RMI exam 3- topic 9

[Topic 9-17] What are the types of guarantees commonly associated with variable annuities?

A) Guaranteed Minimum Accumulation Benefit (GMAB).

B) Guaranteed Minimum Income Benefit (GMIB).

C) Guaranteed Maximum Investment Return (GMIR).

D) Guaranteed Minimum Withdrawal Benefit (GMWB).

E) None of the above.

A) Guaranteed Minimum Accumulation Benefit (GMAB).

B) Guaranteed Minimum Income Benefit (GMIB).

D) Guaranteed Minimum Withdrawal Benefit (GMWB).

[Topic 9-25] What led to the decline and eventual outlawing of tontines in the United States?

A) High administrative costs

B) Lack of government regulation

C) Widespread fraud and unethical practices

D) Poor market performance

E) None of the above.

B) Lack of government regulation

C) Widespread fraud and unethical practices

[Topic 9-8] What are the implications of selling both life insurance and annuities for a company?

A) It makes the company solely dependent on mortality rates.

B) It creates a perfect hedge against mortality and longevity risks.

C) It diversifies the company’s financial products.

D) It increases the company’s vulnerability to global pandemics.

E) None of the above.

B) It creates a perfect hedge against mortality and longevity risks.

C) It diversifies the company’s financial products.

[Topic 9-54] (Exactly One Correct Answer) Mr. PeanutButter – the owner of PB Livin – is deciding on what type of pension to offer his new employee, Todd. Rank his three options by the amount of risk he (Mr. PeanutButter) faces from the most risky option to the least risky option.

A) Defined Contribution, Defined Benefit, Cash Balance.

B) Cash Balance, Defined Contribution, Defined Benefit.

C) Defined Contribution, Cash Balance, Defined Benefit.

D) Defined Benefit, Cash Balance, Defined Contribution

D) Defined Benefit, Cash Balance, Defined Contribution

[Topic 9-1] What are the types of risks that concern economists and regulators in financial markets?

A) Systematic risks.

B) Investment contagion effects like the 2008 financial crisis.

C) Long-term interest rate decreases for life insurers.

D) Systemic risks leading to fire sales and claim payments.

E) None of the above.

A) Systematic risks.

B) Investment contagion effects like the 2008 financial crisis.

C) Long-term interest rate decreases for life insurers.

D) Systemic risks leading to fire sales and claim payments.

[Topic 9-39] (Exactly One Correct Answer) In a defined contribution plan, the amount of retirement income depends on all of the following EXCEPT?

A) The length of service of an employee.

B) The amount of employer and employee contributions [if any].

C) The salary of an employee.

D) The guaranteed rate of return promised by employers

D) The guaranteed rate of return promised by employers

[Topic 9-23] (Exactly One Correct Answer) What is the societal benefit of insurance that is not applicable to variable annuities?

A) Risk pooling

B) Diversification of investments

C) Systematic risk coverage

D) Market risk reduction

A) Risk pooling

[Topic 9-41] What is the main risk basic annuities insure against?

A) Longevity Risk.

B) Investment Risk.

C) Death Risk.

D) Outliving your Assets

E) None of the above.

A) Longevity Risk.

D) Outliving your Assets

[Topic 9-11] What is a true statement about the history of annuities? A) They were originally used as a tool for retirement planning.

B) Their pricing historically ignored the health of the buyer.

C) They were gamed by some life insurers.

D) They have always been popular investment vehicles.

E) None of the above.

B) Their pricing historically ignored the health of the buyer.

C) They were gamed by some life insurers.

[Topic 9-10] Which of these is/are true about annuities?

A) They hedge against the risk of outliving one’s resources.

B) They are only beneficial in times of economic growth.

C) They were historically used to fund government projects.

D) They provide a fixed income for a set period.

E) None of the above.

A) They hedge against the risk of outliving one’s resources.

C) They were historically used to fund government projects.

[Topic 9-12] Why did Genovese monks prefer buying annuities for young nuns?

A) It was a common practice in religious institutions.

B) Childbirth was a leading cause of death, which nuns avoided.

C) Monks sought to protect monastaries from longevity risk.

D) Nuns had a higher life expectancy.

E) None of the above

B) Childbirth was a leading cause of death, which nuns avoided.

D) Nuns had a higher life expectancy.

[Topic 9-18] What phase in a variable annuity involves no capital gains taxes on investments?

A) Annuitization Phase.

B) Death Benefit Phase.

C) Accumulation Phase.

D) Investment Phase.

E) None of the above.

A) Annuitization Phase.

B) Death Benefit Phase.

