Obviously, annuities are important for a person who needs a vehicle to meet their financial needs. The financial needs of corporations that provide group benefits also benefit from annuities. Financial planners use annuities for a variety of reasons, and in today’s market, annuities must compete with other investment vehicles. Therefore, for annuities to take their proper place in the area of investments there are some basic considerations that must be kept in mind.
As a general rule, annuities should be considered part of a long-term investment strategy rather than as a short-term liquid savings account (with one notable exception – the immediate annuity). This statement will be repeated in one form or another throughout this text, as it underlies the entire subject of annuities used as an investment. One of the primary benefits of annuities— the tax-deferral on interest—applies only as long as the funds deposited in the annuity are not withdrawn. When discussing the precise tax consequences, it is apparent that Internal Revenue Service tax penalties can be quite severe. Also, as discussed elsewhere, it must be noted that the insurance company imposes its own penalties in the form of surrender charges or interest rate adjustments when annuity funds are withdrawn under certain circumstances.
The exception to the long-term investment strategy is the use of a single premium immediate annuity to begin providing income payments as soon as possible. In this case, of course, the purpose is to pay an immediate stream of income, not to build up funds for the future.
Generally annuities are purchased with flexible premiums so as to defer the income return until some future date and to reap the tax benefits in the meantime. Annuitants who adhere to the long-term strategy are thus “rewarded” and annuitants who do not are “penalized.” At the same time, the flexibility and withdrawal privileges of newer annuities are more sensitive to changing financial circumstances; therefore annuity owners who encounter large, unexpected or immediate financial needs are able to access their annuity funds to some extent.24
In particular, Variable Annuities are best perceived as long-term investments. When the stockmarket is a “bull” market, then the investments underlying a Variable Annuity will also perform well over the long term.
Historically, a mix of securities, such as those that are investments for variable annuities and mutual funds, has been profitable over an extended period of time. The key is avoiding the temptation to withdraw from the investment during temporary downturns in the market.
The annuity insurer will usually and periodically determine a first-year interest rate and a renewal year interest rate, based upon the interest rates realized by the insurer and the general economy. The annuity will have a “guaranteed” rate which will remain static throughout the life of the annuity, but it will also have a “current” rate which is the one that changes, generally upon the decisions of the Board of Directors of the insurer.
As with all insurance products, “first-year” interest rate is the rate that is applied when the annuity is first purchased. “Renewal” interest rates will apply to later years and may or may not be the same as the first-year rate. Sometimes insurers will have a higher first-year rate so that it may attract new business (so-called “teaser” rates).
Interest rates for annuities may be either annual or multi-year. As one would expect, annual interest rates are the interest rates guaranteed for one year, whereas multi-year rates can extend over a period of several years. Some multi-year annuities guarantee interest rates for two years, others for period of 3 to 10 years. The multi-year guarantee annuities were designed specifically to compete with certificate of deposit which can change their interest earnings periodically.
Multi-year guarantee annuities do not provide the liquidity of annual guarantee annuities and surrender charges are usually imposed if the annuity is surrendered prior to the end of the present guarantee period. Most annuities allow that for a specified period of time, usually 30 days, the multi-year guarantee contract can be surrendered without being penalized by surrender charges. If the annuity owner has not surrendered the annuity, it is then renewed for a multi-year period which is the same as the original period, although the annuity owner may select a different renewal period.
Surrender charges for a multi-year guarantee annuity usually do not apply if withdrawals are of an amount that is less than the credited interest or if the annuity owner elects to receive periodic income payments (annuitizes). Of course, if the death of the owner of the annuity occurs then death benefits are paid with no surrender charge.
In some multi-year guarantee annuities, an insurer may offer a “bonus” annuity by crediting additional interest in the first year of the multi-year guarantee period. (See discussion of the bonus effect in SPDAs in Chapter 2, and “Disclosure Obligations of Bonus Programs” in Chapter 6.)
