Income Beginner: Introduction to Annuities

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1.
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.
2.
Which of the following is acceptable for putting money into a flexible premium annuity?
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All of the above. With a flexible premium annuity, an investor can make a single premium payment, periodic payments, or sporadic payments according to no particular schedule.
3.
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.
4.
At any time after commencement of lifetime annuity payments, the annuitant may request a surrender to receive a lump sum cash payment.
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False. To receive lifetime annuity payments, the annuitant must surrender the annuity cash value to the insurance company.
5.
Under what type of payout arrangement can an annuitant arrange for a certain dollar amount to be periodically liquidated from the annuity and sent to him or her?
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Systematic withdrawals. With this option, a certain amount is sent to the annuitant every month, quarter, or year.
6.
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.
7.
Most annuities have a surrender charge schedule built into them that penalizes early withdrawals.
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True. Most annuities have a surrender charge schedule built into them that penalizesand therefore discouragesearly withdrawals (except permitted limited withdrawals). A typical surrender charge might start at 10 percent and decline to 0 percent over a 10- or 15-year period.