Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it

1. A) life annuity, no refund.
2. B) life annuity with period certain.
3. C) installment refund annuity.
4. D) cash refund annuity.

Answer: B

Which of the following statements is (are) true with respect to a joint-and-survivor annuity?

1. Some joint-and-survivor annuities reduce the income payment after the first annuitant dies.
2. No payments are made after the first annuitant dies.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

During the funding period, the premiums paid for a variable annuity are used to purchase

1. A) annuity units.
2. B) immediate participation shares.
3. C) mutual fund shares.
4. D) accumulation units.

Answer: D

Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following annuity payout options will provide Brad with the highest monthly income?

1. A) life annuity (no refund)
2. B) life income with payments guaranteed for 5 years
3. C) life income with payments guaranteed for 10 years
4. D) installment refund annuity

Answer: A

Which of the following statements is (are) true with respect to the cash annuity settlement option?

1. The taxable portion of the distribution is subject to federal and state income taxes.
2. The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

Which of the following statements is (are) true with respect to variable annuities?

1. The price at which accumulation units can be purchased fluctuates during the funding period.
2. The value of annuity units fluctuates over time.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

1. A) account administration fee.
2. B) investment management fee.
3. C) front-end load.
4. D) surrender charge.

Answer: D

Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

1. A) investment management charge.
2. B) administrative charge.
3. C) surrender charge.
4. D) front-end load.

Answer: A

Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the

1. A) investment management charge.
2. B) surrender charge.
3. C) administrative charge.
4. D) front-end load.

Answer: C

Which of the following statements about variable annuities is true?

1. A) The periodic payments received by the annuitant are fixed.
2. B) Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement.
3. C) Insurers offering variable annuities are not permitted to charge administrative fees.
4. D) Although the value of annuity units fluctuates, accumulation units have a fixed value.

Answer: B

Which of the following statements is (are) true with respect to an equity-indexed annuity?

1. The maximum percentage gain is usually capped.
2. There is no downside protection against loss of principal if the annuity is held to term.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

With an equity-indexed annuity, what name is given to the method of crediting excess interest to the annuity?

1. A) the capitation method
2. B) the indexing method
3. C) the distribution method
4. D) the earnings method

Answer: B

Under an equity-indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?

1. A) the expense rate
2. B) the exclusion ratio
3. C) the indexing method
4. D) the participation rate

Answer: D

Which of the following statements regarding the taxation of individual annuities is (are) true?

1. The exclusion ratio is the percentage of the annuity income that is taxable.
2. After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case?

1. A) 33.33 percent
2. B) 40.00 percent
3. C) 50.00 percent
4. D) 66.67 percent

Answer: C

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

1. A) $3,000
2. B) $4,000
3. C) $4,500
4. D) $6,000

Answer: A

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

1. A) nothing
2. B) $3,000
3. C) $4,500
4. D) $6,000

Answer: D

Which of the following statements is (are) true regarding the taxation of distributions from individual annuities?

1. Individual annuity distributions are never taxable.
2. Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following is a permissible IRA investment alternative?

1. A) mutual funds
2. B) fine art
3. C) antiques
4. D) life insurance

Answer: A

Which of the following statements is (are) true regarding the Roth IRA?

1. Roth IRA contributions are tax deductible.
2. Roth IRA investment income accumulates income-tax free.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?

1. A) Rita cannot contribute to her traditional IRA because she is over age 65.
2. B) Rita can make a $3,000 contribution to her traditional IRA, but it is not tax deductible.
3. C) Rita can make a $3,000 contribution to her traditional IRA, but it is only partially tax deductible.
4. D) Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.

Answer: D

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

1. A) taking a lump-sum distribution.
2. B) using an IRA rollover account.
3. C) receiving the money through four equal installments.
4. D) using the funds to purchase common stock issued by the former employer.

Answer: B

Which of the following statements is (are) true with regard to Roth IRAs?

1. The portion of a Roth IRA distribution that is attributable to investment income is taxable.
2. There is a maximum income level above which Roth IRA contributions are not allowed.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

All of the following statements about traditional and Roth IRAs are true EXCEPT

1. A) Traditional IRA contributions may be fully, partially, or not income tax deductible.
2. B) Qualified distributions from Roth IRAs are received income tax free.
3. C) Contributions to Roth IRAs are made with after-tax dollars.
4. D) Traditional IRAs are exempt from the penalty tax on premature distributions.

Answer: D

Which of the following persons can establish a traditional IRA?

1. A person whose only income received is from investments.
2. A 75 year-old man who has earned taxable income.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: D

Donna, age 50, is single and earns $40,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $4,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution?

1. A) Her contribution is fully tax deductible.
2. B) Her contribution is partially tax deductible.
3. C) No portion of the contribution is tax deductible.
4. D) Donna is not eligible to establish a traditional IRA, so no contribution can be made.

Answer: A

Which of the following statements about the withdrawal of funds from a traditional IRA is true?

1. A) Withdrawals of deductible contributions between the ages of 59.5 and 65 are subject to a tax penalty unless they are withdrawn because of specified circumstances such as death or long-term disability.
2. B) Amounts attributable to nondeductible contributions are fully taxable as ordinary income when received.
3. C) Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.
4. D) Withdrawals must be taken in the form of an annuity.