Multi-year guarantee annuities may resemble bonds in some fashion as they have a market value adjustment, which, in “bond lingo” refers to a bond which pays interest depending upon what investors can receive in other markets. In some cases the adjustment may increase, in others it would decrease – interestingly to those who are not familiar with the bond market, if the prevailing interest rates go up, then the bond holder is stuck with a lower interest rate, so the bondholder will lose when he sells at the market value. Conversely, if the market drops, then the bond becomes more valuable and the bondholder would make a profit if he sold at the market value. This dissertation on market value adjustment has a bearing on multi-year guarantee annuities.
If the annuity owner surrenders the annuity before the end of its term, the market value adjustment normally would be applied in addition to any other surrender charge or “premature distribution” tax penalty. Therefore, if the prevailing interest rates have increased, then the market value adjustment would be negative – just like in a bond and the surrender charge could become expensive.
Conversely, if the interest rates have dropped, then the market value adjustment would be positive, therefore offsetting some of the surrender charge.
In actual practice, surrenders of annuities primarily occur during riding interest rates where the annuity owners are chasing higher interest investments, therefore the market value adjustment is generally costly to the annuity owner.
Annuities may be written as either qualified or nonqualified contracts. “Qualified” means the annuity is established and maintained according to Internal Revenue Service rules that permit a tax deduction for the premiums paid. This also means that no current income tax is required on the portion of income used to pay the premiums for a qualified annuity. On the other hand, nonqualified annuities are paid for with after-tax dollars, which means contributions are not tax deductible.
The only qualified annuities available for most individuals are those used to fund Individual Retirement Accounts (IRAs). For corporations and other business entities, group annuities designed to fund employee or other group retirement plans may also be qualified. In both individual and group situations, the annuities must be designed for and operate under stringent IRS qualification guidelines.
Most insurance companies offer both qualified and nonqualified annuities, but some do not. An insurer may offer types that may be written only as qualified plans while others may be written only as nonqualified annuities. Some may restrict their qualified annuity offerings to certain uses, such as for IRAs or for 403(b) organizations.
Individual retirement annuities (IRAs) which are established on an individual basis, allow wage earners to make independent contributions to their own retirement plans. Either a fixed or Variable Annuity may be used and:
F - an IRA is always a flexible premium deferred annuity.
IRAs provide a limited tax deduction for the individual’s contribution as well as interest accumulation on a tax-deferred basis. (Instruments other than annuities may be used to establish individual retirement accounts, but our discussion is limited to annuities used for this purpose.25)
Originally, the purpose of an IRA was to offer retirement savings incentives to people not included in a corporate or employer-sponsored plan. This is still the primary use for an IRA, but some people who are covered by employer plans may establish tax-deductible IRAs as well. Because Congress tinkers with IRAs every few years, the regulations and limitations change from time to time. The purpose of this discussion is to better understand annuities, therefore the following applications of annuities into retirement plans emphasize the position and applicability of the annuities only. However, when annuity premiums are deductible in such a case, it is because of the annuity’s inclusion in the plan rather than the fact that it is, indeed, an annuity.
IRAs are available to every wage earner who is under 70½ years old; after age 70½, individuals may not establish an IRA. Each wage earner is limited to an annual contribution of $2,000 or 100% of earnings, whichever is less. For example, an individual earning a total of $1,500 annually may contribute no more than 100% or $1,500 per year to an IRA. Someone who earns $2,001 or more per year may contribute only the $2,000 maximum rather than 100% of earnings. In addition, the wage earner may make an additional contribution on behalf of a non-employed spouse, in which case the wage earner may contribute up to $4,000 a year or 100% of earnings.
The maximum age for participating in an IRA is 70 ½, at which age there must be withdrawals which are specified in the government regulations and which can be taken in a lump sum or spread out over a number of years.
FAs indicated, any wage earner who contributes to an IRA receives the benefit of earning interest without paying taxes on the earnings until the funds are withdrawn.
Wage earners who are not included in an employer-sponsored qualified retirement plan may deduct the entire amount of the contribution from taxable income for the year the contribution is made.
