Ch. 12 Quiz Annuities

8. An annuity might be called the flip side of A. compounding B. life insurance C. retirement planning D. Social Security

B. Life Insurance

10. An annuity that guarantees a minimum rate of return is A. an immediate annuity B. a deferred annuity C. a variable annuity D. a fixed annuity

D. a fixed annuity -Provide a fixed, guaranteed accumulation or payout, as opposed to variable annuities which attempt to offset inflation by providing a benefit linked to a variable underlying investment account.

4. Which type of annuity is most likely to provide death benefits? A. Fixed annuity B. Variable annuity C. Deferred annuity D. Immediate annuity

C. Deferred Annuity -The benefit payments are postponed until a later date, such as a planned retirement Death Benefits Deferred Annuity -When the annuitant dies before the start of annuity payments, some companies return the aggregate, net premiums paid by the purchaser of a deferred annuity and a portion of the interest the money has earned. others deduct enough money from premiums paid to cover the expense incurred in setting up the contract.

12. Albert has purchased an annuity that will pay him a monthly income for the rest of his life. If Albert dies before the annuity has paid back as much as he put into it, the insurance company has agreed to pay the difference to Albert's daughter. Albert has purchased A. a straight-life annuity B. a life annuity with period certain C. a refund life annuity D. a temporary annuity

C. A refund life annuity - A refund life annuity will pay the annuitant for life, but if the annuitant dies too soon after the annuity period begins, there will be a refund of any undistributed principal or cost of the annuity. This option assures that the full purchase price of the annuity will be paid out to someone. This refund may be in the form of continued monthly installments (installment refund) or paid in one lump sum (cash refund), whichever has been elected by the annuitant. Guaranteed Minimum Payouts - refund ife annuity - life annuity certain ---An annuity certain is an option that does not guarantee a lifetime income to the annuitant. It provides an income for a guaranteed period (or for a fixed amount) regardless of whether the annuitant is alive or not. If the annuitant outlives the guaranteed period, the annuity payments cease. If the annuitant dies during the guaranteed period, the payments continue to a survivor until the guaranteed period of time ends.

1. Annuities exist to A. accumulate a sum of money B. distribute a lifetime income C. both accumulate a sum of money and distribute a lifetime income D. neither accumulate a sum of money nor distribute a lifetime income

C. Both accumulate sum of money and distribute a lifetime income - Annuities are the exact opposite of life insurance. The principal function of a life insurance contract is to create an estate (sum of money) by the periodic payment of money into the contract. - Annuities principal function is the liquidation of an estate. - In contrast to life insurance, which is designed to protect against the risk of premature death, annuities are designed to protect against the risk of living too long.

3. Liz purchases an immediate annuity. The annuity contract must be A. a fixed annuity B. a variable annuity C. a deferred annuity D. a single premium annuity

D. a Single Premium Annuity -An annuity purchased by a single lump sum payment is called a single premium annuity. The annuity itself is a contract between the company and the annuitant. For the single premium, the company promises to pay the annuitant an amount each period (monthly, quarterly, semiannually, or annually)

Exercise 12.B 1. This is an account held by an insurer that consists primarily of a portfolio of common stock and other equity investments. 2. The value of these will change based on the daily performance of the separate account, and so will the amount of the benefit checks. 3. This type of annuity provides a hedge against inflation and is not a fully guaranteed contract. 4. This is an account held by an insurer that consists of conservative investments to match its contractual guarantees and liabilities. 5. This is a type of annuity where benefit payments begin within 12 months of purchase.

1. E. Separate account 2. B. Annuity Units 3. C. Variable Annuity 4. A. General Account 5. D. Immediate annuity

11. Devon purchases an annuity that will pay a monthly income for the remainder of his life and then stop making payments. Devon has purchased A. a fixed annuity B. a straight-life annuity C. a variable annuity D. a temporary annuity certain

B. A straight life annuity -A life only (straight life) option provides for payment of annuity benefits for the life of the annuitant with no further payment following the death of the annuitant. This option will pay the highest amount of monthly income to the annuitant because ti is based only on life expectancy, but it creates a risk that the annuitant may die early and forfeit much of the value of the annuity to the insurance company.

6. Which of the following types of annuities are regulated as securities? A. Fixed annuities B. Flexible annuities C. Variable annuities D. Structured annuities

C. Variable Annuities - Like variable life insurance, is designed to provide a hedge against inflation through investments in a separate account of the insurer consisting primarily of common stock. - A variable annuity is not a fully guaranteed contract. Variable annuities provide annuitants the opportunity to experience large gains; they may, however, also produce a loss. Thus, variable annuities are characterized by a variable rate of growth and a variable benefit payable to the annuitant.

2. Tracey is paying money into an annuity she hopes will support her in her retirement years. Her contract currently is in which of the following periods? A. Accumulation period B. Nonforfeiture period C. Payout period D. Annuity period

A. Accumulation Period - This is the growth time. "Putting In" - For a single premium deferred annuity, it is the time between the purchase date and the date benefits begin. - For a periodic premium deferred annuity, it includes all the time between the first and last premium payments as well as any additional time before benefits begin. The owner has the ability to make changes during the accumulate period. On all types of annuities, the principal earns interest. The first years interest is added to the original principal, and the combined sum then earns more interest in the second year. In other words, we earn interest on interest, or compound interest, in the second and ever subsequent year. - The interest earned by the annuity contract is not currently taxed as it is with other savings investment vehicles. Instead, if an individual owns the annuity, the interest generally is not taxed until it I paid out of the contract. Meanwhile, during the accumulation period, this untaxed interest goes right on earning even more interest, which is also added to principal and not currently taxed. This tax advantage is an important reason why people buy annuities.

