CAS CAS Annuity Riders and Contract Provisions 2 — Questions and Answers
Question 1: What is the 'free-look' provision in an annuity contract?
- The right to waive all fees for the first year
- The right to cancel the contract within a specified period and receive a full refund (Correct answer)
- A provision allowing one free withdrawal annually
- The right to switch annuity carriers without penalty
Correct answer: The right to cancel the contract within a specified period and receive a full refund
The free-look provision gives the contract owner a set period (typically 10–30 days after receipt) to review and cancel the annuity without penalty, receiving a full refund of premiums paid.
Question 2: In an annuity contract, what is a 'market value adjustment' (MVA)?
- An annual fee based on current market conditions
- A formula that adjusts the surrender value up or down based on interest rate changes (Correct answer)
- A provision that credits bonus interest in rising markets
- A charge for changing investment allocations
Correct answer: A formula that adjusts the surrender value up or down based on interest rate changes
A market value adjustment (MVA) modifies the surrender value of certain fixed or fixed-indexed annuities based on the difference between current interest rates and the rate at time of purchase, which can increase or decrease the amount received on surrender.
Question 3: What is the purpose of a 'bailout' provision in a fixed annuity contract?
- To allow the insurer to terminate the policy if interest rates drop
- To allow the owner to surrender without penalty if the renewal rate falls below a specified minimum (Correct answer)
- To provide a guaranteed minimum interest rate regardless of market conditions
- To automatically convert the annuity to a payout phase
Correct answer: To allow the owner to surrender without penalty if the renewal rate falls below a specified minimum
A bailout provision allows the annuity owner to surrender the contract without surrender charges if the renewal interest rate is set below a specified trigger rate, protecting the owner from being locked into low returns.
Question 4: Which annuity contract feature determines how the contract value will be distributed to beneficiaries upon the owner's death?
- Annuitization option
- Beneficiary designation and death benefit provision (Correct answer)
- Surrender charge schedule
- Free withdrawal provision
Correct answer: Beneficiary designation and death benefit provision
The beneficiary designation and death benefit provision specify who receives the annuity's value upon the owner's death and how that value is calculated and distributed.
Question 5: What happens when an annuity contract reaches the 'annuity date' or 'maturity date'?
- The policy automatically lapses and premiums are returned
- The accumulation phase ends and the owner must choose an income or distribution option (Correct answer)
- Surrender charges are permanently waived going forward
- The contract converts to a life insurance policy
Correct answer: The accumulation phase ends and the owner must choose an income or distribution option
The annuity date (maturity date) marks the end of the accumulation phase; at that point, the contract owner must elect a distribution or income option, such as annuitization or a lump-sum withdrawal.
Question 6: A 'stepped-up' death benefit in a variable annuity works by:
- Increasing premiums annually based on inflation
- Locking in the highest contract anniversary value as the death benefit (Correct answer)
- Automatically annuitizing the contract when the owner reaches age 90
- Guaranteeing a minimum return equal to Treasury bond rates
Correct answer: Locking in the highest contract anniversary value as the death benefit
A stepped-up death benefit periodically (typically annually) resets the guaranteed death benefit to the current account value if it is higher, locking in investment gains for the beneficiary.
CAS CAS Annuity Riders and Contract Provisions 2
What is the 'free-look' provision in an annuity contract?