Answer: C

All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT

1. A) The withdrawal is in substantially equal installments paid over the individual's life expectancy.
2. B) The withdrawal is used to pay living expenses after unemployment insurance benefits cease.
3. C) The distribution is to the beneficiary of a deceased IRA owner.
4. D) The withdrawal is because of income needed due to the individual's disability.

Answer: B

Which of the following statements regarding individual retirement accounts (IRAs) is (are) true?

1. If an individual's only income during the year is from investments, he or she cannot make an IRA contribution.
2. The funds in the IRA can be used to purchase life insurance on the owner.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Which of the following statements is (are) true with regard to IRAs?

1. Contribution limits are higher for workers aged 50 and older.
2. The minimum distribution rules after attainment of age 70.5 do not apply to Roth IRAs.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

The fundamental purpose of a variable annuity is to

1. A) provide funding flexibility to the purchaser.
2. B) provide a hedge against inflation.
3. C) fund the purchase of cash value life insurance.
4. D) guarantee a fixed-dollar benefit throughout retirement.

Answer: B

An immediate life annuity offers all of the following benefits EXCEPT

1. A) Immediate annuity payments are entirely exempt from federal income tax.
2. B) Simplicity for the purchaser as he or she does not have to manage investment funds.
3. C) Security for the purchaser as stable lifetime income that cannot be outlived is provided.
4. D) The principal is safe as the funds are guaranteed by the assets of the insurer.

Answer: A

Which of the following statements is (are) true with regard to the inflation annuity option?

1. The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age.
2. Periodic payments to the annuitant are adjusted for inflation.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: C

Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true?

1. Such conversions can be done with no income tax consequences.
2. Qualified distributions from a Roth IRA after a conversion are received tax-free.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements is (are) true concerning the joint and survivor annuity settlement option?

1. Under this option, payments begin after the first annuitant dies.
2. This settlement option is often selected by married couples.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: B

Which of the following statements is true concerning traditional and Roth IRAs?

1. A) The investment income portion of Roth IRA distributions must be reported as taxable income.
2. B) Roth IRA contributions are tax deductible.
3. C) There are minimum distribution requirements for traditional IRAs.
4. D) There are no limits on the tax deductibility of traditional IRA contributions once the account owner has reached age 50.

Answer: C

Which of the following statements is (are) true with regard to the adequacy of IRA funds during retirement?

1. To assure lifetime income, the IRA funds can be used to purchase a life annuity.
2. The duration of IRA benefit payments depends on the rate of return earned on the invested assets after retirement and the withdrawal rate.
3. A) I only
4. B) II only
5. C) both I and II
6. D) Neither I nor II

Answer: C

Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called

1. A) endowment insurance.
2. B) equity-indexed annuity.
3. C) life income with guaranteed payments annuity.
4. D) longevity insurance.

Answer: D

Which of the following is a characteristic of a longevity annuity (longevity insurance)?

1. A) payment of the face value of the policy at age 100
2. B) forfeiture of the purchase price if the annuitant dies during the deferral period
3. C) cash value can be borrowed or recouped through a nonforfeiture option
4. D) high-cost annuity compared to other life annuities

Answer: B

Which of the following is an advantage of a longevity annuity (longevity insurance)?

1. A) Death benefits are paid to a beneficiary if death occurs during the deferral period.
2. B) The interest rate credited to the cash value is higher than what is earned on traditional life insurance.
3. C) Monthly benefits begin at an advanced age when other assets are likely to have been depleted.
4. D) The policyowner has unrestricted access to the funds during the deferral period through loans and cash withdrawals.

Answer: C

Which of the following statements is (are) true about a longevity annuity (longevity insurance)?

1. If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited.
2. Longevity insurance is an example of an immediate annuity.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Answer: A

Traditionally, tables have been prepared showing how long IRA funds will last based on rates of return and annual withdrawal rates. These tables, however, assume constant returns over the projection period. Many financial planners are now using a technique that allows for fluctuations in market returns. A computer is programmed to estimate how long funds will last under many different return scenarios and to determine the probability that funds will last until a specified age. This technique is called

1. A) decision-tree analysis.
2. B) sensitivity analysis.
3. C) computer simulation.
4. D) cost-benefit analysis.

Answer: C

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

1. A) flexible premium annuity.
2. B) joint life annuity.
3. C) longevity annuity.
4. D) joint-and-survivor annuity.

Answer: B

James is concerned that if he purchases a fixed immediate annuity his funds will be tied-up and not accessible if an emergency arises. His insurance agent said that a rider could be attached to his annuity to address this concern. The rider is a(n)

1. A) partial cash withdrawal rider.
2. B) return of premium rider.
3. C) guaranteed purchase option rider.
4. D) waiver-of-premium rider.

Answer: A

Carl is concerned that if he purchases an equity indexed annuity, he will lose money long-term if the stock index declines. Which equity indexed annuity provision assures Carl that he will not lose money if he holds the equity indexed annuity to term?

1. A) the indexing method
2. B) the participation rate
3. C) the guaranteed minimum value
4. D) the maximum rate cap

Answer: C

Which statement is true regarding IRA distributions?

1. A) The minimum distribution rules apply to Roth IRAs, but not to traditional IRAs.
2. B) Distributions from a Roth IRA are taxed at the individual’s marginal tax rate.
3. C) The IRA penalty tax applies to all traditional IRA distributions before age 59.5 with no exceptions.
4. D) Unless a life annuity is issued, a retiree may still be alive when the IRA account is exhausted.

Answer: D