Annuities

Which of the following annuities specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments? a. immediate annuity b. flexible premium deferred annuity c. deferred annuity d. fixed premium deferred annuity

d. fixed premium deferred annuity

Deferred annuities accumulate funds for future distribution. Under what circumstances are these funds forfeitable to the insurer? a. under no circumstances b. only at the annuitant's death, if it occurs before the annuity starting date c. only if the contract is surrendered during the surrender charge period d. only if the owner stops paying premiums

a. under no circumstances Accumulated funds in a deferred annuity always belong to the owner. They are not forfeitable, even if the owner stops making premium payments.

What does the length of an annuity's surrender charge period depend on? a. the age of the beneficiary b. the contract design c. the age of the annuitant d. the period selected by the owner when the annuity is purchased

b. the contract design The owner has no say in the terms of the surrender charge, which is defined in the contract.

All of the following statements about annuities are correct, EXCEPT: a. Annuities are sold by life insurance agents and are issued by life insurance companies. b. An annuity converts a sum of money into a series of income payments. c. The primary purpose of an annuity is to guarantee the accumulation of money over time. d. Annuities are not life insurance.

c. The primary purpose of an annuity is to guarantee the accumulation of money over time. The primary purpose of an annuity is to liquidate a sum of money over a guaranteed period of time.

Which of the following correctly describes the effect that a 14 percent rate cap would have on an indexed annuity? a. The maximum rate that will be credited to the annuity is 14 percent. b. The maximum rate that will be credited to the annuity is 14 percent minus the percentage change of the selected stock index. c. The maximum rate that will be credited to the annuity is 14 percent minus the guaranteed rate specified in the annuity contract. d. The maximum rate that will be credited to the annuity is 14 percent plus the percentage change of the selected stock index.

a. The maximum rate that will be credited to the annuity is 14 percent. The rate cap is the maximum interest rate that can be credited to the annuity.

All the following are parties to an annuity contract EXCEPT: a. the annuitant b. the owner c. the agent d. the beneficiaryThe annuity owner is the person (or entity) who buys the contract.

c. the agent An annuity's beneficiary is the person the owner chooses to receive the contract's values if either the owner or the annuitant dies before annuitization.

Which of the following would be most appropriate for Haley, 55, if her primary objective is to ensure having an income she cannot outlive? a. mutual funds b. an annuity c. life insurance d. CDs

b. an annuity Annuities provide benefits during one's life. They ensure that one's income cannot be outlived.

An indexed annuity with a participation rate of 75 percent is currently valued at $10,000. If the S&P 500 increases 10 percent during the contract's term, how much interest will be credited to the annuity? a. $350 b. $500 c. $750 d. $1,400

c. $750 For that period the contract earned $750 ($10,000 × .075).

George purchased an annuity that will provide his wife, Anna, with monthly income payments for as long as she lives. In this scenario, what is Anna called? a. the agent b. the owner c. the annuitant d. the beneficiary

c. the annuitant An annuity's beneficiary is the person the owner chooses to receive the contract's values if either the owner or the annuitant dies before annuitization.

Which statement about deferred annuity surrender charges is correct? a. The surrender charge is usually applied to all withdrawals prior to annuitization. b. The insurer may extend the surrender charge period if the annuity owner makes excessive numbers of withdrawals. c. The surrender charge usually remains level. d. The surrender charge percentage typically decreases over the surrender charge period.

d. The surrender charge percentage typically decreases over the surrender charge period. The length of the surrender charge period is defined in the contract. The insurer cannot extend it.

All the following statements about annuity death benefits are correct EXCEPT: a. Variable annuities guarantee a death benefit equal to at least the premium invested minus previous withdrawals. b. If the owner or annuitant dies during the accumulation period, a beneficiary receives a death benefit at least equal to the amount invested in the contract. c. All annuities provide a death benefit if the owner or annuitant dies after the contract has been annuitized. d. All annuities provide a death benefit if the owner or annuitant dies during the accumulation period.

c. All annuities provide a death benefit if the owner or annuitant dies after the contract has been annuitized. If the owner or annuitant dies during the accumulation period, a beneficiary receives as a death benefit an amount at least equal to the amount invested in the contract.

