Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 17 Annuities
1) A life annuity that pays nothing after the annuitant’s death is a ________ annuity.
A) period certain
B) straight life
C) refund
D) single premium deferred
2) Which of the following is false regarding the annuity contract?
A) At the beginning of the accumulation phase, the annuitant irrevocably selects the distribution
method for the liquidation phase.
B) There is considerable flexibility in choosing the length of the accumulation phase.
C) The liquidation period is a function of several factors including when the annuitant dies.
D) Generally, a longer accumulation period results in higher liquidation payments (all other
things being equal).
3) Which annuity provides for a built-in reduction of monthly payments after a specified event
occurs?
A) Joint annuity
B) Joint and last survivor annuity
C) Pure reduction annuity
D) Joint and one-half survivor annuity
4) Which of the following is correct regarding the federal income taxation of annuities that are
purchased with after tax dollars?
A) Tax must be paid annually on the investment income that accrues during the accumulation
period.
B) If funds are withdrawn during the accumulation period, they are taxed as ordinary income.
C) Payments received during the liquidation phase are partially exempt from taxation.
D) There is no tax since each payment is considered compensation for a loss (ie., retirement).
5) Which of the following does not affect how monthly annuity benefit payments are calculated?
A) Age
B) Sex
C) Amount premium the annuitant has paid
D) Number of years worked
6) Why do insurers use a different mortality table for annuity benefit calculations than they use
for life insurance premium calculations?
A) Annuities require more stringent underwriting than life insurance.
B) The average life expectancy of an annuity applicant is greater than that of a life insurance
applicant.
C) The health status of annuity applicants is generally worse than that of life insurance
applicants.
D) People with a greater-than-average likelihood of premature death are typically the ones who
want to purchase annuities.
7) Choose the recipient of the largest dollar amount of annual annuity receipts for a $100,000
single-premium immediate annuity:
A) male age 65
B) female age 65
C) male age 25
D) female age 20
8) The variable annuity:
A) pays a fixed dollar amount for a variable length of time
B) pays an annuity to a variable number of people
C) overcomes the problem of inflation and the loss of purchasing power
D) accepts variable amounts of deposits on a periodic basis during the accumulation period
9) Life income annuities could be beneficial to all of the following persons except:
A) individuals just beginning retirement
B) childless couples without close living relatives
C) individuals in poor health
D) couples with adult children who are helping to support their parents
10) Assume you are analyzing two separate annuity pools. Pool A has significantly higher
mortality (deaths/thousand) than Pool B. Holding other factors constant, which pool will make
higher payments per month to each annuitant?
A) A
B) B
C) The monthly liquidation payments will be equal.
D) We cannot say because mortality is not an important factor in calculating annuity payments.
11) A life annuity that pays nothing to the beneficiary after the annuitant dies is called a
________ annuity.
A) period certain
B) straight life
C) refund
D) joint-and-last-survivor
12) An annuity, five years certain, makes payments to the annuitant:
A) for 5 years or until the annuitant’s death, whichever event happens last
B) for only the first 5 years of the liquidation period
C) only if the insured dies within the first five years
D) for 5 years or until the annuitant’s death, whichever event happens first
13) Which of the following statements is false?
A) Annuities can be used to fund structured settlements in negligence cases.
B) Annuities are useful for generating an income that cannot be outlived.
C) Annuities are good retirement funding vehicles for persons in poor health.
D) Annuities maximize cash flow for people who are willing to liquidate their assets.
14) Life annuities may be classified according to all but which one of the following criteria?
A) When liquidation payments begin
B) Method of paying premiums
C) Number of lives insured
D) Maximum number of payments guaranteed
15) Oprah has $250,000 and wishes to purchase a single-premium annuity. All other things being
equal, which of the following annuities will provide her with the smallest monthly liquidation
payment?
A) 20-year period certain, joint and 2/3 survivor, single premium
B) 20-year period certain, single premium
C) 20-year period certain, joint and survivor, single premium
D) Straight life annuity, single premium.
