Annuities

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Application

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define an annuity.
  • Explain parties to an annuity, such as:
    • Annuity provider
    • Plan owner
    • Annuitant 
  • Explain advantages of annuities, such as:
    • Guaranteed income
    • Potential deferral of taxation
    • Simplified income stream
    • Protection against outliving income
    • Protection against fluctuating returns on investment
    • Protection against cash flow mismanagement
  • Explain disadvantages of an annuity, such as:
    • Loss of capital
    • Loss of flexibility
    • Subject to interest rate risk
    • Subject to inflation risk
    • Extra cost for additional benefits
  • Define the parties to an annuity.
    • Annuity provider
    • Plan owner
    • Annuitant
  • Define the main types of annuities.
    • Life annuities
      • Single life
      • Joint life
      • Single life with a guaranteed period
      • Joint life with a guaranteed period
      • Impaired
    • Term-certain annuities
      • Temporary
  • Explain the features that may be added to the types of annuities, such as:
    • Variable rates
    • Inflation protection
    • Guarantee period
    • Return of premium
  • Identify the terms that may be used to describe an annuity based on the source of capital used to purchase it.
    • Non-registered annuities
    • Registered annuities 
  • Identify which annuities may only be sold by insurance companies. 
  • Explain the permissible sources of capital for each type of annuity.
    • Registered funds
    • Non-registered funds
  • Identify the sources that may be used to fund a registered annuity. 
  • Identify the types of annuities that may be purchased using registered funds. 
  • Identify that the plan owner and the annuitant must be the same person for a registered annuity. 
  • Identify the factors that may affect the amount of income provided by an annuity, such as:
    • Value of invested capital
    • Interest rate assumptions
    • Single-life or joint life
    • Annuitant’s age
    • Annuitant’s sex
    • Guarantee period of payments
    • Payment options (Fixed, variable, indexed)
    • Annuitant’s health (for impaired annuities)
  • Explain the relationship between the variables that may impact the income provided by an annuity and the payment amount. 
  • Explain the requirements for an annuity to qualify for prescribed tax treatment. 
  • Explain the tax treatment of non-registered annuities.
    • When receiving income from a non-prescribed annuity
    • When receiving income from a prescribed annuity
    • Upon death of the annuitant
  • Explain the tax treatment of income received from an annuity that was purchased using assets from a registered plan.
    • When receiving income from the annuity
    • Upon the death of the annuitant

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define an annuity.
  • Explain parties to an annuity, such as:
    • Annuity provider
    • Plan owner
    • Annuitant 
  • Explain advantages of annuities, such as:
    • Guaranteed income
    • Potential deferral of taxation
    • Simplified income stream
    • Protection against outliving income
    • Protection against fluctuating returns on investment
    • Protection against cash flow mismanagement
  • Explain disadvantages of an annuity, such as:
    • Loss of capital
    • Loss of flexibility
    • Subject to interest rate risk
    • Subject to inflation risk
    • Extra cost for additional benefits
  • Define the parties to an annuity.
    • Annuity provider
    • Plan owner
    • Annuitant
  • Define the main types of annuities.
    • Life annuities
      • Single life
      • Joint life
      • Single life with a guaranteed period
      • Joint life with a guaranteed period
      • Impaired
    • Term-certain annuities
      • Temporary
  • Explain the features that may be added to the types of annuities, such as:
    • Variable rates
    • Inflation protection
    • Guarantee period
    • Return of premium
  • Identify the terms that may be used to describe an annuity based on the source of capital used to purchase it.
    • Non-registered annuities
    • Registered annuities 
  • Identify which annuities may only be sold by insurance companies. 
  • Explain the permissible sources of capital for each type of annuity.
    • Registered funds
    • Non-registered funds
  • Identify the sources that may be used to fund a registered annuity. 
  • Identify the types of annuities that may be purchased using registered funds. 
  • Identify that the plan owner and the annuitant must be the same person for a registered annuity. 
  • Determine the factors that may affect the amount of income provided by an annuity, such as:
    • Value of invested capital
    • Interest rate assumptions
    • Single-life or joint life
    • Annuitant’s age
    • Annuitant’s sex
    • Guarantee period of payments
    • Payment options (Fixed, variable, indexed)
    • Annuitant’s health (for impaired annuities)
  • Explain the relationship between the variables that may impact the income provided by an annuity and the payment amount. 
  • Explain the requirements for an annuity to qualify for prescribed tax treatment. 
  • Explain the tax treatment of non-registered annuities.
    • When receiving income from a non-prescribed annuity
    • When receiving income from a prescribed annuity
    • Upon death of the annuitant
  • Explain the tax treatment of income received from an annuity that was purchased using assets from a registered plan.
    • When receiving income from the annuity
    • Upon the death of the annuitant
Additional Knowledge Expected of CFP Professionals
  • Compare the tax treatment of prescribed and non-prescribed annuities, specifically:
    • Level of tax over time
    • Level of after-tax income over time
    • Total taxable portion over lifetime of annuity
  • Determine the factors to consider in assessing the suitability of an annuity, such as:
    • Requirement for income
    • Risk tolerance
    • Loss of decision-making control
    • Control over timing of receiving income
    • Effect on current cash flow
    • Effect on future cash flow
    • Effect on current net worth
    • Effect on future net worth
    • Flexibility required
    • Current interest rates
    • Expected rates of return
    • Age
    • Life expectancy
    • Tax impact
    • Estate planning objectives
    • Individual attitudes / preferences
  • Evaluate the factors to consider in assessing the suitability of an annuity.