What is the name of the period during which funds are paid out of an annuity contract in the form of periodic income payments? a. the annuity payout b. the accumulation period c. the annuity payout period d. the benefit period

c. the annuity payout period This is the name for the period during which funds are distributed, in the form of periodic income payments.

The death benefit of a fixed deferred annuity equals: a. the sum of periodic income payments projected to the annuitant's life expectancy b. the face amount stipulated in the deferred annuity contract. c. the contract's accumulated value when death occurs d. the sum of premiums paid into the annuity

c. the contract's accumulated value when death occurs The death benefit equals the sum of premiums paid, plus accrued interest, minus previous withdrawals; in other words, the annuity's accumulated value at the time of death.

George purchased an annuity in which his wife will receive income for as long as she lives. In this scenario, what is George most correctly called? a. the agent b. the beneficiary c. the owner d. the annuitant

c. the owner The annuity owner is the person (or entity) who buys the contract.

What is the name of the period during which premium funds are paid into an annuity contract? a. the benefit period b. the accumulation period c. the annuity payout d. the annuity period

b. the accumulation period The annuity payout is the dollar amount paid by an annuity at maturity.

Both indexed annuities and market-value adjusted annuities are generally considered a form of: a. fixed annuity b. variable annuity c. equity product d. securities-based product

a. fixed annuity Despite the variable nature of their interest, both indexed and MVA annuities are considered fixed annuities.

At the end of a contract period, market-value adjusted annuity owners can do all of the following, EXCEPT: a. withdraw funds b. extend the contract term with a higher guaranteed rate c. annuitize the contract d. renew the contract

b. extend the contract term with a higher guaranteed rate Extending the contract term with a higher guaranteed rate is not an option.

What is the purpose of the bailout provision of a deferred annuity contract? a. Permit the owner to withdraw funds at any time, without a surrender charge, if the interest rate falls below a specified level. b. Permit the owner to annuitize the contract prior to the scheduled annuitization date. c. Permit the insurer to terminate annuity income payments if the annuitant lives past his or her life expectancy. d. Permit the owner to cancel the contract for a full refund of premiums paid, minus any surrender charges, if he or she is unhappy with the contract.

a. Permit the owner to withdraw funds at any time, without a surrender charge, if the interest rate falls below a specified level. Deferred annuity policyowners are always free to surrender their contract and receive the full contract value, though surrender charge may be assessed if this is done within a specified period after the annuity's purchase.

Which of the following distribute a sum of money regularly, starting very shortly after they are bought? a. immediate annuities b. deferred annuities c. retirement annuities d. life insurance

a. immediate annuities Deferred annuities build funds over time for a future payout and do not distribute any funds immediately.

Which one of the following most correctly describes the process that occurs when a group annuity member retires? a. The group annuity begins paying the monthly income amount directly from the group contract. b. The retiree converts his or her accumulated share of the group contract into an individual annuity. c. An individual annuity contract is issued to the retiring member using funds from the group contract. d. The employer buys a variable annuity, which pays the benefits promised retirees in the group contract.

c. An individual annuity contract is issued to the retiring member using funds from the group contract. The retiree does not convert his or her accumulated share of the group contract into an individual annuity.

Jenny has purchased a variable annuity. She directs $2,500 of her $5,000 premium deposit into the contract's blue-chip stock sub-account when its net asset value is $10. How many accumulation units has Jenny bought? a. 250 accumulation units of the sub-account b. 2,500 accumulation units of the sub-account c. 160 accumulation units of the sub-account d. 1,500 accumulation units of the sub-account

a. 250 accumulation units of the sub-account Jenny bought 250 accumulation units of that sub-account ($2,500 ÷ $10).

