A Trivia Quiz On Annuities!

By Vivian Tayor
Vivian Tayor, Insurance & Finance
Vivian, with over a decade of financial and insurance leadership, founded Celevi CE, an elite continuing education organization, aiming to empower industry experts with trust and respect.
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, Insurance & Finance
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A Trivia Quiz On Annuities! - Quiz

A trivia quiz on annuities! There are different ways that people choose to invest their income and annuities are perfect answer to people who do not want to risk lacking income as they ensure after one has made their premiums they get their cash back with interest or as original based on the annuity one chooses over a period of time. Test out what more you know about these types of contract through this quiz.


Questions and Answers
  • 1. 

    What is the advantage of having a qualified annuity?

    • A.

      There is no advantage

    • B.

      Higher dividends

    • C.

      The employer receives a tax deduction for the contributions

    • D.

      Receiving a lump-sum settlement tax free

    Correct Answer
    C. The employer receives a tax deduction for the contributions
    Explanation
    Having a qualified annuity provides the advantage of the employer receiving a tax deduction for the contributions made. This means that the employer can deduct the contributions made towards the annuity plan from their taxable income, reducing their overall tax liability. This can be a significant benefit for the employer as it helps to lower their tax burden and potentially increase their after-tax profits.

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  • 2. 

    Under a Straight Life Annuity, if the annuitant dies before the principal amount is paid out, the beneficiary will receive:

    • A.

      Guaranteed minimum benefit

    • B.

      Nothing; the payments will cease

    • C.

      The amount paid into the annuity

    • D.

      The remainder of the principal

    Correct Answer
    B. Nothing; the payments will cease
    Explanation
    Under a Straight Life Annuity, the annuitant receives a fixed amount of income for their lifetime. If the annuitant dies before the principal amount is paid out, the payments will cease. This means that the beneficiary will not receive any further payments from the annuity.

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  • 3. 

    A prospective Deferred Annuity owner is concerned about what would happen if the surrendered the annuity before the annuitization period. The agent most likely explained which of the following?

    • A.

      The owner will receive some of the money back, which will depend on the surrender value established by the insurer at the time that the contract is terminated

    • B.

      It is not possible to surrender an annuity before the annuitization period.

    • C.

      Non-Forfeiture Option guarantees that the owner will receive a surrender value of the contract

    • D.

      The insurance company will apply the money to another annuity or a Life Insurance policy, but the money cannot be returned

    Correct Answer
    C. Non-Forfeiture Option guarantees that the owner will receive a surrender value of the contract
    Explanation
    The agent most likely explained that the Non-Forfeiture Option guarantees that the annuity owner will receive a surrender value of the contract if they choose to surrender it before the annuitization period. This means that the owner will receive some of the money back, which will depend on the surrender value established by the insurer at the time of termination.

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  • 4. 

    The period of time during which payments earn interest and grow tax-deferred is called:

    • A.

      Pay-out period

    • B.

      Pay in-period

    • C.

      Liquidation Period

    • D.

      Annuitization period

    Correct Answer
    B. Pay in-period
    Explanation
    The correct answer is "Pay in-period" because it refers to the period of time when payments are made into an investment or retirement account and accumulate interest. During this period, the growth of the investment is tax-deferred, meaning that taxes on the earnings are not paid until the funds are withdrawn.

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  • 5. 

    An annuity is payable for as long as the annuitant lives, and upon death, all the payments cease. This is which Payment Option?

    • A.

      Life Income Joint and Survivor Option

    • B.

      Life Income Option

    • C.

      Joint Life Option

    • D.

      Life Income with Refund Option

    Correct Answer
    B. Life Income Option
    Explanation
    The correct answer is Life Income Option. This payment option guarantees that the annuity will be paid for as long as the annuitant lives, and upon their death, all payments will cease. This option provides a steady income stream for the annuitant throughout their lifetime.

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  • 6. 

    What is incorrect regarding annuities?

    • A.

      Annuities do not use the pooling technique to spread risk

    • B.

      An owner may change the annuity date, the beneficiary, or the settlement option

    • C.

      Once the payout period begins, the annuitant recieves periodic payments

    • D.

      The accumulation period is the period prior to the annuitzation date

    Correct Answer
    A. Annuities do not use the pooling technique to spread risk
    Explanation
    Annuities actually do use the pooling technique to spread risk. This means that multiple individuals contribute to a pool of funds, which is then used to provide payments to annuitants. By spreading the risk across a larger pool of individuals, the potential impact of individual losses or longevity risk is reduced. This pooling technique helps to ensure that annuitants receive their periodic payments as agreed upon.

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  • 7. 

    All are characteristics of annuities, except:

    • A.

      Annuities may use a beneficiary designationin case of the annuitant's death

    • B.

      Premature distributions are subject to a 15% penalty tax in order to discourage the use of annuity contracts as a short-term tax shelter.

    • C.

      Owners of individual annuities have contracted rights beginning at the time of purchase.

    • D.

      Business Corporations may use annuities to provide pensions for employees, either nonqualified or qualified plans, or to structure payments of liability settlements.

    Correct Answer
    B. Premature distributions are subject to a 15% penalty tax in order to discourage the use of annuity contracts as a short-term tax shelter.
    Explanation
    Annuities may use a beneficiary designation in case of the annuitant's death, owners of individual annuities have contracted rights beginning at the time of purchase, and business corporations may use annuities to provide pensions or structure payments of liability settlements. However, premature distributions being subject to a 15% penalty tax is not a characteristic of annuities. This penalty tax is imposed to discourage individuals from using annuity contracts as a short-term tax shelter.

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  • 8. 

