CAS Annuity Fundamentals and Types — Questions and Answers
Question 1: What is the primary purpose of an annuity?
- To provide a lump sum payout
- To accumulate wealth with no withdrawals
- To generate lifetime income through periodic payments (Correct answer)
- To function as a short-term investment
Correct answer: To generate lifetime income through periodic payments
An annuity is designed to provide a steady stream of income, typically during retirement, by distributing payments over time.
Question 2: Which type of annuity provides a guaranteed, fixed payment amount?
- Variable annuity
- Indexed annuity
- Fixed annuity (Correct answer)
- Deferred annuity
Correct answer: Fixed annuity
A fixed annuity provides predictable payments by offering a guaranteed interest rate and set payouts.
Question 3: What is the main characteristic of a variable annuity?
- Fixed payments
- Guaranteed minimum interest
- Payments vary with investment performance (Correct answer)
- No investment options
Correct answer: Payments vary with investment performance
A variable annuity’s payments fluctuate based on the performance of underlying investment options, exposing the annuitant to market risk.
Question 4: How does an indexed annuity differ from a variable annuity?
- Indexed annuities have fixed interest rates
- Variable annuities provide guaranteed returns
- Indexed annuities offer market participation with downside protection (Correct answer)
- Variable annuities have no investment risk
Correct answer: Indexed annuities offer market participation with downside protection
Indexed annuities provide returns based on a market index with some protection from market losses, while variable annuities have direct exposure to market risks.
Question 5: Which of the following best describes an immediate annuity?
- Payments begin after a deferral period
- It requires investment in the stock market
- Payments begin shortly after purchase (Correct answer)
- It is only available through employers
Correct answer: Payments begin shortly after purchase
An immediate annuity begins making payments soon after the contract is purchased, typically within a year, and is used for retirement income.
Question 6: Which annuity type allows tax-deferred growth until withdrawals begin?
- Immediate annuity
- Fixed annuity
- Deferred annuity (Correct answer)
- Variable annuity with annual distributions
Correct answer: Deferred annuity
A deferred annuity allows the investor to accumulate funds on a tax-deferred basis, with taxes applied only upon withdrawals.
CAS Annuity Fundamentals and Types
What is the primary purpose of an annuity?