Annuity Principles and Concepts

Question 1

A contract that is designed to accumulate value over time with the intent to provide a stream of income over the lifetime of an individual is called _________.

A
An annuity

B
Variable life insurance

C
Term insurance

D
Whole life insurance

Answer 1

A
An annuity

Annuities are designed to provide a stream of income for the lifetime of an individual. Life insurance policies such as whole life, variable life, and term insurance are designed to provide death benefits.

Question 2

When comparing life insurance to an annuity, an annuity:

A
Guarantees a death benefit upon the insured’s death

B
Provides tax-free payments for the lifetime of a beneficiary

C
Protects against the annuitant living too long

D
Creates a lump sum benefit to be paid upon the annuitant’s death

Answer 2

C
Protects against the annuitant living too long

Annuities protect against an annuitant living too long by providing a stream of income the annuitant cannot outlive. Annuities do not provide tax-free payments or guarantee a death benefit. Annuities liquidate an estate and life insurance creates an estate.

Question 3

All of the following statements are correct regarding an annuity, EXCEPT:

A
The accumulation value grows tax-deferred

B
Annuity premiums can be made in single or periodic payments

C
An immediate annuity must start providing income within 3 years of the first premium payment

D
An annuity can be characterized by immediate or deferred income

Answer 3

C- An immediate annuity must start providing income within 3 years of the first premium payment

An immediate annuity must start providing income within one year of the first premium payment.

Question 4

A flexible premium deferred annuity permits all of the following EXCEPT:

A
A lump sum payment can be used to purchase the annuity

B
Scheduled and unscheduled premiums may be payable at any time prior to annuitization

C
Annuitization is allowed at any time after 1 year

D
Accumulated values in the account are not taxable until they are withdrawn

Answer 4

A
A lump sum payment can be used to purchase the annuity

Question 5

Which of these annuity distribution options promises the largest possible payment to a single annuitant?

A
Lump sum refund

B
Life income with period certain

C
Installment refund

D
Life income only

Answer 5

D- Life income only

A life income only option provides the largest possible payment since the insurer has no risk of paying income to a beneficiary. There is a greater possibility that the insurer will pay income beyond the life of the annuitant if any of the other options are selected.

Question 6

All of the following factors are used to determine the monthly benefit payment of an annuity, except:

A
Annuitant’s medical history

B
Annuity payment option selected

C
Age of annuitant

D
Accumulated account value

Answer 6

A- Annuitant’s medical history

The monthly annuity payment is based on several factors, including the accumulated value, interest rate, age and gender of annuitant and the payment option selected. Since there are no insurability requirements, the annuitant’s medical history is not a factor.

Question 7

All of the following are characteristics of a variable annuity, except:

A
The separate account provides for a guaranteed minimum return

B
Each month the payment will increase, decrease, or remain the same as the previous month’s payment based on the actual return as compared to the assumed interest rate (AIR)

C
Designed to protect against inflation

D
Premiums made into the annuity purchase accumulation units

Answer 7

A
The separate account provides for a guaranteed minimum return

Question 8

Instead of electing to annuitize the annuity, what is another common option chosen?

A
Electing a Fixed Amount

B
Lump sum distribution

C
Selling the annuity in the secondary market place

D
Choosing a Period Certain

Answer 8

B
Lump sum distribution

Question 9

Which of the following annuities typically offers no guarantees?

A
Fixed

B
Bonus Interest Rate Annuities

C
Variable

D
Indexed

Answer 9

C
Variable

Variable annuity holder bears all investment risk

Question 10

All of the following are traits of a Fixed Annuity, except:

A
The purchasing power of a fixed dollar benefit amount decreases as the cost of living increases

B
The insurer’s general account assets guarantee the fixed annuity contract

C
The actual rate of interest credited will be based on the state-published interest rate index

D
The insurer bears any investment risk

Answer 10

C- The actual rate of interest credited will be based on the state-published interest rate index

The actual rate of interest credited is based on the insurer’s general account assets.

Question 11

A Single Premium Immediate Annuity (SPIA) begins paying out its benefit:

A
No later than within 1 year

B
At a specified date next year

C
No later than within 1 month

D
No later than within 60 days, once proper paperwork is completed

Answer 11

A- No later than within 1 year

Under an SPIA, the idea is to have income begin immediately. There is essentially no accumulation period, and benefits begin within 1 year of the issue date.

Question 12

Ralph has selected an annuity benefit or payment option where, upon annuitization, the annuity will pay a benefit for as long as either Ralph or a co-annuitant are alive. Ralph has elected which of the following benefit or payment options?

A
Straight Life

B
Life Income Period Certain

C
Life Income Joint and Survivor

D
Joint Life

Answer 12

C- Life Income Joint and Survivor

Under Life Income Joint and Survivor, payments would continue until the death of the second person to die.

