Deck 18: Retirement Planning and Annuities

Question 1

The primary reason that annuities are purchased is to supply retirement income.

Answer 1

True

Question 2

An annuity is a contract that provides for a series of payments made over a specified period of time which are usually comprised entirely of income.

Answer 2

False

Question 3

An annuitant is a company that issues annuities.

Answer 3

False

Question 4

An immediate annuity is one in which benefits begin as soon as the annuity is purchased.

Question 5

A penalty tax of 10 percent may be assessed on a withdrawal from an annuity made prior to age 59.5. This tax is in addition to ordinary income tax payable on the withdrawal.

Question 6

For income taxation purposes, participating annuity dividends are subject to taxation in the year received.

Question 7

A straight life annuity requires premium payments that are paid for the lifetime of the annuitant.

Question 8

A joint and survivor annuity begins making benefit payments at the death of the first annuitant and pays until the death of the survivor.

Question 9

Mortality tables and interest rates are used in pricing annuities.

Question 10

An annuity certain will pay benefits for a specified period of time, without regard to the life or death of the annuitant.

Question 11

The benefits associated with variable annuities are expressed in terms of annuity units that fluctuate with the performance of an investment portfolio.

Question 12

The distinguishing feature of the market value-adjusted annuity is the option to receive the market value of the survivorship benefit.

Question 13

An annuity certain contains a survivorship element.

Question 14

A temporary life annuity pays benefits until the death of the annuitant or the expiration of a specified period of time, whichever occurs first.

Question 15

After the total purchase price of an annuity has been excluded from income, the subsequent benefit payments are fully taxable.

Question 16

Annuities are generally purchased as a way to guard against the possibility that the annuitant will suffer a premature death.

Question 17

Match the descriptions with their terms:

-A/An _________________ has benefits that are expressed in terms of annuity units.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 18

Match the descriptions with their terms:

-A/An _________________ is paid for all at once.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 19

Match the descriptions with their terms:

-A/An _________________ allows considerable latitude regarding the timing and amount of premiums.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 20

Match the descriptions with their terms:

-A/An _________________ assures the annuitant a lifelong income and guarantees that a minimum number of payments will be made regardless of the time of the death of the annuitant.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 21

Match the descriptions with their terms:

-A/An _________________ assures the annuitant that the purchase price will be paid out in benefits. If the annuitant dies before the purchase price has been paid out, the regular benefit payments continue until the difference is paid.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 22

Match the descriptions with their terms:

-The value of _________________ fluctuates with the performance of a specified portfolio of investments that causes the annuity income to fluctuate as well.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 23

Match the descriptions with their terms:

-A/An _________________ pays benefits only during the life of the annuitant.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 24

Match the descriptions with their terms:

-A/An _________________ assures that the purchase price will be recovered regardless of the time of the annuitant's death. If the annuitant dies before the purchase price has been paid out in benefits, then the difference is paid in a single lump-sum distribution.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 25

Match the descriptions with their terms:

-A/An _________________ is payable for a specified period of time, without regard to the life or death of the annuitant.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 26

Match the descriptions with their terms:

-A/An _________________ is a contract providing for the liquidation of a sum of money through a series of payments over a specified period of time.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 27

Match the descriptions with their terms:

-A/An _________________ is an annuity issued on more than one life and pays as long as either annuitant is alive.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 28

Match the descriptions with their terms:

-The _________________ represents the portion of each annuity payment that is not included in the recipient's taxable income.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 29

Match the descriptions with their terms:

-A/An _________________ begins paying regular annuity distributions as soon as it is purchased.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 30

Match the descriptions with their terms:

-The _________________ is the person who receives the annuity payments.

A) annuitant
B) annuity
C) annuity certain
D) annuity units
E) cash refund guarantee
F) exclusion ratio
G) flexible-premium annuity
H) immediate annuity
I) installment refund guarantee
J) joint and survivor annuity
K) single-premium annuity
L) straight life annuity
M) ten-year period-certain-life annuity
N) variable annuity

Question 31

Assume an exclusion ratio of 75 percent and a marginal tax rate of 34 percent. The total amount of income and penalty tax payable on a withdrawal of $1,000 made while the annuitant is 50 years old is

A) $0,
B) $100,
C) $185,
D) $355.

Question 32

If Harry can purchase a straight life annuity with a monthly benefit of $500 for a single premium of $100,000, what can be said about the size of the monthly benefit associated with a joint and survivor annuity that Harry and his wife can purchase for the same premium?

A) Nothing can be said about the size of the benefit,
B) The benefit will be less than $500 per month,
C) The benefit will be more than $500 per month,
D) The benefit will be less than $500 per month if Harry is older than his wife, and more than $500 if Harry is younger than his wife.

