Income Beginner: Introduction to Annuities

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1.
The key feature of any annuity is that it can provide income for life.
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True. The annuitant can have his or her payments from a fixed annuity paid out over his or her lifetime at a fixed dollar amount. In exchange for this privilege, he or she must first surrender the value of the annuity to the insurance company.
2.
An annuity should never be used for a childs future education expenses, because the child will be less than age 59 and thus subject to the 10 percent penalty tax.
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False. If the annuitant or contract owner is a parent or grandparent who will be older than age 59 at the time the education funds are needed, then an annuity can be a viable option.
3.
If an annuitant receives a guaranteed monthly check for life, with payments ceasing at death, which payout option has he or she selected?
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A life annuity.
4.
A fixed annuity offers a guarantee of the safety of principal, but not a guaranteed rate of return.
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False. A fixed annuity offers the investor a guarantee of the safety of his or her principal as well as a guaranteed rate of return on all funds placed in the insurance companys general account.
5.
There are no tax consequences associated with surrendering an annuity.
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False. Federal and state income taxes on all earnings will be due and payable in full in the year of the surrender, in addition to a 10 percent penalty tax if surrendered before age 59.
6.
If an annuity is designated as an individual retirement account (IRA), money invested into it may be tax deductible. This means that _______.
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Contributions are not taxed in the year contributed. Once the contract is annuitized, the entire amount of the annuity payments is then taxed.
7.
With a flexible premium annuity, an annuitant should never miss a premium payment, as this will likely void his or her contract.
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False. With a flexible premium annuity, generally, a scheduled payment can be missed without fear of losing any of the preceding payments into the plan.