Deck 17: Annuities

Question 1

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.

Answer 1

C

Question 2

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

Answer 2

A

Question 3

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

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

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 9

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 and survivor
C) Installment refund
D) Cannot be determined from the given information

Question 10

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

Question 11

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 12

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

Question 13

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

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

Question 14

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 survivor, single premium
D) Straight life annuity, single premium.

Question 15

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 16

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 17

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

Question 18

An annuity mortality table:

A) has the same numbers as a life insurance mortality table
B) projects that people live longer than a life insurance mortality table
C) projects that people live shorter than a life insurance mortality table
D) is always printed on yellow paper

Question 19

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 20

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 21

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 22

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 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

How do insurers classify annuities to describe their benefits?

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

What is the difference between a SPDA and a FPDA?

Question 34

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

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

Question 37

An installment-refund annuity:

A) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the premium
B) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the excess interest
C) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the liquidation value
D) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the structured settlement premium

Question 38

Explain briefly how annuity distributions are taxed.

Question 39

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 40

Which of the following is true about administrative charges on an FPDA?

A) A front-end load is also called a surrender charge.
B) A front-end load is charged on each premium payment.
C) A front-end load is always higher than the back-end load.
D) By law an insurer can only charge a front-end load or a back-end load, but not both.

Question 41

Explain how an annuity 10 years certain would work.