Annuity Concepts and Uses Flashcards

An individual purchases a non-qualified deferred annuity. During the accumulation period, what is the tax treatment of the growth within the contract?

Answer: The growth is tax-deferred until withdrawal.

A primary benefit of a deferred annuity is that the interest or investment gains grow on a tax-deferred basis. This means taxes are not paid on the earnings until the money is withdrawn, allowing for potentially faster accumulation due to tax-free compounding.

A 60-year-old client is risk-averse and wants to purchase an annuity that provides a guaranteed interest rate and protects their principal from market fluctuations. Which type of annuity would be most suitable for this client?

Answer: Fixed Annuity

A Fixed Annuity is designed for risk-averse individuals as it offers a guaranteed minimum interest rate and the insurance company assumes the investment risk, protecting the principal from market loss. A variable annuity involves market risk, an equity-indexed annuity has more complexity, and an immediate annuity refers to the payout timing, not the risk profile.

A married couple is setting up an annuity and wants to ensure that if one spouse dies, the surviving spouse will continue to receive income payments for the rest of their life. Which payout option best achieves this goal?

Answer: Joint and Survivor

The Joint and Survivor payout option is specifically designed to provide income for two or more individuals, typically a married couple. Payments continue as long as either annuitant is alive, ensuring the survivor is financially supported.

Which of the following correctly identifies the parties to an annuity contract and their roles?

Answer: The owner purchases and controls the contract, the annuitant's life expectancy is used to calculate payments, and the beneficiary receives any death benefit.

In an annuity contract, the owner is the person who purchases it and has all rights, such as naming the beneficiary. The annuitant is the individual whose life the payments are based on. The beneficiary is the person or entity who receives any remaining value or death benefit upon the death of the owner or annuitant.

An equity-indexed annuity's return is linked to a stock market index, but it guarantees a minimum interest rate. If the index performs well, the interest credited to the annuity might be limited by a feature that specifies the maximum percentage of the gain that will be applied. What is this feature called?

Answer: Participation Rate

A Participation Rate determines what percentage of the index's gain is credited to the annuity. For example, if the index gains 10% and the participation rate is 80%, the annuity would be credited with an 8% gain (before any caps or spreads).

When an individual begins receiving payments from a non-qualified immediate annuity, a portion of each payment is considered a tax-free return of principal, while the rest is taxable earnings. What is the method used to determine the non-taxable portion of each payment called?

Answer: The Exclusion Ratio

The Exclusion Ratio is an IRS calculation used for non-qualified annuitized payments. It determines the portion of each payment that is a tax-free return of the premium paid. The remaining portion is considered taxable interest. LIFO applies to withdrawals during the accumulation phase, not to annuitized payments.