Question 33

Which of the following is not a true statement regarding the income taxation of annuities?

A) Investment earnings are taxed when withdrawn and not when accrued,
B) Dividends on participating policies are not taxed when received,
C) The exclusion ratio represents the amount of a benefit payment that can be excluded from taxable income,
D) A penalty tax of 10 percent is charged for excess accumulations within the annuity if withdrawals are not started by age 59.5.

Question 34

An annuity guarantees payments for the lifetime of the annuitant. A portion of each payment is not from

A) a partial liquidation of principal,
B) investment earnings,
C) expense charge,
D) survivorship benefit.

Question 35

Which of the following would have the highest current value?

A) an immediate joint and 100 percent survivor annuity for two 60-year-old people that will pay $1,000 per month, with a five-year period-certain guarantee,
B) an immediate annuity for a 60 year old that will pay $1,000 per month,
C) an immediate joint and 100 percent survivor annuity for two 60-year-old people that will pay $1,000 per month,
D) a deferred straight life annuity for a 50 year old that will pay $1,000 per month beginning at age 60.

Question 36

A 10-year period-certain guarantee

A) is not available in conjunction with an annuity based on more than one life,
B) when made in connection with a single-life annuity, will cease payments at the death of the annuitant or the expiration of 10 years, whichever occurs later,
C) when made in connection with a single-life annuity, will cease payments at the death of the annuitant or the expiration of 10 years, whichever occurs first,
D) will have a larger effect if the annuitant is relatively young.

Question 37

Jill, age 39, can buy a deferred annuity that will pay $100 per month beginning at age 65 and will continue until her death for a single premium today of $1,000. Jack, age 37, can buy a deferred annuity that will pay $100 per month beginning at age 65 and will continue until his death for a single premium today of $900. What can be said about the single premium that would be required of Jill and Jack for a joint and 100 percent survivor annuity that will pay $100 per month beginning at age 65?

A) The cost will be about $1,900,
B) The cost will be between $900 and $1,000,
C) The cost will exceed $1,000,
D) It is impossible to determine anything about the price of the joint annuity because the differing ages of the annuitants would require the use of a mortality table to determine the price.

Question 38

An annuity that would be particularly suitable for the investment of an inheritance of $500,000 to fund a future retirement is

A) a single-premium annuity,
B) a flexible-premium annuity,
C) an annual-premium annuity,
D) an immediate annuity.

Question 39

An annuity that would be particularly suitable for saving from an unstable income for a retirement that will take place in several years is

A) a single-premium annuity,
B) a flexible-premium annuity,
C) an annual-premium annuity,
D) an immediate annuity.

Question 40

A married couple with only one spouse currently working outside the home plans to retire in several years. An annuity that would be particularly suitable for saving for that retirement would be

A) a straight life annuity on the life of the working spouse,
B) a straight life annuity on the life of the nonworking spouse,
C) a deferred joint and survivor annuity,
D) an immediate joint and survivor annuity.

Question 41

Jim is 50 years old, childless, and was financially dependent on the income of his recently deceased wife, Alexis. When Jim attains age 60, he will be eligible to collect Social Security benefits as Alexis' widower. He wants an annuity that will provide an income until he is eligible for Social Security benefits or dies, whichever occurs first. An annuity that would be particularly suitable for Jim is

A) a l0-year annuity certain,
B) an immediate annuity,
C) a deferred annuity that would begin benefit payments in 10 years,
D) a 10-year temporary annuity.

Question 42

Which of the following statements regarding variable annuities is always true?

A) Variable annuities offer great flexibility in the amount of each premium payment,
B) The premiums owed are expressed in terms of annuity units,
C) Variable annuities are best suited for the needs of retirees because they provide a predictable income flow,
D) The annuity benefit fluctuates with the performance of an investment portfolio.

Question 43

An early withdrawal penalty tax generally will be charged on withdrawals prior to

A) the annuitant's attaining the age of 59.5,
B) the expiration of the contract,
C) the annuitant's attaining the age of 62,
D) the retirement of the annuitant.

Question 44

If a single-premium immediate variable annuity is purchased for $200,000 and the average return on investment in the last five years has been 5 percent, what can be said about the size of the first monthly annuity payment?

A) The first payment will be $10,000,
B) The first payment will be very close to $833,
C) It is impossible to say because more premiums may be paid before the distribution is made,
D) The amount of the first payment cannot be determined without further information.

Question 45

A 45-year-old single male has very little in liquid assets but is saving for retirement. It is certain that he will retire in 10 years and require an income of a very accurately estimated amount at that time. An annuity that would be most suitable for him is

A) an annuity certain,
B) a temporary annuity,
C) an annual-premium annuity,
D) a single-premium deferred straight life annuity.