Chapter 13

Question 1

Do fixed immediate annuities have payout phases, accumulation phases or both?

Answer 1

only payout phase

Question 2

Do annuities provide death or surrender benefits in the payout phase?>

Answer 2

No

Question 3

do fixed deferred annuities have an accumulation phase, a payout phase or both?

Answer 3

They have an accumulation phase and potentially payout phase.

Question 4

The product model of a fixed deferred annuity must project the costs of what benefit types?

Answer 4

1) death benefit
2) surrender or withdrawal benefit
3) periodic payment benefit.

cost of benefits = (sum of present value of each potential benefit) x by the expected probability that each benefit will be payable.

Question 5

What is the dependable factor to determine the amount of death benefit for fixed deferred annuities?

Answer 5

depends on accumulation value of the contract at the time of the insured’s death rather than on the face amount.

Question 6

What is an expected surrender rate?

Answer 6

an estimate of the percentage of surrenders during a particular year or other time period.
* for deferred fixed annuities the highest rate is during the early years and decreases in time.

Question 7

How does a company find the total of the future surrender benefits?

Answer 7

company sums the annual surrender benefits for each year during the contracts’ accumulation phase.

Question 8

How do insurers calculate the withdrawal value? (year n)

Answer 8

its the accumulation value x the withdrawal rate, year n.

Question 9

How do insurers find the cost of periodic payments?

Answer 9

they calculate the present value of the future periodic payments.

• immediate annuity: payout phase is issue date
• for deferrred annuity: pauout phase is the maturity date.

Question 10

Can annuity payout options be guarenteed payout options or life annuity payout options?

Answer 10

Yes

Question 11

Define guaranteed annuity payout options.

Answer 11

provide periodic payments of either a desginated amount or for a desginated period and are not linked to any life expectancy or mortality risk.
* company will distribute entire accumulation value.

Question 12

what is required for a guaranteed annuity payout option for a fixed period?

Answer 12

requires annuity owner to choose the length of the time the periodic payements - company will pay the amount over that time, that is equivalent fto the contract value.

Question 13

what is required for a guaranteed annuity payout option for a fixed amount?

Answer 13

requires annuity owner to choose the payment amount- so the sum will be paid on a regular basis until the contract value is exhausted.

Question 14

What are some typical kinds of life annuity payout options?

Answer 14

1) single life annuity - periodic payments in an amount based on both the single premium and the annuitants life expectance.
2) single life annuity with period certain- guarantees periodic payments throughout the lifetime of a named individual - the annuitant- and also guarantees the periodic payments will cont for a specific period- if the person dies it does to contingent payee.
3) single life with refund annuity: guarantees specified periodic payments thorughout the lifetime of a named individual- the annuitant- and also guarantees that a refund will be made if the annuitant dies before the total of the periodic payments made equals the amount paid for the annuity.
3) joint life annuity: covers 2 lifes and guarentees periodic payments until one of the covered individuals die.
4) joint and survivor annuity: guarantees series of periodic payments to two or more individuals until both or all of the individuals die.

Question 15

Wha is a fixed indexed annuity (FIA)?

Answer 15

offers the contract owner specified guarantees as to premiums and earnings on premiums, but also offers the possibility of additional earnings by linking crediting on the accumulation values to a published index of stock market prices.
- similar to other fixed deferred annuities.

Question 16

Define an index

Answer 16

a statistical measurement system that tracks the changes in a group of similar values.
- can have an accumulation phase and a payout phase.

Question 17

What are the similarities between indexed and nonindexed individual fixed deferred annuities?

Answer 17

accumulation value
guaranteed min surrender value
death benefit
maturity date
payout options
and sometimes return of premium provisions

Question 18

What are the differences between indexed and nonindexed individual fixed deferred annuities?

Answer 18

Indexed: has indexed crediting and index credits. and reference index.
nonindexed: has current interest. ** main difference

Question 19

Define indexed crediting.

Answer 19

the FIA contract guarantees that the company will periodically award monetary credits, known as index credits, to the contracts accumulation value on a specified basis related to growth in a specified external infex of stock prices.

Question 20

What do you call the specified external index?

Answer 20

reference index/bench mark index.

Question 21

in many deferred FIAs the reference index is what?

Answer 21

the Standard & Poor’s 500 (S&P 500) index without dividens.

Question 22

the index-crediting formulas have provisions designed to limit the companys what?

Answer 22

obligation for indexed crediting so that the compnay can recover the costs of administering products.

Question 23

the provisions of index-crediting formulas may include a participation percentage, a cap , or a yield spreed.
Define the participation percentage provision.

Answer 23

stipulates the rate at which the excess fo the reference index growth percentage is shared between the insurer and the customer.

Question 24

the provisions of index-crediting formulas may include a participation percentage, a cap , or a yield spreed.
Define a cap.

Answer 24

an upper limit on the amount of a reference index’s gain in the value that is credited to the annuity contract.
- May combine an interest-rate cap and an index participation percentage.

Question 25

the provisions of index-crediting formulas may include a participation percentage, a cap , or a yield spreed. Define the yield spread provision.

Answer 25

states the insurer always deducts a specified percentage from teh growth in the reference index. * lease common

Question 26

through mechanism such as the floor provision and gthe return of premium provision, FIAs can guarantee contract owners that they will not lose any portion of their premiums in the contract. define floor privision.