16) The main purpose of an annuity is to protect against:
A) premature death
B) outliving one’s income
C) growing old
D) none of the above
17) Judy has $500,000 with which to purchase a single-premium annuity. Which annuity should
she buy if she wants to maximize her monthly liquidation payment?
A) Straight life annuity
B) 5-year period certain, joint and survivor
C) Installment refund
D) Cannot be determined from the given information
18) An annuity mortality table:
A) has the same numbers as a life insurance mortality table
B) projects that people live longer than a life insurance mortality table
C) projects that people live shorter than a life insurance mortality table
D) is always printed on yellow paper
19) Insurers have greater administrative charges for flexible-premium deferred annuities
(FPDAs) than they do for single-premium deferred annuities (SPDAs) because:
A) they do not have minimum required deposits for FPDAs
B) there is considerably more adverse selection among persons purchasing FPDAs
C) FPDA purchasers have much greater flexibility in making premium payments
D) This is a trick question; insurers do not impose higher administrative charges on FPDAs
versus SPDAs
20) Which of the following does not influence how an insurer calculates monthly annuity
benefits?
A) Age
B) Health status of insured annuitant
C) Sex
D) Amount of the premium the annuitant has paid
21) The amount paid for an annuity divided by the expected return from the annuity is the:
A) FICA deduction ratio
B) rate of return on the annuity
C) exclusion ratio
D) none of the above
22) When an annuitant receives liquidation payments, part of the payment is a return of principal
and is thus exempt from Federal Income tax. The tax-exempt portion of the payment is
calculated using the:
A) exclusion ratio
B) refund ratio
C) vested ratio
D) combined ratio
23) The period during which the insured is making annuity payments to the insurer is the:
A) retirement period
B) deferral period
C) accumulation period
D) liquidation period
24) Ron Liven is a retiree receiving a monthly annuity payment. This year his annuity payment is
$4,000 per month. Last year, it was $3,700 per month, and the year before it was $3,500. Ron
does NOT know what his payment will be NEXT year. What type of annuity does he have?
A) Fixed incremental increase
B) Installment refund
C) Cash refund
D) Variable annuity
25) Which of the following is true about administrative charges on an FPDA?
A) A front-end load is also called a surrender charge.
B) A front-end load is charged on each premium payment.
C) A front-end load is always higher than the back-end load.
D) By law an insurer can only charge a front-end load or a back-end load, but not both.
26) An installment-refund annuity:
A) guarantees that annuity payments will continue to a successor beneficiary until the insurer
pays out a total amount equal to the premium
B) guarantees that annuity payments will continue to a successor beneficiary until the insurer
pays out a total amount equal to the excess interest
C) guarantees that annuity payments will continue to a successor beneficiary until the insurer
pays out a total amount equal to the liquidation value
D) guarantees that annuity payments will continue to a successor beneficiary until the insurer
pays out a total amount equal to the structured settlement premium
27) A cash refund annuity would have lower monthly benefits per $1,000 of premium than an
installment refund annuity.
28) A pure annuity has the greatest monthly benefits per $1,000 of premium payment.
29) A joint-and-one-half survivor annuity covers two people, but the annuity payments are cut in
half at the death of the first annuitant.
30) A variable annuity is usually paid for on a deferred basis.
31) Fixed dollar annuities are widely used as a hedge against inflation.
32) A male age 65 will receive lower monthly benefits per $1,000 of premium payment than a
female age 65, because of the female’s better longevity.
33) No medical exam is required for the purchase of an annuity, no matter how old the applicant.
34) In an annuity, the risk of dying too soon is transferred to the insurer.
35) It is not possible to have a level premium, immediate annuity.
36) An annuity 5 years certain pays for 5 years or the death of the annuitant, whichever comes
first.
37) How do insurers classify annuities to describe their benefits?
38) Explain briefly how annuity distributions are taxed.
39) Explain the purpose of the annuity contract in a financial plan.
40) What is the difference between a SPDA and a FPDA?
41) Explain how an annuity 10 years certain would work.