Annuities — practice questions

5.3% of the exam ≈8 real questions 8 free questions here

Parties, phases, fixed, indexed and variable annuities, payout options, suitability and the senior free-look rules: about 8 of the 150 combined questions.

Where people lose points

• The annuitant's life measures a life income payout.
• During a senior's 30-day free look, variable premiums sit in fixed income or money market unless the owner directs otherwise.
• Selling annuities needs 8 hours of training first and 4 hours each renewal.
• Life income pays the most per month but stops at death.

Questions and answers, explained

All 4 questions above, with the correct answer and why it is correct. Everything here is on annuities.

1. Which annuity payout option is NOT life contingent?

   • AStraight life income
   • BLife income with a 10-year period certain
   • CFixed-period (period certain) optionCorrect
   • DInstallment refund life income

   Why: A fixed-period option liquidates the accumulated value plus interest over a stated number of years to the payee, whether the annuitant lives or dies, so no life is used as a measuring life. Option B is the closest distractor: the period certain adds a guarantee, but the payments still continue for the annuitant's lifetime if he outlives the certain period, which makes it life contingent. The fixed-amount option is the other non-life-contingent choice, paying a selected amount until the funds are exhausted.

   Reference CA Life objectives II.C (Annuities)

2. A deferred annuity contains a market value adjustment (MVA). If market interest rates have RISEN since the contract was purchased and the owner surrenders early, the MVA will:

   • AIncrease the amount payable on surrender.
   • BConvert the contract into a variable annuity.
   • CHave no effect, because an MVA applies only at annuitization.
   • DDecrease the amount payable on surrender.Correct

   Why: An MVA adjusts the surrender value up or down to reflect the change in interest rates since issue; when rates rise, the bonds backing the contract lose value, so the adjustment is negative and reduces the amount paid. Had rates fallen, the adjustment would be positive and would increase the surrender value, which is why option A is the mirror-image distractor. The MVA is applied in addition to any surrender charge and generally only to amounts taken above the free withdrawal allowance before the guarantee period ends.

   Reference CA Life objectives II.C (Annuities)

3. Which of the following correctly describes the accumulation period of a deferred annuity?

   • AThe period during which the insurer makes income payments to the annuitant.
   • BThe period that begins only after the annuitant's death.
   • CThe period when the beneficiary receives the remaining payments.
   • DThe period during which the owner pays into the contract and the values grow tax-deferred.Correct

   Why: During the accumulation period, the owner makes payments and interest or investment earnings grow tax-deferred; the owner can generally surrender or withdraw (possibly with charges) during this phase. Option A describes the annuity (payout) period, which begins at annuitization — the most commonly confused counterpart. Once annuitized, the income stream generally cannot be reversed.

   Reference CA Life objectives II.C (Annuities)

4. Elena annuitized under a life income option with a 10-year period certain. She dies after receiving payments for 4 years. What happens next?

   • AHer beneficiary receives the payments for the remaining 6 years of the certain period.Correct
   • BAll payments cease at her death.
   • CHer beneficiary receives a lump-sum refund of all premiums she paid.
   • DHer beneficiary receives lifetime payments.

   Why: Life income with period certain pays for the annuitant's life, but guarantees payments for at least the stated period; if death occurs within it, the beneficiary collects for the balance of that period — here, 6 more years. Option B describes a straight (pure) life income option, the closest distractor, which maximizes each payment precisely because nothing survives the annuitant. A refund option, not a period certain, would return remaining value as a lump sum or installments.

   Reference CA Life objectives II.C (Annuities)

Topics inside this domain

• California's protections for senior insurance buyers
• California free look periods and life insurance replacement
• Annuities for the California life exam

Drill other domains

• Basic Insurance Concepts and Contract Law (17.3%)
• The Insurance Marketplace, Licensing and Ethics (9.3%)
• Life Insurance Basics, Underwriting and Claims (7.3%)
• Types of Life Policies and Group Life (8%)
• The Life Insurance Contract and Riders (9.3%)
• Replacement, Cancellation, Taxation and Social Security Disability (5.3%)

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