Wage earners who do participate in a qualified retirement plan at their place of employment are also eligible to take a tax deduction for the amount contributed provided they meet Internal Revenue Service guidelines, as briefly outlined in the next paragraph.
The entire amount of the contribution is deductible for a single taxpayer whose adjusted gross income (AGI) is less than $25,000 annually and for married taxpayers filing jointly whose AGI is less than $40,000 per year. (These amounts will be indexed in later years). The portion of the contribution that is deductible is gradually reduced as income rises until it phases out completely. No deduction is available for a single wage earner when AGI reaches $35,000, or for joint filers when their AGI reaches $50,000. But remember, the tax deferral on interest continues even though the contribution is not tax deductible.
A popular use for an individual annuity is as a rollover IRA to receive money from a company-sponsored pension or profit sharing plan. Individuals who leave an employer take with them any such monies in which they are fully vested—which means they own all of their share of the plan. To protect themselves from adverse tax consequences, they must have the funds immediately reinvested in another tax-favored plan. A rollover IRA provides this protection.
At one time, individuals could have possession of such funds for 60 days before rolling the funds into another plan. However, a federal law now states that to avoid all penalties, the corporate plan proceeds must be paid from the former employer’s plan directly into another instrument. If the individual chooses to have a check made payable to him or herself while deciding where to re-invest the money, the employer is required by law to withhold 20% and send it to the government.
The individual still will not be required to pay any taxes if the money is rolled over within 60 days, but there’s a huge hitch in this plan. The individual must roll over the entire amount, which includes the 20% that has been sent to the government. Therefore, the individual must find that 20% somewhere else, add it to the funds actually received, and. roll all of that into the rollover instrument. Not only does the individual get only part of the funds, but if the person cannot pay the additional 20% to make up the entire amount, the 20% already sent to the government is taxed as current income—even though the individual never had access to it.
However, the 20% previously sent to the IRS will be reclaimed on the individual’s tax return, but meanwhile the government has had temporary use of the individual’s money and has also forced the person either to find another 20% to complete the rollover or to pay taxes on money the individual never had because the government took it. A bill has been introduced to repeal this highly unfair law that penalizes anyone who is ill-informed, but as of this writing, the rule applies.
In the meantime, a rollover IRA that is used properly keeps the funds intact and retains the tax-deferral benefits on the pension funds.
Starting in 2002, tax-favored retirement plans (401(a), 401(k), 403(a), 457 plans) and Section 403(b) annuities are allowed to include an IRA account/annuity within the plan. These plans can accept voluntary employee contributions if (1) the contributions are held in a separate account/annuity that is established under the tax-qualified arrangement; and (2) the account/annuity meets the requirements for either a traditional or Roth IRA. These annuities/accounts will be treated as an IRA for tax purposes (hence the name, deemed IRA). They are subject to the contribution limit – such as $3,000 for 2003 – and distribution rules, IRA early withdrawal tax exemptions and reporting requirements.26
Some other features of the deemed IRA are that the voluntary contributions and earnings are not subject to any qualified plan limits and do not affect the applicability of the limits or other rules to amounts held by the individual held under a qualifying (or other) plan. This plan allows IRA and qualified plan funds to be commingled for investment purposes if the deemed IRA assets are held in a trust or annuity separate from other plan assets.
Effective January 1, 1998, most people can fund a Roth IRA. The maximum contribution is $2,000, as in a regular IRA, but a person cannot establish a Roth IRA if they show an adjusted gross income (AGI) of $110,000 (single) or $160,000 (married). If a regular IRA is rolled over into a Roth IRA, that money is not subject to the AGI calculation. Also, all income must be “earned income”, i.e. wages, tips, bonuses, commissions, etc.)
There are certain benefits to a Roth IRA, such as:
Whether a Roth IRA or a traditional IRA is best for the individual, much depends upon whether the individual can deduct the contributions of an IRA from their income taxes, and consideration must be made as to tax bracket, how long the money will be allowed to compound, etc. There really is not an easy answer, but practically it comes down to whether the individual (&/or spouse) needs the benefits of a traditional IRA each year when the tax forms are filed – in other words, the $2,000 per person deductible is important now, and if so, then the traditional IRA will do the job.
