Utah Life and Health Exam- Chapter 5: Annuities

Your client is planning to retire. She has accumulated $100,000 in a retirement annuity, and now wants to select the benefit option that will pay the largest monthly amount for as long as she lives. As her agent, what should you recommend? a- Joint and survivor b- Straight life c- Life income with period certain d- Installment refund

b- Straight life; With the straight life option, the annuity payments cease at death. However, because there are no other guarantees that might incur additional charges, this option provides the highest monthly benefits for an individual annuitant.

Which of the following is TRUE for both equity indexed annuities and fixed annuities? a- Both are considered to be more risky than variable annuities. b- They invest on a conservative basis. c- They have a guaranteed minimum interest rate. d- They are both tied to an equity index.

c- They have a guaranteed minimum interest rate; While equity indexed annuities earn higher interest rates than fixed annuities, both types of annuities guarantee a specific minimum interest rate.

An individual has been making periodic premium payments on an annuity. The annuity income payments are scheduled to begin after 1 year since the annuity was purchased. What type of annuity is it? a- Fixed b- Flexible premium c- Immediate d- Deferred

d- Deferred; Deferred annuities may be purchased with either a single lump sum or periodic payments, but they do not begin the income payments until sometime after 1 year from the date of purchase.

Which of the following ultimately determines the interest rates paid to the owner of a fixed annuity? a- Investment performance of the company b- Investment performance of the insured c- Statewide predetermined annual interest rate d- Insurer's guaranteed minimum rate of interest

d- Insurer's guaranteed minimum rate of interest; With fixed annuities, the company is required to pay at least a guaranteed minimum rate of interest to the owners. If the company investments perform well, the company will pay a higher interest rate, but since the interest rate can never fall below the guaranteed minimum, that's what ultimately determines what the company will pay.

Which of the following best describes the difference between Pure Life and Life with Guaranteed Minimum settlement options? a- Life with Guaranteed Minimum will pay the remaining principal to the beneficiary. b- In Life with Guaranteed Minimum, payments can be made in installments. Pure Life guarantees to pay out all the proceeds. Pure Life is not a life contingency option.

a- Life with Guaranteed Minimum will pay the remaining principal to the beneficiary; With the Life with Guaranteed Minimum, if the annuitant dies before the principal amount (the amount he paid for the annuity) has been paid out, the remainder of the principal amount will be refunded to his/her beneficiary. Under the Pure Life option, the payments cease upon the annuitant's death regardless of the amount of the principal paid out.

Which of the following is a feature of a variable annuity? a- Securities license is not required. b- Benefit payment amounts are not guaranteed. c- Payments into the annuity are kept in the company's general account. d- Interest rate is guaranteed.

b- Benefit payment amounts are not guaranteed; Under a variable annuity, the issuing insurance company does not guarantee a minimum interest rate or the benefit payment amounts. The annuitant's payments into the annuity are invested in the insurer's separate account. Agents selling variable annuities are required to have a securities license in addition to their life agent's license.

In an annuity, the accumulated money is converted into a stream of income during which time period? a- Payment period b- Amortization period c- Conversion period d- Annuitization period

d- Annuitization period

The form of life annuity which pays benefits throughout the lifetime of the annuitant and also guarantees payment for a minimum number of years is called? a- Life income with refund. b- Joint and survivorship. c- Joint life annuity. d- Life income with period certain.

d- Life income with period certain; If the annuitant dies before the period certain, the payments continue to a beneficiary or the estate for the remainder of the period certain.

The term "fixed' in an annuity refers to all of the following EXCEPT? a- Death benefit b- Guaranteed rate of interest c- Equal annuity payments d- Amount and length of payments

a- Death benefit; A fixed annuity is fixed in the sense that it provides a guaranteed minimum rate of interest and income payments that do not vary from one to the next. The company also guarantees the specified dollar amount for each payment and the length of the payout period. Annuities do not provide a death benefit.

In reference to fixed annuities, what comprises most of a life insurance company's general account? a- S&P 500 index b- Conservative investments like bonds c- Aggressive stock and bonds d- Company stock

b- Conservative investments like bonds; Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which makes conservative enough investments (like bonds) to ensure a guaranteed rate to the annuity owners.

All of the following statements are true regarding installments for a fixed period annuity settlement option EXCEPT? a- It will pay the benefit only for a designated time. b- The payments are not guaranteed for life. c- The insurer determines the amount for each payment. d- It is a life contingency option.

d- It is a life contingency option; Under the installments for a fixed period annuity settlement option, the annuitant selects the time period for the benefits; the insurer determines how much each payment will be. This option pays for a specific amount of time only, and there are no life contingencies.

If an annuitant selects the straight life annuity settlement option, in order to receive all of the money out of the contract, it would be necessary to? a- Die before his life expectancy. b- Name a beneficiary. c- Name another annuitant. d- Live at least to his life expectancy.

d- Live at least to his life expectancy; A straight life annuity pays as long as the annuitant lives. The amount is based on the annuitant's life expectancy.

Which of the following is NOT true regarding the Life with Guaranteed Minimum annuity settlement option? a- Payments can be made in installments and as a single cash refund. b- It provides a higher monthly benefit than a pure life annuity. c- It is a life contingency option. d- The beneficiary receives the remainder of the principal amount upon the annuitants death.

b- It provides a higher monthly benefit than a pure life annuity; With the Life with Guaranteed Minimum annuity settlement option, if the annuitant dies before the principal amount (the amount he paid for the annuity) has been paid out, the remainder of the principal amount will be refunded to his/her beneficiary. Pure life provides the highest monthly benefits for an individual annuitant.

