EXAMFX Annuity Concepts and Uses 2 — Questions and Answers
Question 1: Which annuity payout option guarantees income for as long as the annuitant lives, with no payments to beneficiaries after death?
- Life only (Correct answer)
- Joint and survivor
- Period certain
- Life with period certain
Correct answer: Life only
The life-only option provides the highest monthly payment but stops entirely at the annuitant's death with no residual benefit.
Question 2: An indexed annuity credits interest based on the performance of:
- A fixed rate set at issue
- An external market index such as the S&P 500 (Correct answer)
- The insurer's general account portfolio
- U.S. Treasury bill yields
Correct answer: An external market index such as the S&P 500
Indexed annuities link credited interest to an external index, offering upside potential while typically guaranteeing a minimum floor.
Question 3: What is the primary purpose of a surrender charge on a deferred annuity?
- To penalize the owner for changing beneficiaries
- To recover the insurer's acquisition costs if the contract is surrendered early (Correct answer)
- To fund the state guaranty association
- To increase the death benefit
Correct answer: To recover the insurer's acquisition costs if the contract is surrendered early
Surrender charges recoup front-end expenses the insurer incurs and typically decline over a set period.
Question 4: During the accumulation phase of a deferred annuity, the owner's funds grow on a:
- Tax-deferred basis (Correct answer)
- Tax-free basis
- Taxable basis each year
- Pre-tax deductible basis always
Correct answer: Tax-deferred basis
Annuity earnings accumulate tax-deferred, meaning taxes are owed only when funds are distributed.
Question 5: A variable annuity's subaccounts are most similar to which investment vehicle?
- Certificates of deposit
- Mutual funds (Correct answer)
- Fixed-rate savings bonds
- Money market deposit accounts
Correct answer: Mutual funds
Subaccounts function like mutual funds, allowing the owner to direct premiums among various investment options.
Question 6: Which of the following best describes an immediate annuity?
- A contract that begins payouts at least five years after purchase
- A contract funded with a single premium that begins income payments within one year (Correct answer)
- A tax-qualified plan that allows pre-tax contributions
- A contract requiring monthly premium payments for ten years
Correct answer: A contract funded with a single premium that begins income payments within one year
Immediate annuities are purchased with a lump sum and typically begin income within 30 days to one year.
Question 7: A 10-year period certain annuity payout ensures that:
- The annuitant receives income for exactly 10 years only
- If the annuitant dies before 10 years, a beneficiary receives payments for the remainder of that period (Correct answer)
- The insurer guarantees a 10% annual return
- Payments stop after 10 years regardless of whether the annuitant is alive
Correct answer: If the annuitant dies before 10 years, a beneficiary receives payments for the remainder of that period
Period certain guarantees payments for a minimum number of years; if the annuitant dies before the period ends, a beneficiary receives the remaining payments.
EXAMFX Annuity Concepts and Uses 2
Which annuity payout option guarantees income for as long as the annuitant lives, with no payments to beneficiaries after death?