Which of the following statements accurately describes the difference between a joint and survivor (J&S) annuity settlement option and a joint life settlement option? a. The J&S option continues payments until the second annuitant dies, while the joint life option terminates payments upon the first annuitant's death. b. The J&S option terminates payments upon the first annuitant's death, while the joint life option continues payments until the second annuitant dies. c. The J&S option can only be used with family members, while the joint life option can be used with any two people. d. There is no difference between the two.

a. The J&S option continues payments until the second annuitant dies, while the joint life option terminates payments upon the first annuitant's death. The J&S option continues payments until the second (surviving) annuitant dies, while the joint life option terminates payments upon the first annuitant's death.

What must an annuity owner do to withdraw funds from his or her annuity contract? a. The funds must remain in the contract until annuitization. b. notify the insurer of the request to withdraw funds c. provide proof of the owner's need for those funds d. pledge a certain amount of collateral, and agree to a repayment schedule

b. notify the insurer of the request to withdraw funds An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request.

Jenny directed $2,500 of her premium deposit to an aggressive technology stock sub-account. At the time of her original deposit, the value of an accumulation unit in that sub-account was $25. Jenny bought 100 units. Two months later, the value of each of those units dropped to $15. What is Jenny's investment in the technology stock account now? a. $2,500 b. $1,500 c. $1,200 d. $5,000

b. $1,500 Jenny's investment in the technology stock account would have declined from $2,500 to $1,500 ($15 × 100).

All the following statements regarding deferred annuity beneficiaries are correct EXCEPT: a. The distinction between annuitant-driven and owner-driven deferred annuities disappears if the owner and annuitant are the same person. b. With an annuitant-driven contract, the beneficiary must annuitize the contract immediately if the annuitant dies before annuitization. c. With annuitant-driven contracts, the annuitant's death before annuitization triggers payment of the contract value to the beneficiary even if the owner is still alive. d. With owner-driven contracts, the owner's death before annuitization triggers payment of the death benefit to the beneficiary, even if the designated annuitant is still alive.

b. With an annuitant-driven contract, the beneficiary must annuitize the contract immediately if the annuitant dies before annuitization. The annuitant has no expectation of pre-annuitization benefits in an owner-driven annuity.

Which of the following best describes income payments under the period certain-only annuity settlement option? a. the longer the payout period, the smaller the amount of each monthly payment b. the shorter the payout period, the smaller the amount of each monthly payment c. the longer the payout period, the larger the amount of each monthly payment d. The monthly payment will be the same regardless of the length of the payout period

a. the longer the payout period, the smaller the amount of each monthly payment Under a period or term certain annuity payout, payments are made for the specified number of years and then end. Common term certain payouts are 10, 15, 20, and 25 years. Thus, the larger the payout period, the smaller the amount of each monthly payment.

Under which settlement option is an income paid until the second of two annuitants dies, at which point no further payments are made to anyone? a. joint and survivor option b. life income with period certain option c.joint and survivor with period certain option d. joint life option

a. joint and survivor option Under a joint and survivor life income option, an income is paid until the second of two annuitants dies. When the second annuitant dies, no further payments are made to anyone.

Which annuity settlement option pays income for the annuitant's life, but no less than for a specified number of years? a. life income with period certain b. straight, or pure, life income c. joint and survivor life income d. life income with guaranteed minimum (refund guarantee or life annuity certain)

a. life income with period certain The life with period (or term) certain option guarantees that income is paid for the length of the annuitant's life. However, the income is paid for no less than a certain number of years. If the annuitant dies before the chosen period ends, income payments continue to the beneficiary for the balance of the period.