However, if only the growth for later years is important, then the Roth IRA has substantial advantages. However, the money each year that goes into the Roth IRA is taxed as ordinary income that year.
The major advantages of an annuity over a Roth IRA are that is that there is no limit as to how much can be invested into an annuity each year, and there is no maximum amount that can be invested.
The advantages of a Roth IRA are:
At this point, it might appear that if a prospective client is leaning towards establishing a Roth IRA, the annuity salesperson should walk away. WHY? A Roth IRA (or a traditional IRA) is simply a tax vehicle to encourage people to save. Save in what? What is wrong with an annuity, for heaven’s sake? If this is the response, refer to the chapter on EIAs.
If a person wants to be able to have a guarantee of a minimum interest rate on an investment, greater than that offered by a Bank’s CD, then the EIA is a great vehicle for a Roth IRA.
The advantages of using any annuity in a traditional IRA or a Roth IRA are outlined in various sections of this text. Remember that the IRA and the Roth IRA programs are specifically designed for those who are savings for retirement. And what is a better savings vehicle than an annuity?
Unless an individual annuity is used to fund an IRA, it is nonqualified. While premium deposits to a nonqualified annuity are not tax deductible, interest earnings are tax deferred and enjoy all of the other related advantages.
In addition, nonqualified individual annuities are not subject to the strict contribution limitations of an IRA. As a result, individuals may deposit much more cash into a nonqualified annuity each year than they are permitted to deposit into an IRA. For many people, the flexibility, the potential for depositing greater sums for retirement savings and the relatively fewer Internal Revenue Code requirements and limitations on nonqualified annuities, add up to a better choice than an IRA.
A “Split Annuity” is not a product, actually it is a technique that can be used with either a fixed-premium annuity, or a Variable Annuity. It is designed to allow a certain percentage of the principal and interest to be withdrawn by the contract owner, while the remaining investment grows (and compounds) and with the prospect of eventually equaling the original investment amount.27
The concept is simple: The contract owner divides the account into two parts. One part is completely liquidated, and the other part is used strictly for growth. While either a fixed-premium annuity, or a Variable Annuity can be used, obviously only the fixed-premium contract can make the guarantee that the original amount will be completely restored within a pre-determined period of time.
The purpose of the Split Annuity concept is to maximize income and at the same time, keep wealth intact. It also has a tax advantage. The way that this would work can best be explained in the following Consumer Application.
CONSUMER APPLICATION
Bradley has freed up $100,000 because of a market transaction. He wants to have a current income but he also wants to make sure that after a certain period of time, he still has his $100,000. And, he wants to do this and still have a tax break.
Bradley invests approximately $60,000 into a fixed-premium annuity which guarantees a 6% rate of income over the next eight years. He then takes the remaining money (approximately $40,000) that is immediately annuitized for the same period of time – 8 years. The insurance company issuing the annuities furnish the exact amount that can be used to accomplish his purpose.
According to the interest credited by the insurance company, the approximately $60,000 will be work $100,000 (exactly) at the end of the 8 year period. During this 8 years, he will receive approximately $450 per month (again the insurer will calculate the exact amount).
The tax break develops because 82% of the $450 per month is not subject to income taxes because of the exclusion ratio.
His goals have been accomplished.
As an alternative, Bradley could invest the $40,000 into a variable account that could take advantage of the returns of 12% - 13% growth of the stocks (over the past 50 years). If he had invested 8 years ago, with the recent stock market gains, he would have had substantial growth in his sub-accounts. Just at $12%, it would have grown to over $90,000.
In the development of innovative annuity products, insurers have not missed the opportunity arising from the so-called “graying of America,” the phenomenon of many millions of people over age 65 who are currently alive and in need of income. People in the senior age groups control a high proportion of both personal financial assets and savings dollars. Some insurers have begun to offer annuities with features especially for older adults, aiming at those ages 55 and higher — although the products may be purchased by younger people as well.
