annuitant MUST be a natural person (cannot be a corporation, trust, etc) beneficiary the person who receives accumulation period (pay-in period) the period of time over which the owner makes payments (premiums) into an annuity. it is also the period of time during which the payments earn interest on a tax-deferred basis annuity period (annuitization period, liquidation period, pay-out period) time during which the sume that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. this period may last for the lifetime of the annuitant or for a specified period (could be longer or shorter). the annuitization date is the time when the annuity benefit payouts begin (trigger for benefits) single payment (lump sum) a single premium to fund an annuity periodic payments the premiums are paid in installments over a period of time. these can either be level premiums (in which the annuitant/owner pays a fixed installment) or flexible premium (in which the amount and frequency of each installment varies) immediate annuity an annuity that is purchased with a single, lump sum payment and provides income payments that start WITHIN one year from the date of purchase. as early as 1 month from the purchase, the first payment will be made. most commonly known as a Single Premium Immediate Annuity (SPIA) deferred annuity an annuity in which the income payments begin sometime AFTER one year from the date of purchase. these can be funded with either a single lump sum (Single premium deferred annuity-SPDAs) or through periodic payments (Flexible premium deferred annuities -FPDAs). periodid payments can vary from year to year. the longer the annuity is deferred, the more flexibility for payment of premiums it allows nonforfeiture a deferred annuity has a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization (eg 100% of the premium paid, less any prior withdrawals and related surrender charges) However, a 10% penalty will be applied for early withdrawals (prior to age 59.5) surrender charge purpose: to help compensate the company for loss of the investment value due to any early surrender of a deferred annuity. a ______________ is levied against the cash value, and is generally a percentage that reduces over time. a common surrender charge might be 7% the first year, and then decrease to 6%, 5% year after year etc. AT SURRENDER, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge waiver annuity contracts provide for a __________ of surrender charges if the annuitant is confined to a Long-term Care facility for at least 30 days bail-out provision found in some annuity contracts, this allows the contract holder, in the event that interest rates drop a specified amount within a specified time frame, to surrender the contract without charge pure life (life-only, straight life) a life contingency option, this payment ceases at the annuitant's death (no matter how soon into the annuitization period that occurs). this option provides the HIGHEST monthly benefits for an individual annuitant. no guarantee that all the proceeds will be fully paid out life with guaranteed minimum if the annuitant dies BEFORE the principal amount has been paid out, the remainder of the principal amount will be refunded to the beneficiary. also known as refund life. it guarantees that the entire principal amount will be paid out (type of refund life) cash refund when the annuitant dies, the beneficiary receives a lump-sum refund of the principal minus benefit payments already made to the annuitant. cash refund option does NOT guarantee to pay any interest (type of refund life) installment refund when the annuitant dies, the beneficiary will continue to receive guaranteed installments until the entire principal amount has been paid out life with period certain another life contingency payout option. under this option, the annuity payments are guaranteed for the lifetime of the annuitant and for a specified period of time for the beneficiary (remainder of specified period for the annuitant) single life annuity cover ONE LIFE and annuity payments are made with reference to one life only. contributions can be made with a single premium OR on a periodic premium basis with subsequent values accumulating until the contract is annuitized multiple life annuity covers 2 or more lives. the most common of these are joint life and joint and survivor joint life a payout arrangement where two or more annuitants receive payments until the first death among the annuitants, and then the payments stop joint and survivor a modification of the life income option in that it guarantees an income for TWO recipients that neither can outlive. although it is possible for the surviving recipient(s) to receive payments in the same amount as the first recipient to die, most contracts provide that the surviving recipients will receive a reduced payment after the first recipient dies. (joint and 1/2 survivor, etc). no guarantee that all proceeds will be paid out if both beneficiaries die annuities certain short-term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated fixed-period installments the annuitant selects the time period for the benefits, and the insurer determines how much each payment will be, based on the value of the account and future earnings projections. This option pays for a specified amount of time only whether or not the annuitant is living fixed amount installments the annuitant selects how much each payment will be and the insurer determines how long the benefits will be paid by analyzing the value of the account and future earnings. this option pays a specific amount until funds are exhausted whether or not the annuitant is living fixed annuity -guaranteed minimum rate of interest to be credited to the purchase payment(s) -income (annuity) payments that do not vary from one payment to the next -the insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant (level benefit payment amount) (purchasing power may be eroded over time due to inflation with this annuity) general account fixed annuity premiums are deposited into the life insurance company's _________________. the _______________ is comprised mostly of conservative investments like bonds. these investments are secure enough to allow the insurance company to guarantee a specified rate of interest, as well as assure the future income payments that the annuity will provide guaranteed minimum typically 3%, the interest rate which it cannot fall below with a fixed annuity indexed (equity) annuities fixed annuities that invest on a relatively aggressive basis to aim for higher returns. still has a guaranteed minimum interest rate. the current interest rate that is actually credited is often tied to a familiar index like S&P's 500 company keep a specific amount of initial returns but gives excess to the annuitant. Lock-in annuity account value is an option variable annuity serves as a hedge against inflation and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity. underlying investment (characteristic of variable annuity) the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, NOT their general account. the separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account interest rate (for variable annuity) issuing insurance company does not guarantee a minimum interest rate license requirements (for variable annuity) a variable annuity is considered a security and is regulated by the SEC (Securities exchange commission) in addition to state insurance regulations. an agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA accumulation units variable premiums purchase ________________, which is similar to buying shares in a Mutual Fund. _______________________ represent ownership interest in the separate account. Upon annuitization, the accumulation units are converted to annuity units. The income is then paid to the annuitant based on the value of the annuity units. The number of annuity units received remains level, but the unit values will fluctuate until actually paid out to the annuitant. market value (market value adjusted annuities -MVA) (modified guaranteed annuity) a single-premium deferred annuity that allows the owner to lock in a guaranteed interst rate over a specified maturity period, anywhere between 3-10 years. In an MV, penalties for a premature surrender depend upon current interest rates at the time of surrender. if the annuity is surrendered early, the insurance company requires the annuitant to share in the market risk of changing interest rates lump-sum settlement good use of annuity when someone comes into a large lump sum of money (inheritance, lawsuit award etc). a person may use this money to purchase a single premium immediate annuity which will convert the lump sum of money into a series of periodic payments, providing a stream of income for the annuitant. qualified retirement plans annuities used to fund retirement. this means they meet the IRS guidelines to receive favorable tax treatment. qualified retirement annuities may be individual (such as individual retirement accounts-IRAs) or group (such as tax-sheltered annuity-TSA, or profit-sharing pension plans). both qualified and unqualified annuities grow tax-deferred. exclusion ratio dividing the total investment by the total amount that is expected to be paid out over the life on the contract education funds annuities can be used to accumulate funds for college education.