Whether a variable annuity's monthly income rises, falls, or stays level depends largely on which of the following? a. the annuity settlement option selected by the annuity owner b. the assumed interest rate (AIR) selected by the contract owner c. the number of annuity units calculated for the annuity d. 2000 CSO Mortality Table

b. the assumed interest rate (AIR) selected by the contract owner While the settlement option does influence the amount of income, this does not result in income payments that may rise and fall over time.

Sue, an annuity owner, names her 15-year-old son and 10-year-old daughter as joint annuitants of her contract. Upon whose life (or lives) are income payments determined? a. Sue's son's life b. the joint life expectancy of Sue's son and daughter c. Sue's daughter's life d. Sue's life

b. the joint life expectancy of Sue's son and daughter In this case, Sue's life is not the measuring life for the income payments under the contract.

Assets that support the contractual obligations of the insurer's fixed and guaranteed products are maintained in the company's: a. general account b. separate account c. customer account d. insured account

a. general account The general account holds the investment assets that support the contractual obligations of the insurer's fixed and guaranteed products, such as whole life policies and fixed annuities.

Alice's deferred annuity imposes a declining surrender charge that begins at 7 percent during the first year of the contract and declines 1 percentage point each year. What would the surrender charge rate be for a full withdrawal in the third year of the same contract? a. 5 percent b. 3 percent c. 4 percent d. 6 percent

a. 5 percent If a deferred annuity imposes a 7 percent declining surrender charge during the first year of the contract, it would be 6 percent during the second year and 5 percent during the third year. The surrender charge is typically a percentage of the contract's accumulated value and usually declines at 1 percent per year. In the eighth year, the surrender charge period ends.

All of the following statements about deferred annuity surrender charges are correct EXCEPT: a. A deferred annuity owner has rights to his or her contract values but may be forced to pay an insurer-imposed charge for withdrawing them. b. They are applied any time a withdrawal is made from a deferred annuity other than for annuitization. c. The surrender charge is typically a declining percentage of the contract's accumulated value. d. Most deferred annuities apply them if the owner withdraws from, or surrenders, the contract within a specified period after purchase.

b. They are applied any time a withdrawal is made from a deferred annuity other than for annuitization. The surrender charge is typically a declining percentage of the contracts accumulated value.

Lottery winners who want to receive their winnings in installment payments over a 20-year period will most likely be set up with: a. a structured settlement, using an immediate fixed annuity, that guarantees the distribution of payments over the specified period b. a stream of income paid by the lottery commission from a fund consisting of the announced lottery prize c. a deferred annuity from an insurance company that will annuitize in 20 years d. an immediate variable annuity that offers the potential for the lottery winner to receive even more than the announced prize winnings

a. a structured settlement, using an immediate fixed annuity, that guarantees the distribution of payments over the specified period Because of the certainty and guarantees they represent, immediate fixed annuities using a period-certain-only settlement option are used in setting up a structured settlement.

For which of the following people would an annuity probably NOT be suitable? a. Barbara, age 64, who recently inherited a large sum of money and wants to use some of it to provide retirement income she can't outlive. b. Charlie, age 79, who is looking for a place to save the proceeds from the recent sale of his vacation home. c. Deanna, age 24, who was recently awarded a large monetary settlement in a lawsuit and who wants to make sure the money lasts her entire life. d. Alan, age 42, who wants to save money outside of his 401k plan for extra retirement income,

b. Charlie, age 79, who is looking for a place to save the proceeds from the recent sale of his vacation home. Potentially steep surrender charges, lasting ten or more years, can make deferred annuities unsuitable for seniors who are simply interested in a place to hold their savings.

Which of the following is most designed to discourage deferred annuity contract owners from surrendering their annuity and moving the money to a new annuity when rates are rising? a. a variable annuity b. traditional fixed annuities c. an indexed annuity d. market-value adjusted annuities

d. market-value adjusted annuities Beyond a normal surrender charge, traditional fixed annuities do not penalize contract owners who surrender their contracts before the end of the term.

