CH#5: Annuities Q&A
Surrender charge
After three years of making payments into a flexible premium deferred annuity, the owner decides to surrender the annuity. The insurer returns all the premium payments to the owner, except for a predetermined percentage. What is this percentage called A) Inflation adjustment B) Surrender charge C) Termination penalty D) Bail-out charge
Annuitant
When an annuity is written, whose life expectancy is taken into account A) Beneficiary B) Life expectancy is not a factor when writing an annuity. C) Owner D) Annuitant
The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge
If the owner prematurely surrenders his deferred annuity before the annuitization period begins, which of the following is most likely to occur A) The owner will forfeit any premiums he has paid into the account, but will receive any interest earned on the account. B) The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge. C) A surrender charge will be imposed that is equal to 3 of the owner's monthly annuity payments. D) A surrender charge will not be imposed because the account has been open for at least 1 year
Conservative investments like bonds
In reference to fixed annuities, what comprises most of a life insurance company's general account A) Conservative investments like bonds B) Aggressive stocks and bonds C) Company stock D) S&P 500 index
Fixed amount
Under which installments option does the annuitant select the amount of each payment, and the insurer determines how long they will pay benefits A) Variable period B) Variable amount C) Fixed period D) Fixed amount
Only the annuity owner
Which of the following can surrender a deferred annuity contract A) Only the insurance company for nonpayment of premiums B) The beneficiary after the owner's death C) Deferred annuity cannot be surrendered. D) Only the annuity owner
Depreciation period
Which of the following is NOT a term for the period of time during which the annuitant or the beneficiary receives income A) Annuitization period B) Pay-out period C) Liquidation period D) Depreciation period
The surrender charge is a percentage of the cash value and decreases over time
If a deferred annuity is surrendered prematurely, a surrender charge is imposed. How is the surrender charge determined A) The surrender charge is always 7% of the cash value. B) The surrender charge is a flat fee determined by the annuity owner when the annuity is purchased. C) The surrender charge will increase as the accumulation period increases. D) The surrender charge is a percentage of the cash value and decreases over time
Nonforfeiture option guarantees that the owner will receive a surrender value of the contract
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) The insurance company will apply the money to another annuity or a life insurance policy, but the money cannot be returned. B) It is not possible to surrender an annuity before the annuitization period. C) Nonforfeiture option guarantees that the owner will receive a surrender value of the contract. D) The owner will receive some of the money back, which will depend on the surrender value established by the insurer at the time that the contract is terminated
An index like Standard & Poor's 500
The equity in an equity index annuity is linked to A) The annuitant's individual stock portfolio. B) The insurance company's general account investments. C) An index like Standard & Poor's 500. D) The returns from the insurance company's separate account
Joint and Survivor
A couple near retirement is planning for their golden years. They want to make sure that their retirement annuity provides monthly benefits for the rest of their lives. Should one of them die, the other would still like to continue receiving benefits. Which settlement option should they choose A) Joint and Survivor B) Joint life C) Life with period certain D) Straight life
The cash value will be paid to the annuitant's estate
The annuity owner dies during the accumulation period of his annuity. The cash value of his annuity exceeds the premiums he paid. There is no named beneficiary. Which of the following is true A) The premium value will be paid to the annuitant's estate. B) The state government will receive the amount of premiums paid. C) The state government will receive the cash value of the annuity. D) The cash value will be paid to the annuitant's estate
Installments for a fixed period
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) Installment refund B) Cash refund C) Installments for a fixed period D) Installments for a fixed amount
Favorable tax treatment
What is the advantage of having a qualified annuity A) Receiving a lump-sum settlement tax free B) Higher dividends C) Favorable tax treatment D) No filing with the IRS
Payments stop after the first death among the annuitants
Which of the following is NOT true about a joint and survivor annuity benefit option A) Payments stop after the first death among the annuitants. B) A period certain option may be included. C) This option guarantees income for two or more recipients. D) The surviving annuitant may receive reduced payments
They earn lower interest rates than fixed annuities
Which of the following is NOT true regarding Equity Indexed Annuities A) The insurance company keeps a percentage of the returns. B) They have guaranteed minimum interest rates. C) They are less risky than variable annuities. D) They earn lower interest rates than fixed annuities
The annuitant cannot be the same person as the annuity owner
Which of the following is NOT true regarding the annuitant A) The annuitant's life expectancy is taken into consideration for the annuity. B) The annuitant receives the annuity benefits. C) The annuitant must be a natural person. D) The annuitant cannot be the same person as the annuity owner
They have a guaranteed minimum interest rate
Which of the following is TRUE for both equity indexed annuities and fixed annuities A) They have a guaranteed minimum interest rate. B) They are both tied to an equity index. C) Both are considered to be more risky than variable annuities. D) They invest on a conservative basis
It is a life contingency option
All of the following statements are true regarding installments for a fixed period annuity settlement option EXCEPT A) The payments are not guaranteed for life. B) The insurer determines the amount for each payment. C) It is a life contingency option. D) It will pay the benefit only for a designated period of time.
