Ch. 2 - Basic Annuity Designs

Question 0

Renewal rate

Answer 0

The rate that the insurer uses at the end of an initial crediting period for a fixed annuity signifying the new crediting period.

Question 1

Spread

Answer 1

The difference between what the insurer earns on its invested assets and the interest rate it credits to its fixed annuity products.

Question 2

Declared interest rate

Answer 2

The interest rates that an insurer advertises upfront for fixed annuities.

Question 3

The two methods insurers use to determine in credit declared interest rates:

Answer 3

1. ) Portfolio based interest crediting

2. ) New money based interest crediting

Question 4

Portfolio based interest crediting

Answer 4

And interest crediting method insurers to use whereby they place all the funds into one big pot and issue the same interest to all contract holders regardless of economic conditions.

Question 5

Factors that influence declared interest rates

Answer 5

1. ) Insurer’s mortality and expense results
2. ) The insurer’s reserve requirements
3. ) Competitive market influences
4. ) Prevailing interest rates investment returns

Question 6

Two tiered fixed annuity

Answer 6

An annuity that provides a higher tier of interest if the contract is maintained and annuitized or a lower interest rate if the contract is not annuitized.

Question 7

Participation rate

Answer 7

The amount or level of the index increase that’ll be credited to the contract.

Question 8

Margin (spread)

Answer 8

The stated percentage deducted from the percentage change in the index levels before that percentage is applied as an interest rates to the annuity funds.

Question 9

Cap

Answer 9

The maximum amount of interest that will be credited during any one interest crediting period.

Question 10

Floor

Answer 10

The minimum amount of indexed linked interest that is to be credited to a contract during any crediting period.

Question 11

Point-to-Point

Answer 11

This method credits an interest rate based on the increase in the index value from one defined point of time to another.

Question 12

Interest crediting methods

Answer 12

These defines the period or term over which the index returns will be measured and how these returns will be calculated and applied to the contract.

Question 13

Long term point-to-point method

Answer 13

Point-to-point crediting method that has a term longer than one year.

Question 14

High water mark

Answer 14

Crediting method that looks at the index value at various points during the interest crediting period. It compares it to that of the starting period. The difference between the two is the basis for the interest to be credited.

Question 15

Annual ratchet (annual reset or annual point-to-point)

Answer 15

Crediting method the credits interest based on the performance of an index over a single year. The interest to be credited is based on the change in the value of the index from one point to another.

Question 16

Monthly average

Answer 16

This crediting method uses an amount of interest based on the average of the index’s monthly returns over a single year or other term.

Question 17

Variable annuity

Answer 17

And annuity that has no minimum guarantee and allows the owner of the annuity to invest the funds directly into portfolios consisting of stocks, bonds and/or money market accounts.

Question 18

Accumulation units

Answer 18

Units that represent a proportional share of the net assets purchased with premium dollars in a variable annuity’s sub account. The value of these units can fluctuate based on the performance of underlying investments.

Question 19

Automatic asset allocation programs

Answer 19

Feature offered by variable annuities that allow insurers to allocate their premiums into subaccounts that match specific investment profiles, such as conservative, moderate, moderately aggressive, and aggressive.

Question 20

Interest sweeps

Answer 20

Feature of variable annuity that allows the owner to transfer or sweep interest earned on fixed or money market subaccounts into other subaccounts.