If a market-value adjusted annuity (MVA) is surrendered before the end of the contract term at a time when current market interest rates are lower than they were when the annuity was issued, the insurer will: a. maintain the same interest rate on the withdrawn funds and reduce the normal surrender charge b. increase the interest rate on the withdrawn funds and charge the normal surrender charge c. maintain the same interest rate on the withdrawn funds and charge the normal surrender charge d. decrease the interest rate on the withdrawn funds and charge the normal surrender charge

b. increase the interest rate on the withdrawn funds and charge the normal surrender charge If current market rates are lower than they were when the annuity was issued, the MVA works to the contract owner's advantage by causing the insurer to increase the interest that was credited to the surrendered amount. Under no circumstances are surrender charges reduced during the surrender charge period.

All the following statements regarding annuities are correct EXCEPT: a. The insurer guarantees income payments for whatever annuity payout period the annuitant selects. b. The insurer can provide a guaranteed stream of income for a single life or for a joint life, based on life expectancies and its mortality experience. c. Deferred annuities are a suitable replacement for life insurance. d. Annuities provide income payments that annuitants cannot outlive even if they surpass their life expectancy.

c. Deferred annuities are a suitable replacement for life insurance. They pay a certain amount for the length of what is an unknown time.

Which of the following distributes income payments over time beginning soon after purchase and can be funded only with a single lump-sum premium payment? a. single premium deferred annuity b. flexible premium immediate annuity c. fixed premium deferred annuity d. single premium immediate annuity

d. single premium immediate annuity Though funded with a single premium, SPDAs do not begin annuity payments until a future date. Deferred annuities can be funded with a single premium payment, a series of fixed premium payments, or a flexible premium payment.

Kelly owns a deferred annuity. What options does she have for using the funds accumulating in her contract before the annuitization date? a. They can be withdrawn, partially or in full, before the contract annuitizes. b. These values can only be partially withdrawn in an emergency before annuitization. c. Those values must be left intact in the contract for future annuitization. d. Those values must be fully withdrawn before annuitization.

a. They can be withdrawn, partially or in full, before the contract annuitizes. These values can be left intact in the contract for future annuitization. Or, they can be withdrawn, partially or in full, before the contract annuitizes.

In a fixed deferred annuity that has a current declared interest rate, a change in the current rate results in a new: a. renewal rate b. initial interest rate c. guaranteed rate d. general account rate

a. renewal rate The initial interest rate, effective for the first two contract years, cannot be changed. Beyond the initial rate period, renewal rates can be changed at any time, though most limit changes to no more than once per year.

The purpose for a long-term care rider with a deferred annuity contract is to: a. allow the deferred annuity to be annuitized earlier than age 65 if the annuitant requires long-term care b. allow the annuity owner to assign the deferred annuity to a nursing home c. allow tax-free withdrawals from the deferred annuity if the annuitant requires long-term care d. allow withdrawals from the deferred annuity without a surrender charge if the annuitant is confined to a nursing home

d. allow withdrawals from the deferred annuity without a surrender charge if the annuitant is confined to a nursing home Withdrawals from a deferred annuity are not exempt from taxation regardless of the reason for the withdrawal.

Which of the following correctly describes an indexed annuity contract owner's option(s) at the end of the contract's term? a. surrender the contract only b. either surrender the contract free or renew it c. either surrender or annuitize the contract only d. surrender, renew, or annuitize the contract

d. surrender, renew, or annuitize the contract At the end of the term, the owner can surrender the contract free of surrender charge, renew the contract, or annuitize it.

When Gary bought an indexed annuity with a $10,000 premium deposit, the S&P 500 Index was at 1000. At the end of the contract's first term one year later, this index was at 1100. Based only on this information, what is the basis for the amount of interest credited to Gary's contract? a. 15 percent b. 10 percent c. 5 percent d. 20 percent

b. 10 percent When Gary bought his annuity, the S&P 500 was at 1000. One year later it was at 1100: an increase of 10 percent. Thus, the basis for the amount of interest to be credited to Gary's EIA contract is 10 percent.