Under which of the following annuity options does the annuitant select the time period for the benefits, and the insurer determines how much each payment will be? a- Installments and fixed amount b- Installment refund c- Cash refund d- Installments for a fixed period

d- Installments for a fixed period; this option pays for a specific period of time only, and there are no life contingencies.

An individual buys a flexible premium deferred life annuity with 20 year period certain. What would his beneficiary receive if he died 5 years after beginning the annuity phase? a- Payments for 20 years b- Payments for life c- Nothing d- Payments for 15 years

d- Payments for 15 years; With any period certain, death of the annuitant within the stated period will provide payments to the beneficiary only for the remainder of the period certain.

Which of the following is true regarding a waiver of a surrender charge on an annuity contract? a- The charge can only be waived if the annuitant needs the funds for medical expenses. b- The surrender charge will be applied to all premature surrenders. c- The surrender charge waiver only applies to immediate annuity. d- The charge may be waived if the annuitant is confined to a long-term care facility for at least 30 days.

d- The charge may be waived if the annuitant is confined to a long-term care facility for at least 30 days; Annuity contracts provide for a waiver of surrender charges if the annuitant is confined to a Long-term Care facility for at least 30 days.

Which of the following can surrender a deferred annuity contract? a- Deferred annuity cannot be surrendered b- Only the annuity owner c- Only the insurance company for nonpayment of premiums d- The beneficiary after the owner's death

b- Only the annuity owner; If the need arises, a deferred annuity contract may be surrendered only by the annuity owner. At surrender the owner receives the value of the annuity minus a surrender charge.

Your client plans to retire at age 50. He would like to purchase an annuity that would provide from the time he retires to the age when social security and other pension funds become available. What settlement option should he consider? a- Annuity certain b- Fixed annuity c- Refund life d- Variable annuity

a- Annuity certain; Annuity Certain option allows the annuitant to select the time period or the amount for the benefits. Under the installments for a fixed period, distribution begins on a specific date and stops on a specific date.

Which of the following is TRUE regarding variable annuities? a- A person selling variable annuities is required to have only a life agent's license. b- The annuitant assumes the risk of the investment. c- The funds are invested in the company's general account. d- The company guarantees a minimum interest rate.

b- The annuitant assumes the risk of the investment; The payments that the annuitant invests into the variable annuity are invested in the insurer's separate account. The separate account under many annuities provides the annuitant with a dozen or more investment options ranging from "money market funds" to "growth stock funds" to "precious metal funds". Therefore, the annuitant assumes the risk of the investment.

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n)? a- Equity Indexed Annuity b- Variable Annuity c- Flexible Annuity d- Immediate Annuity

a- Equity Indexed Annuity; The interest rates of Equity Indexed Annuities are tied to the Standard and Poor's Index.

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policy holders? a- 2% b- 2.5% c-3% d- Whatever interest rate the company deems appropriate

b- 2.5%; Insurance companies promise guaranteed minimums on the fixed annuities (2.5% in this scenario). This means that if the investments draw less than that, the company will have to pay 2.5% anyway. If the investments earn over 2.5%, the company will pay that excess.

A prospective deferred annuity owner is concerned about what would happen if he surrendered the annuity before the annuitization period. The agent most likely explained which of the following? a- It is not possible to surrender an annuity before the annuitization period. b- Forfeiture option guarantees that the owner will receive a surrender value of the contract. c- The owner will receive some of the money back, which will depend on the surrender value established by the insurer at the time the contract is terminated. d- The insurance company will apply the money to another annuity or a life insurance policy, but the money cannot be returned.

b- Forfeiture option guarantees that the owner will receive a surrender value of the contract; If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges) due to the nonforfeiture provision.

Why is an equity indexed annuity considered to be a fixed annuity? a- It is not tied to an index like the S&P 500. b- It has a guaranteed minimum interest rate. c- It has modest investment potential. d- It has a fixed rate of return.

b- It has a guaranteed minimum interest rate; While equity indexed annuities earn higher interest rates than fixed annuities, both types of annuities guarantee a specific minimum interest rate.

When a fixed annuity owner pays his/ her insurance company a monthly annuity premium, where is this money placed? a- Each contract's separate account b- The annuity owner's account c- The insurance company's general account d- Forwarded to an investor

c- The insurance company's general account; Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which is part of its investment portfolio. The company makes conservative enough investments to insure a guaranteed rate to the annuity owners.

If the owner prematurely surrenders his deferred annuity before the annuitization period begins, which of the following is most likely to occur? a- A surrender charge will not be imposed because the account has been open for at least a year. b- The owner will forfeit any premiums he has paid into the account, but will receive any interest earned on the account. c- The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge. A surrender charge will be imposed that is equal to 3 of the owner's monthly annuity payment.

c- The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge; The charge is generally a percentage that reduces over time until it ends.

Which two terms are associated directly with the way an annuity is funded? a- Increasing or decreasing b- Immediate or deferred c- Renewable or convertible d- Single payment or periodic payments

d- Single payment or periodic payments; Annuities are characterized by how they can be paid for: either a single payment (lump sum) or through periodic payments in which the premiums are paid in installments over a period of time. Periodic payment annuities can be either level, in which the annuitant/owner pays a fixed installment, or the payments can be flexible, in which the amount and frequency of each installment varies.