Chapter 6 Practice Questions
1. Which of the following is true of a fixed annuity?
A. Investments are deposited into the insurance company’s general account.
B. Investments are deposited into separate subaccounts that take on more risk.
C. It is a security.
D. Its holder takes on all investment risk.
2. When she opened her account, Mary contributed $50,000 to her non-qualified variable annuity. She did not make any other contributions to the account. Eight years later, at the age of 60, she withdraws all of the money in the annuity, which totals $75,000. How is the withdrawal taxed?
A. $25,000 at the capital gains rate
B. $75,000 at the capital gains rate
C. $25,000 at her ordinary income rate
D. $75,000 at her ordinary income rate
3. Which of the following is true of a variable annuity when compared to a fixed annuity?
A. It comes with lower investment risk.
B. Its investors are more likely to receive regular payments.
C. It comes with higher purchasing power risk.
D. It brings the likelihood of higher returns on investments.
4. What is the purpose of an assumed interest rate?
A. It helps to determine the amount of the annuity payments to the investor.
B. It helps to determine the rate of return on a fixed annuity.
C. It helps to determine the interest rate of the surrender charge on a deferred annuity.
D. It helps to determine the interest rate charges on loans taken against the account.
5. Marco is receiving monthly payments for his variable annuity. If his last payout was $500, and this month the return on his account drops below the AIR, his next payment will be:
A. $400
B. $500
C. More than $500
D. Less than $500
6. Leo and Katherine have been married for 25 years. Leo wants to set up an annuity so that his wife will receive payments beginning at his death and continue to receive them until her own death. Which of following payout options would be the best