Chapter 9: Annuities

Question 1

403(B) plan

Answer 1

As defined in section 403B of the IRS tax code, this is a retirement plan for certain employees of public school, employees of specific tax, exempt organizations, and certain ministers.

Question 2

1035 contract exchange

Answer 2

This provision states that if an annuity is exchanged for another annuity a “gain” ( for tax purposes) is not realized. This is also true if a life insurance policy or endowment contract is exchange for annuity however, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows a policyholder to transfer funds from a life insurance, and doubt, or annuity to a new annuity policy without being required to pay taxes.

Question 3

Accumulation period

Answer 3

During this period the premiums that an annuitant pays into an annuity or accredited as accumulation units the accumulation period may continue during the period between when the premium payments have seized, and the payout has not yet begun at the end of the accumulation. Accumulation units are converted to annuity units.

Question 4

Accumulation units

Answer 4

These units represent the value of contributions that are made by the annuitant LESS a deduction for expenses, the value of each accumulation unit is a credit to the individuals account and varies, depending on the value of the underlying stock investment.

Question 5

Annuitant

Answer 5

This is one to whom an annuity is payable, or a person upon who continued life future payments are dependent.

Question 6

Annuity units

Answer 6

These units are used to make payments to the annuitant. Annuity units are received once the accumulation units are converted to begin the payout. At the time of the initial payout, the annuity unit calculation is made and from then on the number of annuity units will remain the same for the life of the contract.

Question 7

Cash refund option

Answer 7

Upon the death of an annuitant, this option provides that before payments totaling the purchase price have been made the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one lump sum to designated beneficiaries.

Question 8

Deferred annuity

Answer 8

These annuities provide for the postponement of the payment of an annuity until after a specified period or until the annuitant attains a specified age. A deferred annuity may be purchased on either a single premium or a flexible premium basis deferred annuities typically don’t begin making income payments for at least one year after the date of purchase.

Question 9

Equity index annuity (EIA)

Answer 9

This is a fixed deferred annuity that offers the traditional guaranteed minimum interest rate as well as an excess interest feature that’s based on the performance of an external equity market index.

Question 10

Exclusion ratio

Answer 10

This is a fraction, which is used to determine the amount of annual annuity income that that’s exempt from federal income tax. The exclusion ratio is calculated by taking the total contribution or investment in the annuity divided by the expected ratio.

Question 11

Fixed annuity

Answer 11

This is an annuity that provides a guaranteed rate of return. The interest payable for any given year is declared in advanced by the insure and is guaranteed to be no less than a minimum that’s specified in the contract with fixed annuity. The investment risk is assumed by the insurer

Question 12

Immediate annuity

Answer 12

This type of annuity can only be purchased with a single payment and typically begins paying income within one month of purchase.

Question 13

Joint life and Survivor option

Answer 13

This annuity payout option provides for payment to two people if either person dies the income payment continue to the Survivor for life when the surviving annuitant dies no further payments are made to any person. A full survivor option pays the same( I.e., full) benefit amount to the survivor. A two-3rds survivor option pays 2– 3rds of the original joint benefit to the survivor. A one-half survivor option pays one-half of the original joint benefit to the survivor.

Question 14

Life with period certain (or life income with term-certain) option

Answer 14

This pay option is designed to pay the annuitant and income for life, but guarantees a definite minimum period of payments therefore, if the annuitant dies during the specified period benefit payments will continue to the beneficiary for the remainder of that.

Question 15

Market value adjustment

Answer 15

This adjustment can be attached to a deferred annuity and features fixed interest rate guarantees, combined with an interest rate adjustment that can cause the actual crediting rates to increase or decrease in response to market conditions. Rather than having the annuity interest rate linked to an index(as with the equity – index annuity) an MVA annuity interest rate is guaranteed to be fixed if the contract is held for the period that specified in the policy, the market – value adjustment feature applies. Only if the contract is surrendered before the contract period expires if it’s not surrendered the annuity functions in the same manner as I fixed annuity.

Question 16

Period certain annuity

Answer 16

This is an annuity income option that guarantees a definite minimum period of payments(e.g., 10 years)

Question 17

Periodic payment annuity(flexible premium)

Answer 17

This refers to an annuity owner, making multiple premium payments to accumulate principle. typically after the initial premium these payments are flexible in regard to both frequency and amount.

Question 18

Principal

Answer 18

This is the original sum of money that’s paid into an annuity through premium(s).

Question 19

Single premium annuity

Answer 19

This is an annuity for which the entire premium is paid in one lump sum at the beginning of the contract period.This can be deferred or immediate single premium annuity.

Question 20

Straight life annuity

Answer 20

This is an annuity income option that pays guaranteed income for the annuitants lifetime, but payment sees upon the annuitants death.

Question 21

Variable annuity

Answer 21

This annuity shifts the investment risk from the insurer to the contract owner variable annuities are similar to a traditional fixed annuity in that retirement payments will be made periodically to the annuitants usually over the remaining years of their lives however, with the variable annuity, there’s no guarantee of the dollar amount of the payments. The payment actually fluctuate according to the value of the securities in the account primarily the value of common stocks, a variable annuity, invests deferred annuity payments and an insurers separate account rather than the insurers general account, which allows the insurer to guarantee interest in a fixed annuity since variable annuities are based on non-guaranteed equity invest investments, example, stock a sales representative, who wants to sell these contracts must be registered with the financial industry, regulatory authorityand must hold a state insurance license