C) Accumulation Phase.

D) Investment Phase.

[Topic 9-14] What are the tax implications of variable annuities during the accumulation phase?

A) There are contribution limits.

B) Minimum investment returns are never guaranteed.

C) Income tax is waived for contributions.

D) Capital gains are not taxed.

E) None of the above.

C) Income tax is waived for contributions.

D) Capital gains are not taxed.

[Topic 9-46] (Exactly One Correct Answer) An employer currently maintains a fully funded defined benefit pension plan. Suppose investment returns decrease for the fund assets. What impact will this have on this plan?

A) This would cause the price of a life annuity to increase.

B) This would cause the plan to become under-funded.

C) This would cause the plan to become over-funded.

D) This would cause retirees to receive less pension benefits.

B) This would cause the plan to become under-funded.

[Topic 9-30] (Exactly One Correct Answer) Which of the following insures pensions?

A) PBGC.

B) ERISA.

C) COBRA.

D) OASDI.

A) PBGC.

[Topic 9-24] How do tontines work as a retirement product?

A) Participants contribute to a common fund for periodic payouts

B) Offers guaranteed returns after a certain age

C) Reduces risk through investment diversification

D) Payouts are redistributed to surviving members as participants die

E) None of the above

A) Participants contribute to a common fund for periodic payouts

D) Payouts are redistributed to surviving members as participants die

[Topic 9-55] (Exactly One Correct Answer) Mr. PeanutButter – the owner of PB Livin – is deciding on what type of pension to offer his new employee, Todd. Rank his three options by the amount of risk Todd faces from the least risky option to the most risky option.

A) Defined Contribution, Cash Balance, Defined Benefit.

B) Defined Benefit, Cash Balance, Defined Contribution.

C) Defined Contribution, Defined Benefit, Cash Balance.

D) Cash Balance, Defined Contribution, Defined Benefit

B) Defined Benefit, Cash Balance, Defined Contribution.

[Topic 9-38] In a Roth 401(k) or 403(b) plan, which of the following statements is (are) TRUE?

A) Employees are taxed on withdrawal.

B) Employees are taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

C) Employees are not taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

D) Employees are not taxed on withdrawal

E) None of the above.

B) Employees are taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

D) Employees are not taxed on withdrawal

[Topic 9-56] (Exactly One Correct Answer) Mr. PeanutButter – the owner of PB Livin – is deciding on what type of pension to offer his new employee, Todd. Rank his three options by the amount of risk Todd faces from the most risky option to the least risky option.

A) Cash Balance, Defined Contribution, Defined Benefit.

B) Defined Contribution, Defined Benefit, Cash Balance.

C) Defined Contribution, Cash Balance, Defined Benefit.

D) Defined Benefit, Cash Balance, Defined Contribution.

C) Defined Contribution, Cash Balance, Defined Benefit.

[Topic 9-51] (Exactly One Correct Answer) The long run actuarial status of OASDI indicates that:

A) The trust funds will increase as the baby boom generation continues to retire.

B) The trust funds are invested in junk bonds and other risky investments.

C) OASDI is financially sound in the long run.

D) The ratio of workers to beneficiaries is declining, leading to underfunding.

D) The ratio of workers to beneficiaries is declining, leading to underfunding.

[Topic 9-50] Many state and local governments have severely under-funded pension plans. This situation is caused by which of the following?

A) Plans assume rates of return on plan assets which are too low.

B) Adverse selection into the PBGC

C) Taxes are too high.

D) State and local governments have high administrative costs.

E) None of the above.

E) None of the above.

[Topic 9-47] (Exactly One Correct Answer) An employer currently maintains a fully funded defined benefit pension plan. Suppose investment returns increase for the fund assets. What impact will this have on this plan?

A) This would cause the plan to become over-funded.

B) This would cause the price of a life annuity to increase.

C) This would cause the plan to become under-funded.

D) This would cause retirees to receive less pension benefits.

A) This would cause the plan to become over-funded.

[Topic 9-13] What are the guaranteed phases in a variable annuity?

A) Annuitization (Payout) Phase.

B) Accumulation (Investment) Phase.

C) Death Benefit Phase.

D) Guaranteed Minimum Income Benefit Phase.

E) None of the above.

A) Annuitization (Payout) Phase.

B) Accumulation (Investment) Phase.

[Topic 9-19] (Exactly One Correct Answer) What is a unique feature of variable annuities compared to basic annuities?

A) They offer fixed returns.

B) They can include a death benefit.

C) They have no accumulation phase.

D) They are only available to high-income individuals

B) They can include a death benefit.

