RAA Annuity Products & Structures 2 — Questions and Answers
Question 1: Which annuity structure provides a guaranteed minimum interest rate while also crediting interest based on the performance of an external market index?
- Fixed deferred annuity
- Indexed annuity (Correct answer)
- Variable annuity
- Immediate annuity
Correct answer: Indexed annuity
An indexed (or fixed-indexed) annuity credits interest linked to an external index such as the S&P 500 while guaranteeing that the contract value will not fall below zero due to market losses.
Question 2: A participation rate of 70% on an indexed annuity means the contract owner receives:
- 70% of the premium is invested in the index
- 70% of any positive index gain is credited to the account (Correct answer)
- A guaranteed 70% return over the contract term
- The index must gain at least 70% before any credit is applied
Correct answer: 70% of any positive index gain is credited to the account
The participation rate determines what percentage of the index's positive return is credited to the annuity; a 70% rate means only 70 cents of every dollar of index gain is credited.
Question 3: Which of the following best describes a 'spread' or 'margin' in the context of indexed annuities?
- The difference between the buy and sell price of annuity units
- An amount deducted from the index gain before crediting interest (Correct answer)
- The insurer's profit margin on surrender charges
- The gap between fixed and variable sub-account returns
Correct answer: An amount deducted from the index gain before crediting interest
A spread (or margin) is subtracted from the index gain; if the index rises 8% and the spread is 2%, only 6% is credited to the annuity.
Question 4: A deferred annuity's 'accumulation phase' ends when the owner:
- Dies
- Annuitizes or surrenders the contract (Correct answer)
- Reaches age 59½
- Completes the free-look period
Correct answer: Annuitizes or surrenders the contract
The accumulation phase is the period during which premiums grow tax-deferred and ends when the owner annuitizes the contract or surrenders it for its cash value.
Question 5: What distinguishes a 'graded benefit' deferred annuity from a standard deferred annuity?
- It earns a higher interest rate in later years
- The death benefit increases incrementally over the first several contract years (Correct answer)
- It has no surrender charges after the grading period
- Premiums are automatically escalated each year
Correct answer: The death benefit increases incrementally over the first several contract years
A graded benefit annuity pays a limited death benefit (often return of premium) if death occurs early in the contract, with the full account value payable only after the grading period ends.
Question 6: Which annuity payout option guarantees income for the annuitant's lifetime but stops payments upon the annuitant's death with no further payments to beneficiaries?
- Life with period certain
- Joint and survivor
- Straight life (life only) (Correct answer)
- Installment refund
Correct answer: Straight life (life only)
A straight life (life-only) annuity provides the highest periodic payment but ceases entirely upon the annuitant's death, leaving no residual value for beneficiaries.
Question 7: A 'bonus annuity' typically offers an initial premium bonus, but advisors should warn clients about which offsetting feature?
- Lower free-look periods
- Longer surrender charge periods and/or lower cap rates (Correct answer)
- Mandatory annuitization within five years
- Reduced death benefit crediting
Correct answer: Longer surrender charge periods and/or lower cap rates
Bonus annuities often recoup the upfront premium credit through extended surrender charge schedules, higher spreads, or lower participation/cap rates over the life of the contract.
RAA Annuity Products & Structures 2
Which annuity structure provides a guaranteed minimum interest rate while also crediting interest based on the performance of an external market index?