Chapter 6- Part 2/ Classification of Annuities

Annuity units

During the payout period of a variable annuity, the amount of each payment is based on: Once a variable annuity is annuitized, accumulation units are converted into a fixed number of annuity units. The value of an annuity unity varies depending on the investment experience in the separate account.

Market value adjusted annuity

If this annuity is surrendered prior to annuitization, the contract owner must pay a surrender fee if the interest rate has increased: A market value adjusted annuity stipulates that the annuity will incur a surrender charge if the contract is surrendered prior to annuitization. Contracts earning higher rates will require the contract owner to pay a surrender charge because the insurer is losing income on a profitable contract.

Fixed annuity

Which annuity provides a guaranteed minimum rate of return? A fixed annuity has a guaranteed minimum interest rate.

Series 6 or 7 license

In addition to a life insurance producer license, producers selling variable products must have a(n): Producers selling variable products must have a securities license _ series 6 or 7 _ in addition to a life insurance producer license.

It is an indication of the portion of the separate account owned by the contract owner.

During the accumulation period, how does the number of accumulation units affect a variable annuity contract owner? The number of accumulation units a contract owner has directly correlates to what portion of the separate account the contract owner owns.

It determines the contract owner's dollar value investment in the separate account.

During the annuity phase of a variable annuity, how does the number of annuity units affect a variable annuity contract owner? During the annuity phase, annuity units are used in lieu of accumulation units to determine the amount of each annuity payment. Annuity payments are not fixed, and vary based on the value of each annuity unit from day to day. The number of annuity units is fixed and is based on the contract's dollar value investment in the separate account, and how much the first annuity payment will be.

Equity indexed annuity

This fixed annuity has a minimum interest rate and a current interest rate that is tied to the S&P 500: An equity indexed annuity will earn a guaranteed minimum interest rate up to a current interest rate that is tied to an equity index, such as the S&P 500.

Equity indexed annuity

Which of the following fixed annuities has a minimum rate of return and a current rate of return that is connected to the S&P 500? An equity indexed annuity will earn a guaranteed minimum interest rate up to a current interest rate that is tied to an equity index, such as the S&P 500.

If the insurer's current interest rate drops below the quoted fixed interest rate, the insurer will pay the lower current interest rate.

All of the following statements are true regarding the interest rate guarantees of fixed annuities, EXCEPT: Fixed annuities will earn the insurer's current interest rate. However, contract owners are quoted a guaranteed minimum interest rate (around 4%) that the annuity will earn, at a minimum. If the current interest rate drops below the guaranteed minimum interest rate stated in the contract, the insurer is obliged to pay the guaranteed minimum interest.

The interest rate at which premium payments grow interest during the accumulation phase is not fixed.

Fixed annuities are characterized by all of the following, EXCEPT: Fixed annuities have a guaranteed minimum interest rate at which the premium payments accrue interest during the accumulation phase and a fixed interest rate at which benefits are paid during the annuity phase. Each annuity payment is fixed. Fixed annuities allow annuitants to know the precise amount of each annuity payment throughout the entire annuity phase.

Variable interest rates and benefits

Variable annuities have: Variable annuities have variable interest rates and benefits. Because the interest rates are not guaranteed, the insurer cannot promise a certain dollar amount periodic annuity benefit.

Accumulation units

What is a contract owner purchasing when they pay premiums into the separate account? When a contract owner pays premiums into the separate account, he or she is purchasing accumulation units.

Fixed interest rates during the payout period

Which of the following is characteristic of fixed annuities? Interest rates are fixed during both phases of the annuity. Each payment amount is fixed, and premiums are invested in the insurer's general account.

Used to invest premiums for fixed annuities

An insurer's general account is: An insurer's general account is used to invest premiums for fixed insurance products and annuities. It is comprised of conservative assets such as bonds, with conservative yields.

Variable annuity

This annuity is regulated as a securities product and agents selling this product must have a securities license: Variable annuities are regulated as securities products. Any agent selling a variable annuity or variable life insurance policy must have a securities license in addition to a life insurance license.

Flexible Premium Variable Annuity

Bertran, a 30-year old convenience store clerk, wants to buy an annuity to plan for his retirement. Bertran is concerned about the buying power of the dollar in future years, and wants to be sure the annuity he buys keeps up with inflation. What annuity would you recommend to him? A variable annuity is the best choice to keep up with inflation because the interest rate may increase above fixed-interest levels, allowing for greater growth than a fixed-interest rate annuity.

A set number

How many accumulation units are in the separate account? The separate account has a certain total number of accumulation units.

Level annuity benefits

Fixed annuities have: Fixed annuities have level annuity benefits. There are several factors that affect the amount of each annuity benefit payment, not just the interest rate.

Market value adjusted annuity

For which of the following annuities must a surrender fee be paid if the interest rate has increased, and the annuity is surrendered before it is annuitized? A market value adjusted annuity stipulates that the annuity will incur a surrender charge if the contract is surrendered prior to annuitization. Contracts earning higher rates will require the contract owner to pay a surrender charge because the insurer is losing income on a profitable contract.

Variable annuity

For which of the following annuities must an agent have a securities license in order to sell? Variable annuities are regulated as securities products. Any agent selling a variable annuity or variable life insurance policy must have a securities license in addition to a life insurance license.

Separate account

Premiums from variable annuities are invested in the insurer's: Premiums from variable annuities are invested in the insurer's separate account.

Fixed annuity

Question text Of the following annuities, which provides a guaranteed minimum interest rate? A fixed annuity has a guaranteed minimum interest rate.

Daily

The value of each accumulation unit varies: The value of each accumulation unit varies daily.

The investment risk is borne upon the insurance company.

All of the following are true of variable annuities, EXCEPT: The investment risk is borne upon the contract owner.

Annuity unit

What accounting unit is used during the annuity phase of a variable annuity? During the annuity phase, annuity units are used in lieu of accumulation units to determine the amount of each annuity payment. The number of annuity units is fixed and is based on the contract's dollar value investment in the separate account, and how much the first annuity payment will be.

Variable

The cash value of Pete's annuity is invested in securities. What type of annuity does Pete have? Select one: a. Immediate b. Deferred c. Fixed d. Variable LH93014 Feedback Your answer is incorrect With a variable annuity, the cash value is invested in securities.

Earning potential may not be enough to offset the effects of inflation

What is a disadvantage of fixed annuities? The downside to fixed annuities is that the earning potential may not be sufficient to offset the effects of inflation. A variable annuity can address this problem.

Variable annuities are back-end loaded.

Jenny surrenders her deferred variable annuity 10 years after making premium payments. Which of the following is true? The insurer may charge a fee upon surrender of a variable annuity. The amount of the surrender fee is based on how long the contract was in force prior to surrender.

Knowing the exact amount of each annuity payment

What is an advantage of fixed annuities? An advantage of fixed annuities is that the interest rate is guaranteed; therefore, each annuity payment is fixed.

Earn a guaranteed minimum rate of return or a current interest rate which is linked to the S&P 500

Which of the following best describes equity indexed annuities? Equity indexed annuities are fixed annuities with a guaranteed minimum interest rate, and a current interest rate that is tied to the S&P 500 index.