Question 13

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 4%, the effect on this month’s income benefit check will be such that it:

A
Remain the Same

B
All Depends on the Separate Account(s) Selected

C
Becomes Higher

D
Becomes Lower

Answer 13

A- Remain the Same

Question 14

The period of time over which a single sum or periodic deposits grow within an annuity is referred to as the:

A
Benefit Period

B
Growth Period

C
Savings Period

D
Accumulation Period

Answer 14

D- Accumulation Period

The pay-in phase of an annuity is called the Accumulation Period or Phase. The pay-out phase is the Annuity Period or Phase.

Question 15

_____________ are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract.

A
Systematic withdrawals

B
Premium deferrals

C
Contract waivers

D
Loans

Answer 15

A- Systematic withdrawals

Systematic withdrawals are allowed as a way to access annuity values without having to elect a settlement option or surrender the contract.

Question 16

X is 57 years old, and planning for their retirement. They do not know what their cash flow will look like over the next 10 years, but wants to fund an annuity to provide retirement income. Which of the following premium funding methods would be best for X to consider?

A
Single

B
Flexible

C
Periodic

D
Variable

Answer 16

B
Flexible

Question 17

A systematic distribution of accumulated funds, either over one’s life, or a specified period, is the definition of a(n):

A
Insurance Option

B
Annuitization Option

C
Accumulation Option

D
Actuarial Option

Answer 17

B
Annuitization Option

Annuitization is the payout, or distribution, phase of the annuity product, while accumulation is the period during which deposits are made.

Question 18

The period of time over which a single sum or periodic deposits grow within an annuity is referred to as the:

A
Savings Period

B
Growth Period

C
Accumulation Period

D
Benefit Period

Answer 18

C
Accumulation Period

Question 19

Which of the following will receive the smallest monthly income benefit check if an annuity is annuitized?

A
50 year old female

B
65 year old female

C
65 year old male

D
50 year old male

Answer 19

A
50 year old female

Question 20

All of the following annuities can be sold without a securities registration/license, except:

A
Fixed

B
Variable

C
Indexed

D
Guaranteed

Answer 20

B
Variable

Question 21

An individual owns a variable annuity. Upon annuitization, the number of Annuity Units on which the benefit amount is based will __________ from month to month.

A
Vary

B
Remain the same

C
Increase

D
Decrease

Answer 21

B - Remain the same

It is important that the individual understand that upon annuitization, the number of units used to calculate the benefit amount will always be the same. It will be the unit value that fluctuates according to the performance of the separate account(s).

Question 22

At the time of her retirement at age 62, Jolene chose a Life Income Payment Option to have her annuity distributed. Five years later, when her health declines, she needs the distribution to be increased. How is this accomplished?

A
By adding a Cost of Living Rider

B
By adding a disability income rider

C
She cannot change the distribution once commenced

D
By adding an increase of benefits rider

Answer 22

C - She cannot change the distribution once commenced

The selection of a lifetime annuity payment option is critical because once chosen it typically may not be changed. An alternative to annuitization is a ‘systematic withdrawal plan’ that allows the amount of withdrawal to be changed in the future. It is not a lifetime income guarantee, and the payments will end when the last dollar of cash value is taken.

Question 23

the period of time from the first deposit into an annuity to the selection of a settlement option is considered the ___________ period.

A
Accumulation

B
Annuity

C
Deferred

D
Annuitization

Answer 23

A- Accumulation

The period of time from the first deposit to the selection of a settlement option is considered the accumulation period, during which taxes are deferred. Accumulation periods are found within deferred annuities.

Question 24

An annuity that is purchased with contributions made as often and in whatever amounts the owner wishes, subject only to the insurer’s minimums and maximums, is called:

A
A single premium annuity

B
A flexible premium annuity

C
A fixed premium annuity

D
A periodic premium annuity

Answer 24

B
A flexible premium annuity

Question 25

Harry, the annuitant of a non-qualified tax deferred annuity with $40,000 cash value chooses the Life Income with Refund Payment Option when he annuitizes the policy. After receiving $1,000 each month for 80 months, Harry suddenly dies. How much will his beneficiary, his wife Lucille, receive?

A
$40,000

B
Zero

C
$80,000

D
Payments over the rest of her life

Answer 25

B
Zero

Question 26

Electing a _____________ option for an annuity means that the annuitant will receive an income for life or for a temporary period of time.

A
Distribution

B
Funding

C
Pay-In

D
Settlement

Answer 26

D
Settlement

Question 27

A systematic distribution of accumulated funds, either over one’s life, or a specified period, is the definition of a(n):

A
Actuarial Option

B
Accumulation Option

C
Annuitization Option

D
Insurance Option

Answer 27

C
Annuitization Option

Question 28

A lump sum of money is placed into an account from which the annuitant will draw periodic benefits beginning more than a year from the date of purchase. This describes a:

A
Single Premium Immediate Annuity

B
Flexible Premium Deferred Annuity

C
Single Premium Deferred Annuity

D
Flexible Premium Immediate Annuity

Answer 28

C -Single Premium Deferred Annuity

Regardless of how it is funded, by definition a deferred annuity does not begin its income stream for at least 13 months. Typically, the deferral period is many years, not just one.