Chapter 14–15
Class Preparation Exercise (CPE)
Read Chapter 14 and answer the following questions:
1. How does an annuity differ from life insurance?
Annuity covers the risk of living too long and provides lifelong income which cannot be
outlived
2. Describe the major characteristics of a fixed annuity.
Pays periodic income payments that are guaranteed and fixed in amount. The first
payment starts one payment interval from the date of purchase, a single-premium
immediate annuity is an annuity purchased with a lump sum, during the accumulation
period prior to retirement and premiums are credited with interest. The guaranteed rate
is the minimum interest rate that will be credited to the fixed annuity, and the current
rate is based on current market conditions and is guaranteed only for a limited period.
3. Identify the annuity settlement options that are typically found in a fixed annuity.
Cash option, no refund life annuity, guaranteed payment life annuity, joint and survivor
annuity, and inflation indexed annuity option
4. Describe the basic characteristics of a variable annuity.
It pays a lifetime income, but the income payments vary depending on common stock
prices. The purpose is to provide an inflation hedge by maintaining the real
purchasing power of payments. Premiums are used to purchase accumulation units
during the period prior to retirement. At retirement, the accumulation units are
converted into annuity units.
5. A.Explain the major characteristics of an equity-indexed annuity.
It is a fixed, deferred annuity that allows the owner to participate in the growth of the
stock market and provides downside protection against the loss of principal and prior
interest earnings if the annuity is held to term. The participation rate is the percent of
increase in the stock index that is credited to the contract, some insurers have a
maximum cap rate on the interest rate credited to your annuity, insurers use different
indexing methods to credit excess interest to the annuity, and some have a guaranteed
minimum value at the end of the index period
b. Explain the major characteristics of a longevity annuity.
They provide protection against the risk of depleting your financial assets at an
advanced age. They are low-cost annuities because there are no cash values or death
benefits in the policy, but some insurers offer optional features that provide death
benefits, inflation protection, or the option of starting payments sooner.
6. Explain the eligibility requirements for a traditional IRA.