It would not occur in a deferred annuity
Which of the following is NOT true regarding the accumulation period of an annuity A) It would not occur in a deferred annuity. B) It is the period during which the annuity payments earn interest. C) It is the period over which the annuitant makes payments into an annuity. D) It is also known as the pay-in period
The owner is guaranteed a fixed interest rate for a specific period of time
Which of the following is true regarding a modified guaranteed annuity A) There are no penalties for a premature surrender of the annuity. B) It provides a level benefit payment. C) The owner is guaranteed a fixed interest rate for a specific period of time. D) The insurer bears all the market risk of changing interest rates
The insurance company's general account
When a fixed annuity owner pays his/her insurance company a monthly annuity premium, where is this money placed A) Forwarded to an investor B) Each contract's separate account C) The annuity owner's account D) The insurance company's general account
The period of time during which accumulated money is converted into income payments
Which of the following best describes what the annuity period is A) The period of time during which accumulated money is converted into income payments B) The period of time from the accumulation period to the annuitization period C) The period of time during which money is accumulated in an annuity D) The period of time from the effective date of the contract to the date of its termination
Current interest rate at the time of surrender
Your client owns a Market Value Adjusted Annuity. In order to pay for a series of large, unexpected medical bills, he decides to surrender his policy prematurely. Which of the following will determine the penalty that the annuity owner will have to pay A) Flat fee determined by an index of interest gains, combined with the amount of time the annuity would take to mature B) There are no penalties imposed for surrendering annuities prematurely. C) Guaranteed minimum interest rate stipulated in the contract D) Current interest rate at the time of surrender
It may last for the lifetime of the annuitant
Which of the following is TRUE regarding the annuity period A) It is also referred to as the accumulation period. B) It is the period of time during which the annuitant makes premium payments into the annuity. C) It may last for the lifetime of the annuitant. D) During this period of time the annuity payments grow interest tax deferred
It has a guaranteed minimum interest rate
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
2.5%
Chapter: Annuities 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 policyholders A) 2% B) 2.5% C) 3% D) Whatever interest rate the company deems appropriate
The payments will stop when the annuitant dies
All of the following statements are true regarding installments for a fixed amount EXCEPT A) This option pays a specific amount until the funds are exhausted. B) The annuitant may select how big the payments will be. C) The payments will stop when the annuitant dies. D) Value of the account and future earnings will determine the time period for the benefits
It is a period during which the payments into the annuity grow tax deferred
Which of the following is TRUE regarding the accumulation period of an annuity A) It is a period of time during which the beneficiary receives income B) It is limited to 10 years. C) It is a period during which the payments into the annuity grow tax deferred. D) It is also referred to as the annuity period.
Creating an estate
Which of the following will NOT be an appropriate use of a deferred annuity A) Accumulating funds in an IRA B) Funding a child's college education C) Creating an estate D) Accumulating retirement funds
Joint life
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
The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges
A deferred annuity is surrendered prior to annuitization. Which of the following best describes the nonforfeiture value of the annuity A) The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges. B) A deferred annuity cannot be surrendered prior to annuitization. The owner must wait until the annuitization period begins to receive any payments. C) The surrender value will be based on current interest rates. D) The surrender value will not be more than 80% of the cash value in the annuity at the time of surrender
Joint and survivor
A married couple's retirement annuity pays them $250 per month. The husband dies and his wife continues to receive $125.50 per month for as long as she lives. When the wife dies, payments stop. What settlement option did they select A) Joint and survivor B) Joint annuity C) Cash refund annuity D) Straight life
Joint life annuity
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 and survivor annuity. B) Deferred annuity. C) Pure annuity. D) Joint life annuity
Annuitization period
In an annuity, the accumulated money is converted into a stream of income during which time period A) Conversion period B) Annuitization period C) Payment period D) Amortization period
Seek higher returns
Equity indexed annuities A) Are more risky than variable annuities. B) Are security instruments. C) Invest conservatively. D) Seek higher returns
Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount
If an annuitant dies before annuitization occurs, what will the beneficiary receive A) Cash value of the plan B) Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount C) Either the amount paid into the plan or the cash value of the plan, whichever is the lesser amount D) Amount paid into the plan
The owner must be the party to receive benefits
All of the following are true of an annuity owner EXCEPT A) The owner is the party who may surrender the annuity. B) The owner must be the party to receive benefits. C) The owner pays the premiums on the annuity. D) The owner has the right to name the beneficiary
It can be owned by individual employees
Which of the following is NOT true about a group annuity A) It can be qualified. B) It can be tax deferred. C) It can be owned by individual employees. D) It can be noncontributory
Individual
Your client's employer does not offer a company-wide annuity contract. What type of annuity contract could your client obtain A) Individual B) Independent Group Contract C) Single D) Nonqualified
The annuitant will receive the higher of either the guaranteed minimum rate or current rate
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
The annuitant must be a natural person
The president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true A) A corporation can be an annuitant as long as the beneficiary is a natural person. B) The contract can be issued without an annuitant. C) The annuitant must be a natural person. D) A corporation can be an annuitant as long as it is also the owner
Insurer's guaranteed minimum rate of interest
Which of the following ultimately determines the interest rates paid to the owner of a fixed annuity A) Investment performance of the insured B) Statewide predetermined annual interest rate C) Insurer's guaranteed minimum rate of interest D) Investment performance of the company
Pay-in period
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
