Deck 15: Annuities

Question 1

An annuity,five years certain,makes payments to the annuitant:

A) for 5 years or until the annuitant's death, whichever event happens last
B)for only the first 5 years of the liquidation period
C)only if the insured dies within the first five years
D)for 5 years or until the annuitant's death, whichever event happens first

Answer 1

A

Question 2

Life annuities may be classified according to all but which one of the following criteria?

A)when liquidation payments begin
B)method of paying premiums
C)number of lives insured
D)maximum number of payments guaranteed

Answer 2

D

Question 3

The variable annuity:

A)pays a fixed dollar amount for a variable length of time
B)pays an annuity to a variable number of people
C)overcomes the problem of inflation and the loss of purchasing power
D)accepts variable amounts of deposits on a periodic basis during the accumulation period

Answer 3

C

Question 4

Insurers have greater administrative charges for flexible-premium deferred annuities (FPDAs)than they do for single-premium deferred annuities (SPDAs)because:

A)they do not have minimum required deposits for FPDAs
B)there is considerably more adverse selection among persons purchasing FPDAs
C)FPDA purchasers have much greater flexibility in making premium payments
D)This is a trick question; insurers do not impose higher administrative charges on FPDAs versus SPDAs

Question 5

Assume you are analyzing two separate annuity pools. Pool A has significantly higher mortality (deaths/thousand)than Pool B. Holding other factors constant,which pool will make higher payments per month to each annuitant?

A) A
B)B
C)the monthly liquidation payments will be equal
D)we cannot say, because mortality is not an important factor in calculating annuity payments

Question 6

Oprah has $250,000 and wishes to purchase a single-premium annuity. All other things being equal,which of the following annuities will provide her with the smallest monthly liquidation payment?

A)20 year period certain, joint and 2/3 survivor, single premium
B)20 year period certain, single premium
C)20 year period certain, joint and 2 survivor, single premium
D)Straight life annuity, single premium.

Question 7

A life annuity that pays nothing to the beneficiary after the annuitant dies is called a __________ annuity.

A)period certain annuity
B)straight life annuity
C)refund annuity
D)joint and last survivor annuity

Question 8

Which of the following is correct regarding the federal income taxation of annuities that are purchased with after tax dollars?

A)tax must be paid annually on the investment income that accrues during the accumulation period
B)if funds are withdrawn during the accumulation period, they are taxed as ordinary income
C)payments received during the liquidation phase are partially exempt from taxation
D)there is no tax since each payment is considered compensation for a loss (ie., retirement)

Question 9

Why do insurers use a different mortality table for annuity benefit calculations than they use for life insurance premium calculations?

A)Annuities require more stringent underwriting than life insurance
B)The average life expectancy of an annuity applicant is greater than that of a life insurance applicant
C)The health status of annuity applicants is generally worse than that of life insurance applicants
D)People with a greater-than-average likelihood of premature death are typically the ones who want to purchase annuities.

Question 10

The main purpose of an annuity is to protect against:

A)premature death
B)outliving one's income
C)growing old
D)none of the above

Question 11

Life income annuities could be beneficial to all of the following persons except:

A)individuals just beginning retirement
B)childless couples without close living relatives
C)individuals in poor health
D)couples with adult children who are helping to support their parents

Question 12

Which annuity provides for a built?in reduction of monthly payments after a specified event occurs?

A)joint annuity
B)joint and last survivor annuity
C)pure reduction annuity
D)joint and one half survivor annuity

Question 13

Which of the following statements is false?

A)Annuities can be used to fund structured settlements in negligence cases
B)Annuities are useful for generating an income that cannot be outlived
C)Annuities are good retirement funding vehicles for persons in poor health
D)Annuities maximize cash flow for people who are willing to liquidate their assets

Question 14

A life annuity that pays nothing after the annuitant's death is a _______________ annuity.

A)period certain
B)straight life
C)refund
D)single premium deferred

Question 15

Which of the following is false regarding the annuity contract?

A)at the beginning of the accumulation phase, the annuitant irrevocably selects the distribution method for the liquidation phase
B)there is considerable flexibility in choosing the length of the accumulation phase
C)the liquidation period is a function of several factors including when the annuitant dies
D)generally, a longer accumulation period results in higher liquidation payments (all other things being equal)

Question 16

Which of the following does not influence how an insurer calculates monthly annuity benefits?

A)age
B)health status of insured annuitant
C)sex
D)amount of the premium the annuitant has paid

Question 17

Which of the following does not affect how monthly annuity benefit payments are calculated?

A)age
B)sex
C)amount premium the annuitant has paid
D)number of years worked

Question 18

Judy has $500,000 with which to purchase a single?premium annuity. Which annuity should she buy if she wants to maximize her monthly liquidation payment?

A)Straight life annuity
B)5 year period certain, joint an 2 survivor
C)Installment refund
D)Cannot be determined from the given information

Question 19

The 1983 Individual Annuity mortality table assumes that all people in the annuity pool die before they are age:

A)95
B)100
C)105
D)115

Question 20

Choose the recipient of the largest dollar amount of annual annuity receipts for a $100,000 single-premium immediate annuity:

A)male age 65
B)female age 65
C)male age 25
D)female age 20

Question 21

The period during which the insured is making annuity payments to the insurer is the:

A)retirement period
B)deferral period
C)accumulation period
D)liquidation period

Question 22

When an annuitant receives liquidation payments,part of the payment is a return of principal and is thus exempt from Federal Income tax. The tax-exempt portion of the payment is calculated using the:

A)exclusion ratio
B)refund ratio
C)vested ratio
D)combined ratio

Question 23

In an annuity the risk of dying too soon is transferred to the insurer.

Question 24

A cash refund annuity would have lower monthly benefits per $1,000 of premium than an installment refund annuity.

Question 25

The amount paid for an annuity divided by the expected return from the annuity is the:

A)FICA deduction ratio
B)rate of return on the annuity
C) exclusion ratio
D)none of the above

Question 26

No medical exam is required for the purchase of an annuity,no matter how old the applicant.

Question 27

Fixed dollar annuities are widely used as a hedge against inflation.

Question 28

Explain how an annuity,10 years certain would work.

Question 29

A joint?and?one?half survivor annuity covers two people,but the annuity payments are cut in half at the death of the first annuitant.

Question 30

Explain briefly how annuity distributions are taxed.

Question 31

An annuity 5 years certain pays for 5 years or the death of the annuitant,whichever comes first.

Question 32

How do insurers classify annuities to describe their benefits?

Question 33

What is the difference between a SPDA and a FPDA?

Question 34

It is not possible to have a level premium,immediate annuity.

Question 35

Ron Liven is a retiree receiving a monthly annuity payment. This year his annuity payment is $4,000 per month. Last year,it was $3,700 per month,and the year before it was $3,500. Ron does NOT know what his payment will be NEXT year. What type of annuity does he have?

A)fixed incremental increase
B)installment refund
C)cash refund
D)variable annuity

Question 36

A variable annuity is usually paid for on a deferred basis.

Question 37

Explain the purpose of the annuity contract in a financial plan.

Question 38

A male age 65 will receive lower monthly benefits per $1,000 of premium payment than a female age 65,because of the female's better longevity.

Question 39

A pure annuity has the greatest monthly benefits per $1,000 of premium payment.