The charge-free withdrawals provision of a deferred annuity contract does which of the following? a. It exempts deferred annuity withdrawals from surrender charges and penalty taxes as long as the withdrawal does not exceed a specified percentage of the accumulated value. b. It permits annuity contract owners to withdraw a specified percentage of the accumulated value annually without imposing a surrender charge. c. It permits annuity contract owners to withdraw a specified percentage of the accumulated value on a one-time basis without imposing a surrender charge. d. It exempts deferred annuity withdrawals from surrender charges and all taxes as long as the withdrawal does not exceed a specified percentage of the accumulated value.

b. It permits annuity contract owners to withdraw a specified percentage of the accumulated value annually without imposing a surrender charge. The charge-free withdrawal provision does not exempt the annuity owner from taxation.

Which of the following annuities accepts periodic premiums of any amount (above a specified minimum) and on any frequency desired by the annuity owner? a. fixed premium deferred annuity b. flexible premium deferred annuity c. retirement annuity d. immediate annuity

b. flexible premium deferred annuity Fixed premium deferred annuities specify the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments.

Regardless of the interest earned by the index underlying an indexed annuity, the actual amount credited is limited by the contract's: a. expense charge b. participation rate and rate cap c. minimum guaranteed interest rate d. annuity purchase rate

b. participation rate and rate cap The actual amount credited does not depend on the contract's minimum interest rate but on the contract's participation rate and rate cap.

While indexed annuities are fairly complex products, the basic concept is best described as which one of the following? a. The difference between the average rate of a selected stock index and the annuity's guaranteed rate is the current interest rate credited to the annuity. b. The percentage increase in the selected stock portfolio over the contract's term translates into a dollar amount that is added to the annuity. c. Changes in the selected stock index are the basis for determining the current interest rate credited to the annuity. d. The percent of change in the insurer's separate account over the contract's term determines the dollar amount credited to the funds in the indexed annuity.

c. Changes in the selected stock index are the basis for determining the current interest rate credited to the annuity. An indexed annuity uses the percent of change in the selected stock index over the contract's term as the basis for determining the percentage interest rate credited to the funds in the annuity.

All of the following statements about the interest rates on deferred annuities are correct EXCEPT: a. The current declared rate is subject to change. b. The guaranteed minimum rate extends for the life of the contract. c. The annuity contract is credited with the higher of the guaranteed rate or the current declared rate. d. The guaranteed minimum rate is usually 5 to 6 percent.

d. The guaranteed minimum rate is usually 5 to 6 percent. This is the purpose for having the two rates.

Which statement about variable annuities (VAs) is correct? a. Variable annuities offer fewer income settlement options than fixed annuities. b. While VAs may yield higher returns than a fixed annuity, both types guarantee the annuity's principal. c. Variable annuities can only be purchased as deferred contracts. d. With a variable annuity, annuity income payments may increase or decrease based on the investment performance of the sub-accounts supporting them.

d. With a variable annuity, annuity income payments may increase or decrease based on the investment performance of the sub-accounts supporting them. Though monthly payments may decrease, VAs are purchased in the hope that income payments will increase over time.

A two-tiered fixed annuity is designed to credit a higher rate of interest to: a. annuity owners who maintain their annuity beyond its surrender charge period b. annuity owners who surrender the annuity and roll over the funds to a new deferred annuity c. annuity owners who make automatic premium payments of a minimum amount into the annuity d. annuity owners who annuitize the contract

d. annuity owners who annuitize the contract A lower interest rate is applied if the contract owner surrenders the annuity and takes its values in a lump sum instead of annuitizing, regardless of what he or she does with the money

For which of the following purposes are annuities most often used? a. income protection in the event of death b. estate planning c. short-term savings d. retirement planning

d. retirement planning