Typically, nonqualified annuities geared to senior needs have many of the same features of other flexible premium or single premium deferred annuities already discussed. The seniors have free withdrawal privileges and a nursing home withdrawal or bailout feature is usually an automatic feature. In addition, the senior age annuity owner is generally permitted to annuitize at anytime without paying surrender or withdrawal charges and begin receiving income payments regularly.
Interest rates are as competitive on senior-directed annuities as on other annuities, although rates may be graded downward at the upper age range. One company, for example, reduces the current interest rate by one-fourth percent for ages 80 to 90, and another one-fourth percent reduction for those ages 91 to 100.
A death benefit typically applies following a stipulated period of time. The benefit may become larger as the policy ages. For example, after the first year, the benefit might be just a return of premiums; followed by return of premiums plus the minimum guaranteed rate; then, in later years, premiums plus all interest earned.
With the burgeoning senior population who control a large percentage of financial assets and savings dollars, the insurers have developed annuities with their needs in mind, leading to what has been called, “the senior industry.”
NOTE: Chapter 10 of this text discusses in detail, the marketing of annuities to Seniors and regulations pertaining to this particular area.
Many elderly persons are retired and strapped for cash, and many have been made aware of various methods of obtaining income from their residence that in many cases are mortgage-free or has considerable equity. “Reverse mortgages” are often used to use the residence as a source of retirement income. The homeowner may be able to borrow considerable funds with a home-equity conversion mortgage, the most popular type of reverse mortgage27A.
These mortgages are better for the individual in many cases, as if they simply refinanced and took out a new mortgage, they would still be faced with mortgage payments – provided they could even find a lender willing to refinance as in many cases the owner would be facing larger monthly mortgage payments than they could afford. The advantages of a regular mortgage are that the up-front costs are lower, and the interest charged is usually tax-deductible. But even if you took the money from refinancing and invested it in bonds, particularly at today’s low interest rates, many times the homeowner would still be out of pocket as the interest income would not make the mortgage payment.
The next best thing, as argued by many financial analysts, is to obtain a line of credit that would allow the homeowner to tap into the equity. However, if problems arise in the future in respect to needing more money, then it would be necessary to go to a longer-term solution.
Another option involves annuities (yes, we are talking about annuities eventually…). The homeowner takes out a mortgage for most of the value of the home, and then uses the proceeds to buy an immediate-fixed annuity that would pay lifetime income. Usually, at the older ages, the monthly payment would easily cover the mortgage payment – the only drawback being that some portion of the annuity check would be taxable.
Then, since there is a conventional mortgage, the debt will shrink, so the longer one lives, the more attractive this arrangement becomes. One drawback, as with any annuity, you want to live for a period of time because if the homeowners buys an annuity and then dies shortly thereafter, it’s a financial disaster because the annuity investment is gone and the homeowner received very little income from the annuity.
If the person is healthy and their family has usually lived for a long time, and all health indications are good, then this is a possible alternative to the reverse-mortgage.
CONSUMER APPLICATION
Bill Jensen has just turned 75 and has most of his retirement in Certificate of Deposit and Money Market funds, with the result that he feels it is necessary to increase his retirement income. In looking around at what he has, he realizes that his home (that he paid off 10 years ago) is now worth $250,000.
Bill takes out a 6.3 percent mortgage for 80% of his home’s $250,000 value. He uses the proceeds to purchase a fixed annuity that pays $1,809 a month. His mortgage payment is $1,238, so even paying income tax on some of the annuity payment, he would increase his monthly income by $571 per month.
It cannot be stressed enough –
F Annuity agents are not “one-size-fits-all” salespersons. Each applicant is unique therefore, the annuity products must be determined as the best product for their needs.
Believe it or not, there are a multitude of annuities available in today’s market. If an agent is not familiar with many of the products, they are not going to be able to professionally recommend a particular product to fit each situation. Obviously, it is not possible to dissect every annuity available so as to differentiate between them, but there are certain areas that apply to every annuity of that particular type.