13. Which type of annuity is most likely to be used to distribute lottery winnings? A. Flexible premium, temporary annuity with period certain B. Single premium, temporary annuity with amount certain C. Single premium life annuity D. Flexible premium, temporary annuity with amount certain

B. Single Premium, Temporary annuity with amount certain Temporary Annuity Certain - A temporary annuity provides annuity payments or a specified period of time, or until death of the annuitant - whichever comes first. It does not necessarily guarantee payment for life or for the specified period of time. it provides for one contingency or the other. The key concept is that the earlier event will terminate benefits.

9. Annuities are a mechanism for transferring to an insurance company the risk of A. poor investment returns B. becoming uninsurable C. outliving financial resources D. outliving a spouse or child

C. Outliving financial resources

7. Which of the following is a purpose of the annuity? A. The creation of a fund at the death of an individual B. The replacement of earnings upon the disability of an individual C. The distribution of a lifetime income D. The discounting of a principal sum back to its present value

C. The Distribution of Life time Income

Exercise 12.A 1. The period during which annuity benefits are received 2. The period between the annuity purchase date and when benefits begin 3. A stream of equal, periodic annuity payments 4. A stream of payments that fluctuate based on the investment performance of the principal funds

1. B. Annuity Period 2. C. Accumulation period 3. A. Fixed payout 4. D. variable payout

5. Which of the following factors is NOT used to determine annuity premiums? A. Annuitant's retirement date B. Assumed interest rate C. Income amount and payment guarantee D. Applicant's sex

A. Annuitants retirement date. 1. Annitants age - The age at which an annuitant will begin to receive a lifetime income is important because it helps the company determine what premium to charge. An annuitant who will begin to receive $300 per month for life beginning at age 60 will pay a higher premium than an annuitant who will begin to receive $300 per month for life beginning at age 65 2. annuitants sex - Because statistically women live longer than men, a woman will pay higher premiums because she is likely to require more income payments than a man her own age. 3. assumed interest rate - Life insurance companies invest premiums and earn a rate of return on those investments. When determining premiums, companies estimate an assumed interest rate for those premium dollars. 4. income amount and payment guarantee - The amount of the periodic income to be paid out also impacts the premium, as do any payment guarantees (such as a 10 year period certain). The higher the amount of periodic income and the longer the guarantee it must be paid, the higher the annuity premium will be. 5. Loading for company expenses. - As with life policies, the annuity purchaser helps pay the company operating expenses. The premiums charged must have an expense, or loading, factor added to them.

14. Marcus purchases an annuity that offers a guaranteed minimum interest rate and a guarantee against loss of principal if the contract is held to term. However, if the Nasdaq moves upward, Marcus's annuity might end up accruing more than the guaranteed minimum interest rate. Marcus has purchased A. an equity-indexed annuity B. a market value-adjusted annuity C. a market value-indexed annuity D. an equity-adjusted annuity

A. an equity-indexed annuity A Fixed Annuity with an equity linked rate of return. Excess interest earnings (above the interest rate guarantees) are calculated using an indexing method that is linked both to the stock market as well as the insurance companies overall investment performance. EIAs are not currently classified as securities and do not require a securities license to sell. - Interest Earned is tied to an equity index such as the S&P 500, adjusted yearly to reflect any index increases. - the advantage of an equity indexed annuity is that it has guaranteed minimum interest rate and can never decrease in value. it also gives the annuitant the opportunity to beat the rate of inflation.

15. Eric purchased an annuity with favorable rates. However, because of unforeseen circumstances, he needs to surrender the annuity. If the market has gone up, Eric will need to pay a higher surrender charge than if the market has gone down. Eric owns A. an equity-indexed annuity B. a market value-adjusted annuity C. a market value-indexed annuity D. an equity-adjusted annuity

B. A market value adjusted annuity - Are individual differed annuity contracts with underlying assets held in a different account. The values are guaranteed if held for a specified period of time, but the nonforfeiture values may fluctuate according to a market value adjustment formula if held for shorter periods. MVA annuities are also known as modified guaranteed annuities. This is a fixed contract, and the interest paid is dependent on the fixed rate and the actual rate of the underlying bonds which are in the General Account. - The interest rate on MVA annuities is guaranteed (fixed) for a specific time. An adjustment is only made if the annuity is surrendered. if interest rates rise, surrender charges will be higher due to the adjustment. If interest rates are low, there will not be a surrender charge. - The market value adjustment comes into play only if the annuity owner decides to surrender the annuity contract early. If the owner does decide to do this, a surrender charge and market value adjustment apply. If current interest rates are higher than the contract rate, the annuity owner will receive less. if the current rates are lower than the contract rate, the annuity owner will receive more. This increase or decrease is what is referred to as the "market value adjustment"