    Mr. Brown received monthly benefits from his annuity, and upon death, Mrs. Brown receives a reduced amount.  What annuity payment option did Mr. Smith choose?

    • A.

      Cash refund

    • B.

      Life Income

    • C.

      Joint and Survivorship

    • D.

      Minimum Distribution

    Correct Answer
    C. Joint and Survivorship
    Explanation
    Mr. Brown chose the Joint and Survivorship annuity payment option. This option allows him to receive monthly benefits from his annuity during his lifetime, and upon his death, his spouse, Mrs. Brown, will continue to receive a reduced amount of the benefits for the rest of her life. This option ensures that both Mr. and Mrs. Brown are provided for financially, even after one of them passes away.

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  • 9. 

    What is the greatest marketable benefit of a Flexible Premium Deferred Annuity?

    • A.

      Tax Deferment

    • B.

      Contributions may be as often and as large as the owner desires

    • C.

      The owner may cancel at anytime

    • D.

      Surrender charges could occur if cancelled in early years

    Correct Answer
    A. Tax Deferment
    Explanation
    A Flexible Premium Deferred Annuity offers the greatest marketable benefit of tax deferment. This means that the owner of the annuity can delay paying taxes on the earnings and growth of the annuity until they start making withdrawals. This can be advantageous as it allows the annuity to potentially grow larger over time since the owner is not paying taxes on the earnings each year. It also gives the owner more control over their tax liability, as they can choose when to start taking withdrawals and therefore when to start paying taxes on those withdrawals.

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  • 10. 

    The payment option that pays an income for the life of the annuitant or for a specified period, whichever occurs last, is

    • A.

      Temporary Annuity

    • B.

      Life income

    • C.

      Life income with Period Certain

    • D.

      Life income with refund

    Correct Answer
    C. Life income with Period Certain
    Explanation
    Life income with Period Certain is the payment option that pays an income for the life of the annuitant or for a specified period, whichever occurs last. This means that the annuitant will receive regular payments for the rest of their life, but if they were to pass away before the specified period ends, the payments will continue to a designated beneficiary until the end of that period. This option provides both the security of lifelong income and the assurance that payments will not be lost if the annuitant dies prematurely.

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  • 11. 

    What is not a trait of a Fixed Annuity?

    • A.

      The insurer's assets guarantee the fixed annuity contract

    • B.

      The purchasing power of a fixed amount decreases as the cost of living increases

    • C.

      It must include a projected schedule of cash availability on its anniversary date, for a minimium of 10 years

    • D.

      The insurere bears any investment risk.

    Correct Answer
    C. It must include a projected schedule of cash availability on its anniversary date, for a minimium of 10 years
    Explanation
    A fixed annuity does not necessarily have to include a projected schedule of cash availability on its anniversary date for a minimum of 10 years. While some fixed annuities may offer this feature, it is not a universal trait of all fixed annuities. The other options mentioned are traits of a fixed annuity - the insurer's assets guarantee the contract, the purchasing power decreases as the cost of living increases, and the insurer bears any investment risk.

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  • 12. 

    Which would be incorrect regarding a Variable Annuity?

    • A.

      Upon annuitization, the accumaltion units are converted to annuity units. The income is paid based on the valueof the units.

    • B.

      The contract owner bears the investment risk and recieves the return actually earned on invested assets, less any charges assesses by the insurer.

    • C.

      Premiums paid during the accumlation period are invested in a seperate account(s).

    • D.

      The number of annuity units recieved, and the unit value, remain level.

    Correct Answer
    D. The number of annuity units recieved, and the unit value, remain level.
    Explanation
    The number of annuity units received and the unit value do not remain level in a Variable Annuity. The value of annuity units can fluctuate based on the performance of the investments in the separate account(s). Therefore, the income paid out will also vary depending on the value of the units.

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  • 13. 

    You purchase an annuity in December and begin receiving monthly benefits in May.  What type of annuity do you own?

    • A.

      Retirement Annuity

    • B.

      Single Premium IRA

    • C.

      Single Premium Immediate Annuity

    • D.

      Tax Sheltered Annuity

    Correct Answer
    C. Single Premium Immediate Annuity
    Explanation
    The correct answer is Single Premium Immediate Annuity. This type of annuity is purchased with a lump sum payment and the annuity payments start immediately or shortly after the purchase. In this scenario, the annuity is purchased in December and the monthly benefits start in May, which aligns with the characteristics of a Single Premium Immediate Annuity.

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  • 14. 

    An annuity purchased 10 years ago would have some value at this time.  The accumulation units may now be converted to annuity units.  What type of annuity is this?

    • A.

      Fixed

    • B.

      Ten year Certain

    • C.

      Variable

    • D.

      Taxable Annuity

    Correct Answer
    C. Variable
    Explanation
    An annuity purchased 10 years ago that can now be converted to annuity units is likely a variable annuity. Variable annuities allow the accumulation units to be invested in various investment options, such as stocks and bonds, which can result in fluctuating values over time. This type of annuity offers the potential for higher returns but also carries more risk compared to fixed annuities or other types of annuities.

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  • 15. 

    Which of the following best defines the Cost Recovery Rule?

    • A.

      The cash value, plus the sum of the premiums paid, equals the equity in the contract.

    • B.

      The face amount, less the cash value, equals the equity in the contract

    • C.

      The face amount, plus the cash value, equals the equity in the contract.

    • D.

      The cash value, minus the sum of the premiums paid, equals the equity in the contract.

    Correct Answer
    D. The cash value, minus the sum of the premiums paid, equals the equity in the contract.
Vivian Tayor |Insurance & Finance
Vivian, with over a decade of financial and insurance leadership, founded Celevi CE, an elite continuing education organization, aiming to empower industry experts with trust and respect.

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