Throughout this text there are discussions on different points of the various types of annuities. For illustration, three types of annuities – Single Premium Deferred Annuities, Variable Annuities and Equity Index Annuities – are discussed. While there are some similarities between all annuities – such as the financial strengths of the issuing company – there are also important differences.
Some of the major items that must be known in order to recommend a particular SPDA:
Of course Variable Annuities share many of the same provisions as SPDAs and other annuities, but there are some provisions that are unique to the VAs that should be known to the agent.
Annualized Rate of Return
Investment Advisory Fee
Fund Operating Expense
12b-1 Fees.
While there are many other items that the agent must pay particular attention to prior to making a presentation to a prospect or discussing an annuity with a client, these are probably the most important items.
It would be nice if there were no such thing as an “unethical” agent, but unfortunately this is not the case. Therefore, regulations are in force to correct the practices that cause irreparable harm to our industry and to our profession. The most often targeted of our population by these miscreants are the elderly for a variety of reasons. Fortunately the Departments of Insurance and legislatures – locally, state and federal – have created special types of regulation protection these citizens, and this is true in the field of annuity sales. There is a chapter of this text dedicated to the problems of the senior citizens with discussions of appropriate regulations and penalties for those who ignore or disregard these regulations. This section discusses the sales practices of agents marketing annuities to anyone regardless of age, recognizing that some of this will be repeated in the later discussion of marketing to the seniors.
For the purpose of this discussion and regulations, “advertising” applies not only to “ads” (which actually is an abbreviation for advertisement…). brochures, newspaper and other media articles, television and radio advertising – but primarily printed material. Envelopes, stationery, business cards and any other material that is used by an agent or insurer that are designed to describe the insurance product and to attempt to encourage a purchase of the insurance product – annuity for this discussion.
Simply put, the regulations89 are intended to insure that the insurers and agents treat their clients honestly and openly. Therefore, any advertising must not mislead those who read it and act upon the information contained in the material (with special obligations to seniors, discussed later).
Advertising is also the material that is used to generate leads through reader response, generally followed by an agent calling. It can advertise a meeting or seminar at which information is provided (also covered in detail in a separate section), or simply advertising the product of the insurer. If the advertisement is directed towards those age 65 or older, if the advertisement is used for leads, the advertiser must disclose in the advertisement that an agent may contact the person – if this is intended.
If the name of the prospect is obtained from a lead source, the source must be disclosed to those over age 65.
Even though it is in nearly all agent’s contracts, it does not hurt to point out that the insurance company must give an agent permission in writing before the agent can advertise the product.
Agents and others who market financial products, attempt to obtain new clients by holding seminars, classes or information meetings. This is particular applicable in the Senior market, and is so discussed later in the text. Basically, the regulations require that for such a meeting to be advertised (to any age) that the advertiser must disclose their intention by adding “and insurance sales presentation” immediately following the words “seminar,” “class,” or “informational meeting.”
Marketing of annuities to those over age 65 have stricter prohibitions, and are so set forth in the chapter “Providing Annuities to the Senior Market.”
Any person or business in violation of the advertising regulations is subject to a stiff fine levied by the Insurance Commissioner. The fine for the first offense is $200, for the second offense it goes to $500, and for the third and later offenses, $1,000. The maximum fine for any one violation is $1,000. And if you are interested, the money goes into the Insurance Fund.63C
While the regulations are quite specific in respect to requiring that every licensee shall prominently affix, print or type on business cards, price quotes or advertisements, its license number, address or fax number, and the word, “Insurance” must be displayed (as stated above) on the printed matter. However, there are certain exceptions to these rules:63D
Regulations differentiate between Fine and Penalties for violation of regulations, and license suspension and/or revocation.91 These acts assume that the agent has used his relationship with the client to take advantage of her/him.
If an agent persuades or causes a client to cosign or make a loan, investment or gift, or provide a future benefit through a right of survivorship for the benefit of
the agent’s license may be suspended or revoked.
This does not apply if the client is related to the agent by birth, adoption or marriage, or is a domestic partner of the agent.
