Fixed, Indexed, Immediate, and Variable Annuities Chapter Quiz

The assumed interest rate (AIR) of a variable annuity contract is established as 4%. If the first periodic payment is $1,000, and the investment performance is 4%, the next period's payment will A. Increase from the prior month B. Decrease from the prior month C. Stay the same as the prior month D. More information is needed to make this determination

C. Stay the same as the prior month

Recent developments to fixed annuities include which of the following features? A. Premium bonuses B. Short-term care benefits C. Bailout provisions D. Guaranteed lifetime withdrawal benefits

D. Guaranteed lifetime withdrawal benefits

An index annuity has a participation rate of 90% and a rate cap of 6%. If the S&P gains 4% over the prior year, the percentage of the interest rate credit to the contract is A. 6% B. 4% C. 3.6% D. 0%

C. 3.6% In this situation, the investor earns 90% of the index performance up to the cap: 90% of 4% is 3.6%

Compare the interest-earning potential of fixed annuities and indexed annuities A. Because indexed annuities are so volatile, they can earn significantly higher or lower interest than fixed annuities B. Fixed annuities and indexed annuities tend to earn the same amount of interest C. Indexed annuities have the potential of earning higher interest rates than fixed annuities D. Fixed annuities earn higher interest rates than indexed annuities

C. Indexed annuities have the potential of earning higher interest rates than fixed annuities

A strategy that many variable annuity issuers employ to ensure that volatile market conditions do not subject them to unmanageable risk is A. Imposing a freeze on purchase payments B. Increasing the M&E charges C. Requiring a specific allocation to a fixed account D. Allowing model portfolio investments only

C. Requiring a specific allocation to a fixed account

Which annuity is purchased with a single payment and begins annuity payments within the first year? A. SPDA B. FPIA C. SPIA D. FPDA

C. SPIA

An index annuity has a participation rate of 80% and a rate cap of 6%. If the S&P lost 4% over the prior year and the minimum guarantee was 1%, the percentage of the interest rate credit to contract is A. 4% B. 3.2% C. 1% D. 0%

D. 0% When an index has a negative performance for the year, the amount credited to the account for that year is 0. The minimum guaranteed interest amount is not calculated or credited until the end of the term.

Which of the following would benefit the most from a straight life immediate annuity? A. A 40-year old man who has a large amount of cash to purchase an annuity and who needs immediate income B. An individual who wants to grow the annuity tax deferred C. A retiree who is looking for a higher rate of return on his investment D. A 60-year old man who needs as much retirement income as possible

D. A 60-year old man who needs as much retirement income as possible

A customer who is purchasing a variable annuity wishes to guarantee annual withdrawals equal to at least the purchase payments, regardless of investment performance. Which of the following variable annuity riders is the most suitable? A. Guaranteed Minimum Accumulation Benefit B. Guaranteed Lifetime Withdrawal Benefit C. Guaranteed Minimum Income Benefit D. Guaranteed Minimum Withdrawal Benefit

D. Guaranteed Minimum Withdrawal Benefit

Which of the following is true regarding surrender charge periods in index annuities? A. They are about the same as those for other types of annuities B. They are not subject to the 10/10 rule C. They are usually shorter than those of other types of annuities D. They are no longer than those of other types of annuities

D. They are no longer than those of other types of annuities

Which of the following is an explanation of how X-shares work? A. They offer bonus credits B. They have no surrender charges C. They typically have the lowest M&E charges of all share classes D. The have a front-end load

A. They offer bonus credits

All other factors being equal, which of the following individuals would receive the largest monthly check from a single premium straight life immediate annuity? A. A 50-year-old woman B. A 60-year-old man C. A 60-year-old woman D. A 50-year-old man

B. A 60-year-old man Among other factors, the annuity income amount is based upon the annuitant's age and gender. An annuitant whose life expectancy is shorter will have the largest income installments. In this example, an older man will have the shortest life expectancy.

The type of fixed annuity in which there is NOT a guarantee that full principal will be returned at surrender is a A. Market value adjusted annuity B. Book value annuity C. Banded rate annuity D. Muti-year guarantee annuity

A. Market value adjusted annuity

A financial adviser must have a Series 6 or Series 7 registration to sell which of the following annuity products? A. Fixed, index, and variable annuities B. Variable annuities C. Index annuities only D. Index and variable annuities

B. Variable annuities

The market value adjustment in modified guaranteed annuities refers to which of the following? A. The performance of annuity investments B. The percentage the insurer keeps for its services C. The difference between the contracted interest rate and the rate at surrender D. The penalty for a premature surrender of the annuity

C. The difference between the contracted interest rate and the rate at surrender

Which of the following statements best describes how an index annuity credits interest? A. Like a variable annuity, earring may be negative in years of poor market performance B. Like a fixed annuity, the amount of interest earned is steady from year to year C. Like a variable annuity the amount of earnings earned goes up and down from year to year, depending on the way the purchase payments are invested. D. Interest credits are not based on the performance of specific investments

D. Interest credits are not based on the performance of specific investments

Who bears all of the investment risk in a fixed annuity? A. The beneficiary B. The annuitant C. The insurance company D. The owner

C. The insurance company

Which of the following share classes is likely to have the lowest mortality and expense charge? A. A-shares B. B-shares C. C-shares D. L-shares

B. B-shares

In a fixed annuity, which of the following is true regarding the guaranteed interest rate on the investment? A. The annuitant will receive the lower of either the guaranteed minimum rate or current rate B. The annuitant will only receive the guaranteed minimum specified in the contract C. The annuitant will receive the higher of either the guaranteed minimum rate or current rate D. The annuitant will always receive the current interest rate

C. The annuitant will receive the higher of either the guaranteed minimum rate or current rate

If a variable annuity offers a free withdrawal provision, the most common amount available is typically A. 5% B. 10% C. 15% D. 20%

B. 10%

All of the following features are commonly associated with an index annuities in the market today EXCEPT A. Premium bonuses B. Banding C. Daily interest credits D. Market value adjustments

C. Daily interest credits

Your client uses $50,000 in inheritance money to purchase a single premium immediate annuity. How soon can he begin receiving income payments? A. At age 65 B. No sooner than 6 months from the time of purchase C. No later than 1 year from the time of purchase D. After 2 years

C. No later than 1 year from the time of purchase

The index that is most commonly used to determine market returns for index annuities is the? A. Russell 2000 B. Dow Jones Industrial Average C. S&P 500 D. S&P 100

C. S&P 500

Which of the following is a feature of a single premium immediate annuity? A. It is purchased through periodic payments B. Income payments start at age 65 C. It is also referred to as a deferred annuity D. Income payments start within one year

D. Income payments start within one year

An investor in a variable annuity contract is seeking a low-cost passive investment strategy. Which option should be considered? A. Target allocation funds B. Model portfolios C. Dollar cost averaging account D. Index funds

D. Index funds

All of the following are common methods of calculation index returns on index annuities EXCEPT A. Annual reset B. High water mark C. Annual point to point D. Participation rate

D. Participation rate