Answer 26

specified that the contracts values are not reduced if the linked indeax decreases in the value during a measurement period. floor provisions typically guarantee that the index credit for the contract n=year term cant be less than 0.

Question 27

through mechanism such as the floor provision and gthe return of premium provision, FIAs can guarantee contract owners that they will not lose any portion of their premiums in the contract. define floor return of premium provision.

Answer 27

under this provision the company promises to pay the customer the full value of the premiums, minus partial withdrawals upon surrender before the contract has built an accumulation value greater than that promised in the return of premium provision.

Question 28

What are some features only found in indexed annuity contracts that are not found in other annuity products

Answer 28

1) cx must leave money in the index-cresditing allocation for a specified minimum contract term of n years. 2) min surrender value at any time is 90% of premiums accumulated at 3% interest for th term the contract as been in force. - FIA could permit cx to lose some of the premiums d/t prolongued market downturn.

Question 29

What 3 methods can insurers use to calculate the excess interest on FIA's?

Answer 29

1) annual reset method 2) point-to-point method 3) high water mark method

Question 30

Define the annual reset method | rachet method

Answer 30

- comparing the value of the index at the end of each contract year with the value at the start of the year. the nexy year the starting value is reset to the ending valye. \ - allows contract owner to lock in gains each year and avoid losses.

Question 31

Define the point-to-point method

Answer 31

compares the value of the index at the start of the annuity contract term to the value at the end of the Term to determine what interest has accrued because of a change in the index. - earnings dependong on the value of the index at the end of the term, they are isolated from the effects of short term fluctuations.

Question 32

Define the high water mark method

Answer 32

involves comparing the value of the index at the beginning of the contract term with the highest value- or high water mark- that the index reaches on any contract anniversary date during the term. - allows for index gains without being subject to index losses.

Question 33

In calculating excess interest, what is the advance of using high water marks rather than year-end or term-end valyes?

Answer 33

earnings are not dependent on index growth at the end of each contract year or at the end fo the term. - the index need only show growth =on any contract anniversary date to order to earn excess interest.

Question 34

Owners of a deferred variable annuity (VA) choses how to allocate premiums. Whats a fixed fund option?

Answer 34

guarenteed payment of a fized rate of interest for a specified period of time. Premiums allocated to a fixed fund option are usually administered and invested with the inere's general accound.

Question 35

True or False A VA invested in variable subaccounts fully reflects the investment results of those subaccounts, whether favourable or unfavourable.

Answer 35

True | variable subaccounts are subject to the various charges.

Question 36

What do you call the additional premium to purchase a rider attached to VAs?

Answer 36

``` rider charge (rider premium) The rider charge for VA secondary guarantees is expressed in basis points and is a specified percentage of the contract's asset value. ```

Question 37

The rider charge on a VA covers the insurance company's compoenent cost for what elements?

Answer 37

1) admin expenses to support rider 2) capital requirement to support the rider 3) cost of managing risk, including costs or investing in options for hedging 4) variability in risk managment costs 5) variability in pricing assumptions, including policyholder behavior and interest rates in the financial environment.

Question 38

What is a guaranteed minimum death benefit (GMDB).

Answer 38

generally guarantees that the VA death benefit will euqal at least a specified minimum amount. Most VAs specify a minimum amount equal to the reater of 1) all premiums paid, adjusted for withdrawals, and 2) the contracts' accumulation value at the time of death. *expensive

Question 39

What is an annually compounded death benefit?

Answer 39

resembles GMDB but the contract's principal (minus withdrawls) is compounded annually at a specified rate, 3-5%/yr.

Question 40

What is a Ratcheted Death benefit

Answer 40

Here the contract's death benefit is reset at periodic intervals, based on growth in the accumulation value. - usually 4-6 yrs. - once death benefit is reset, it can never be lss

Question 41

What is a highest anniversary Value death benefit?

Answer 41

A variation of the ratcheted death benefit but instead of resetting death benefit at predetermined intervals, its reset every anniverary year in which the accumulation value increases.

Question 42

What is a living benefit for VAs?

Answer 42

- increasing in popularity - offers some guaranteed benefit while the contract owner is alive - contract has 2 values: ccumulation value and living benefit value. insurers will put limits on investment choices of living benefits.

Question 43

What are the optional living benefits guarantee riders for VA contracts (issued more recently)

Answer 43

1) guarenteed minimum income benefit (GMIB) 2) Guaranteed minimum withdrawal benefit (GMWB) 3) Guarenteed lifetime withdrawal benefit (GLWB) 4) Guaranteed minimum accumulation benefit ( GMAB)

Question 44

define guaranteed minimum income benefit (GMIB).

Answer 44

living benefit rider that guarantees minimum protected value that can be converted into annuity periodic payments. *value may specify some growth of the principal

Question 45

define Guaranteed minimum withdrawal benefit (GMWB)

Answer 45

living benefit that guarantees a minimum protected value against which a VA owner may make annual withdrawals of a specified amount with charge, even if acumulation value is below the protected value. -

Question 46

Define Guarenteed lifetime withdrawal benefit (GLWB)

Answer 46

closely related to GMWB. | living benefit that guarantees minimum withdrawals to a VA owner for a life.

Question 47

Define Guaranteed minimum accumulation benefit ( GMAB)

Answer 47

living benefit that guarantees a minimum protected value for the customers account even if the contracts accumulation value declines because of poor investment performance. * usually available after a witing period. (7-10 yrs)