Annuity Products & Structures Flashcards
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Read the first 7 Annuity Products & Structures flashcards as text
A 'structured settlement annuity' differs from typical retail annuities primarily because it:
Answer: Is used to fund periodic payments resulting from legal settlements, typically tax-free to the recipient
Structured settlement annuities are typically purchased by defendants or their insurers to satisfy tort or workers' compensation claims, and periodic payments to the injured claimant are generally income-tax-free under IRC Section 104.
Which provision found in some indexed annuities automatically locks in gains and resets the index starting point periodically, typically each contract year?
Answer: Annual reset (ratchet) crediting method
The annual reset (or ratchet) method credits interest based on the index change from the start to the end of each contract year and then locks in those gains, so the next year starts from the new higher index value.
Under the 'last-in, first-out' (LIFO) tax treatment for non-qualified deferred annuities, withdrawals are treated as coming from:
Answer: Earnings first, then cost basis
IRS rules require that non-qualified annuity withdrawals (before annuitization) be taxed on a LIFO basis, meaning all accumulated earnings are deemed distributed first and are fully taxable before any cost basis is recovered.
An 'equity-indexed annuity' cap rate of 6% means that even if the linked index rises 15% in a given year, the maximum interest credited to the account is:
Answer: 6%, because the cap limits the maximum credited interest
The cap rate sets an absolute ceiling on the interest credited; regardless of how much the index gains, the policyholder receives no more than the stated cap in any given crediting period.
Which of the following correctly describes the 'nonforfeiture benefit' requirement that most states impose on deferred annuities?
Answer: Upon surrender, the owner must receive at least a minimum guaranteed cash value as specified in state law
State nonforfeiture laws require that deferred annuity contracts guarantee a minimum surrender value (often based on 87.5% of premiums accumulated at a minimum interest rate), ensuring owners are not left with nothing upon early exit.
A 'flexible premium deferred annuity' differs from a 'single premium deferred annuity' primarily in that it:
Answer: Allows the owner to make additional premium deposits after the initial purchase
A flexible premium deferred annuity (FPDA) accepts multiple premiums over time, giving the owner the flexibility to contribute additional funds, unlike a single premium deferred annuity (SPDA) which requires one lump-sum payment.
Which annuity product is most commonly used inside a qualified retirement plan such as a 403(b) to provide employees with a guaranteed lifetime income option?
Answer: Tax-sheltered annuity (TSA) / 403(b) annuity
A tax-sheltered annuity (TSA), also called a 403(b) annuity, is specifically authorized for use by public school employees and certain nonprofit workers to accumulate retirement savings on a pre-tax basis with insurer-backed lifetime income options.