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Annuity Concepts and Uses Flashcards

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  1. A flexible-premium deferred annuity differs from a single-premium deferred annuity in that it:

    Answer: Allows the owner to make multiple premium payments over time

    Flexible-premium contracts accept ongoing contributions rather than requiring one lump-sum deposit at inception.

  2. The annuity mortality and expense (M&E) risk charge in a variable annuity primarily compensates the insurer for:

    Answer: Guaranteeing the death benefit and bearing longevity risk

    The M&E charge covers the insurer's risk of guaranteeing a death benefit and providing lifetime income regardless of how long the annuitant lives.

  3. Which of the following is an example of a qualified annuity?

    Answer: An annuity held inside an IRA funded with pre-tax contributions

    Qualified annuities are funded with pre-tax dollars inside IRS-approved plans such as IRAs or 401(k)s, and distributions are fully taxable.

  4. What is 'annuitization'?

    Answer: Converting the accumulated value into a stream of periodic income payments

    Annuitization is the process of converting the contract's accumulated value into a series of income payments under a chosen settlement option.

  5. Under the LIFO (last-in, first-out) tax rule for non-qualified deferred annuities, partial withdrawals are treated as:

    Answer: Taxable earnings first, then tax-free return of basis

    The IRS requires that gains (last in) come out first on non-qualified annuity withdrawals, making them fully taxable until all gains are distributed.

  6. A straight life annuity compared to a life with 20-year certain annuity will typically provide:

    Answer: Higher monthly payments because there is no guaranteed minimum payment period

    Straight life pays the most per month because the insurer has no obligation to continue payments after the annuitant's death.

  7. Which regulatory body primarily oversees the sale of variable annuities in addition to state insurance departments?

    Answer: Securities and Exchange Commission (SEC)

    Because variable annuities are classified as securities, their sale is regulated by the SEC and FINRA in addition to state insurance regulators.