Chapter Quiz: life insurance/annuities

Which of the following is NOT fundable by annuities? A) death benefits B) cash accumulation for any reason C) a person's retirement D) estate liquidation

A) death benefits Annuities are most commonly used to fund a person's retirement, but they can technically be used to accumulate cash for any reason. Annuities can also be used to liquidate an estate. Annuities do not provide death benefits; those are provided by life insurance.

Why is an equity indexed annuity considered to be a fixed annuity? A) it has modest investment potential B) it has a fixed rate of return C) it is not tied to an index like the S&P 500 D) it has a guaranteed minimum interest rate

D) 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.

Annuities can be used to fund which of the following? A) variable life insurance B) group life insurance C) estate creation D) retirement plans

D) retirement plans Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans.

A married couple's retirement annuity pays them $250/mo. The husband dies and his wife continues to receive $125.50/mo for as long as she lives. When the wife dies, payment stops. What settlement option did they select? A) join annuity B) cash refund annuity C) straight life D) joint and survivor

D) joint and survivor Under a joint settlement option, payments would stop at the first death, but under joint and survivor, payment would continue until both recipients die. Usually, the surviving beneficiary receives 1/2 or 2/3 of the amount received when both beneficiaries were alive.

If a contract provides a set amount of income for two or more persons with the income stopping upon the first death of the insured, it is called a A) joint life annuity B) joint and survivor annuity C) deferred annuity D) pure annuity

A) joint life annuity Joint life annuity settlement option pays benefits to two or more annuitants, but stops upon the death of the first.

All of the following statements are true regarding installments for a fixed amount EXCEPT: A) the payments will stop when the annuitant dies B) value of the account and future earnings will determine the time period for the benefits C) this option pays a specific amount until the funds are exhausted D) the annuitant may select how big the payments will be

A) the payments will stop when the annuitant dies Installments for a fixed amount option has no life contingencies. A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.

When a fixed annuity owner pays his/her insurance company a monthly annuity premium, where is this money placed? A) the insurance company's general account B) forwarded to an investor C) each contract's separate account D) the annuity owner's account

A) 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.

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.

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 & Poor's Index

According to the nonforfeiture law, if the owner decides to surrender a deferred annuity prior to annuitization, the owner is entitled to which of the following? A) full premium refund without any charges B) guaranteed surrender value C) no payments D) annuity dividends

B) guaranteed surrender value The nonforfeiture law stipulates that a deferred annuity must have a guaranteed surrender value that is available if the owner decides to surrender the annuity prior to annuitization

Which of the following best describes a bail-out provision? A) it allows the owner to receive a higher interest rate at certain timeframe B) it decreases the annuity surrender value C) it allows the owner to surrender the annuity without charge D) it waives the surrender charge for the annuitants confined to a long-term care facility

C) it allows the owner to surrender the annuity without charge Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain timeframe.

All of the following are true of an annuity owner EXCEPT: A) the owner has the right to name a beneficiary B) the owner is the party who may surrender the annuity C) the owner must be the party to receive benefits D) the owner pays the premiums on the annuity

C) the owner must be the party to receive benefits The "owner" is the person who purchases the contract and has all of the rights such as naming the beneficiary and surrendering the annuity. The owner, however, does not have to be the one who receives the benefits; it could be the annuitant (if different from the owner) or the beneficiary.

What happens if a deferred annuity is surrendered before the annuitization period? A) the insurer can only apply the surrender value toward another annuity B) deferred annuities cannot be surrendered prior to the annuitization period C) the owner will receive the surrender value of the annuity D) the owner will only receive a refund of the premium

C) the owner will receive the surrender value of the annuity If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed according to the nonforfeiture provision.

Which of the following is another term for the accumulation period of an annuity? A) premium period B) liquidation period C) annuity period D) pay-in period

D) pay-in period The accumulation period is also known as the pay-in period. It is the period of time over which the annuitant makes payments (premiums) into an annuity.

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

D) the annuitant will receive the higher of either the guaranteed minimum rate or current rate With a fixed annuity, the insurer invests the principal and gives the annuitants a guaranteed interest rate based on a minimum rate specified in the annuity, or current interest rate, whichever is higher.

Twins brother and sister each purchased a retirement annuity. When they retired at the same time, each selected the life income option. Both have similar life styles and are in good health. Which of the following is true with respect to their monthly annuity payments? A) the man's payments will be larger B) the woman's payments will be larger C) the payments will be based on their health at the time the payments began D) because they are the same age, they will receive the same payments

A) the man's payments will be larger Annuities use mortality tables to determine the amount of money needed in retirement. Because the life expectancy of women is greater, the woman's payments in this particular example will be smaller since they need to last longer.

Which of the following is NOT a term for the period of time during which the annuitant or the beneficiary receives income? A) liquidation period B) depreciation period C) annuitization period D) pay-out period

B) depreciation period The annuitization period is the time during which accumulated money is converted into an income stream. It is also referred to as the annuity, liquidation or pay-out period.

What happens if a deferred annuity is surrendered before the annuitization period? A) deferred annuities cannot be surrendered prior to the annuitization period B) the owner will receive the surrender value of the annuity C) the owner will only receive a refund of premium D) the insurer can only apply the surrender value toward another annuity

B) the owner will receive the surrender value of the annuity If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed according to the nonforfeiture provision.

A couple receives a set amount of income from their annuity. When the wife dies, the husband no longer receives annuity payments. What type of annuity did the couple buy? A) life with period certain B) joint limited annuity C) joint life D) joint and survivor

C) joint life Joint life annuity settlement option pays benefits to two or more annuitants, but also stops upon the death of the first.

Which of the following provisions in an annuity contract allows the owner to surrender the annuity if interest rates drop to a specified level? A) surrender B) nonforfeiture C) annuitization D) bail-out

D) bail-out Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain timeframe.

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 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 is true regarding a market value adjusted annuity? A) the insurer bears all the market risk of changing interest rates B) there are no penalties for a premature surrender of the annuity C) it provides a level benefit payment D) the owner is guaranteed a fixed interest rate for a specific period of time

D) the owner is guaranteed a fixed interest rate for a specific period of time Under a market value adjusted (modified guarantee) annuity, the insurer guarantees a competitive interest rate for a specific period (the longer the period, the better the guaranteed rate). At the end of the period, the owner has the option of taking the accumulated value or reinvesting the values of a new interest rate.