The agent’s license may be suspended or revoked if an agent persuades or causes a client to designate as a trust beneficiary or beneficiary or owner of a life insurance policy or annuity for the benefit of the agent, a person with a relationship to the agent by birth, marriage or adoption, a friend or business acquaintance of the agent, or a domestic partner of the agent. This does not apply if the client is related to the agent by birth, adoption or marriage, or is a domestic partner of the agent.
The agent’s license may be suspended or revoked is the agent persuades or causes a client to designate as a trustee under a trust, the agent, etc., as listed above. There is an exception where the agent is designated as a trust of a testamentary or inter vivos trust if the agent is also an attorney in any state and the agent is not a seller of insurance to the Trustor of the fund.
An agent’s license may be suspended or revoked if an agent has a power of attorney for a client and has sold the client an insurance product for which the agent has received a commission. Further, the license may be suspended or revoked if the agent has used the power of attorney to purchase an insurance product on behalf of the client and for which the agent has received a commission.
This rule does not apply if the client is related to the agent by birth, adoption or marriage, or is a domestic partner of the agent.
For misrepresentations the penalties are usually punishable by fine of up to $1,500 and 6 months in jail. Penalties are much harsher for insurance code violations involving older citizens. These penalties are detailed in Chapter Ten.
STUDY QUESTIONS
1. Except for an immediate annuity, annuities should be considered
A. as part of a long-term investment strategy.
B. as part of a short-term liquid savings accountant.
C. as just another type of life insurance policy.
D. as the best type of investment for those who need immediate access to their funds.
2. When variable annuities are used as a long-term investment, the key for profitability is
A. to avoid the temptation to withdraw during temporary market downturns.
B. to put more into the annuities than the contract holder can afford.
C. to purchase the annuity from a low-rated company that will promise more returns.
D. to purchase the annuity through a bank or S&L.
3. With a qualified annuity,
A. it is paid for with after-tax dollars, so contributions are not tax deductible.
B. the agent must be licensed with the SEC.
C. no current income tax is required on the portion of income used to pay the premium.
D. it may be issued only with a company with an A+ or higher rating.
4. An IRA is always
A. a fixed premium immediate annuity.
B. a Variable Annuity.
C. a flexible premium deferred annuity.
D. a single premium immediate annuity.
5. If an IRA holder is going to roll over the IRA into another plan, in order to avoid penalties
A. the new plan must be written with an off-shore or foreign insurer.
B. corporate plan proceeds must be paid from the former employer’s plan directly into an
other instrument.
C. all funds must remain with the former employer.
D. the funds must be held for 60 days before being paid to the new plan.
6. Unless an individual annuity is used to fund an IRA,
A. it is qualified.
B. it is an equity indexed annuity.
C. it is nonqualified.
D. it may not be used for any other purpose.
7. When an individual annuity is used to fund an IRA, one of the major advantages is
A. the nonqualified annuity is not subject to the contribution limitations of an IRA.
B. that it is exactly like any other IRA so the IRS will allow it without question.
C. funds are guaranteed by the Federal Deposit Insurance Corporation (FDIC).
D. there are no commissions paid on an individual annuity.
8. When a contract owner divides an annuity account into two parts and liquidates one part, using the other part strictly for growth, this is called
A. a dual annuity.
B. a last survivor annuity.
C. delving an annuity.
D. a split annuity.
9. When annuities are specially designed for the senior market, they typically may have
A. higher withdrawal penalties than with traditional annuities.
B. must higher premiums because the average age would be older.
C. free withdrawal privileges and provision to annuitize at any time without charges.
D. tougher underwriting requirements.
10. For annuities designed for the senior market, interest rates
A. would be the same as with any other annuities.
B. are stipulated by regulation to not exceed 3% per annum.
C. may be graded downward at the upper age range.
D. will automatically be 3 percent above the consumer index rates.
ANSWERS TO STUDY QUESTIONS
1A 2A 3C 4C 5B 6C 7A 8D 9C 10C