[Topic 9-53] (Exactly One Correct Answer) Mr. PeanutButter – the owner of PB Livin – is deciding on what type of pension to offer his new employee, Todd. Rank his three options by the amount of risk he (Mr. PeanutButter) faces from the least risky option to the most risky option.

A) Defined Contribution, Defined Benefit, Cash Balance.

B) Defined Contribution, Cash Balance, Defined Benefit.

C) Cash Balance, Defined Contribution, Defined Benefit.

D) Defined Benefit, Cash Balance, Defined Contribution.

B) Defined Contribution, Cash Balance, Defined Benefit.

[Topic 9-5] Why do life insurers sell both life insurance and annuities?

A) Annuities cover longevity risk.

B) Annuities benefit from increased death rates.

C) Life insurance covers mortality risk.

D) Selling both hedges against global pandemic risks.

E) None of the above.

A) Annuities cover longevity risk.

B) Annuities benefit from increased death rates.

C) Life insurance covers mortality risk.

D) Selling both hedges against global pandemic risks.

[Topic 9-20] Why might annuities be less popular despite concerns about outliving retirement savings?

A) Lack of awareness or understanding of annuities.

B) Restrictions on withdrawal amounts.

C) People prefer immediate access to their funds.

D) Higher fees and costs.

E) None of the above.

A) Lack of awareness or understanding of annuities.

D) Higher fees and costs.

[Topic 9-22] What do variable annuities insure against?

A) Credit risk

B) Market risk

C) Inflation

D) Longevity risk

E) None of the above

B) Market risk

[Topic 9-42] What is the main risk basic annuities insure against?

A) Death Risk.

B) Interest Rate Risk.

C) Investment Risk.

D) Health Risk.

E) None of the above

E) None of the above

[Topic 9-37] In a traditional 401(k) or 403(b) plan, which of the following statements is (are) TRUE?

A) Employees are taxed on withdrawal.

B) Employees are not taxed on withdrawal

C) Employees are not taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

D) Employees are taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

E) None of the above.

A) Employees are taxed on withdrawal.

C) Employees are not taxed currently on the value of contributions made to a traditional 401(k) or 403(b).

Shirley participates in a 401(k) plan. Suppose Shirley leaves between her 5th and 6th years of employment and begins work with another employer – who also has a 401(k) plan. At the point she left, her account balance was $90,000. Of the $90,000, employer contributions were $50,000, employee contributions were $25,000 and the remaining $15,000 represents interest earnings which was split proportionally

[Topic 9-43] (Exactly One Correct Answer) An important feature of any retirement plan is the vesting schedule. In this case, vesting refers to the ability for Shirley to transfer how much of her account balance to her new employer’s 401(k) plan?

A) $50,000.

B) $25,000.

C) $15,000.

D) $60,000.

D) $60,000.

Shirley participates in a 401(k) plan. Suppose Shirley leaves between her 5th and 6th years of employment and begins work with another employer – who also has a 401(k) plan. At the point she left, her account balance was $90,000. Of the $90,000, employer contributions were $50,000, employee contributions were $25,000 and the remaining $15,000 represents interest earnings which was split proportionally

. [Topic 9-44] (Exactly One Correct Answer) If the employer uses the graded 2-6 year rule for vesting purposes, how much can Shirley take with her in total?

A) $36,000.

B) $30,000.

C) $78,000.

D) Shirley cannot take any part of her account with her.

C) $78,000.

Shirley participates in a 401(k) plan. Suppose Shirley leaves between her 5th and 6th years of employment and begins work with another employer – who also has a 401(k) plan. At the point she left, her account balance was $90,000. Of the $90,000, employer contributions were $50,000, employee contributions were $25,000 and the remaining $15,000 represents interest earnings which was split proportionally

[Topic 9-45] (Exactly One Correct Answer) If the employer uses three-year cliff vesting, how much can Shirley take with her in total? A) $60,000.

B) $90,000.

C) $15,000.

D) $35,000.

B) $90,000

[Topic 9-29] (Exactly One Correct Answer) Which of the following is the correct name for social security?

A) PBGC.

B) COBRA.

C) ERISA.

D) OASDI.

D) OASDI.

[Topic 9-31] (Exactly One Correct Answer) Which type of pension plan typically allows employees more flexibility in terms of investment choices and portability?

A) Defined Contribution Plan

B) Defined Benefit Plan

C) Cash Balance Plan

A) Defined Contribution Plan

[Topic 9-26] In what ways do Variable Annuities differ from Fixed Annuities?

A) They offer a fixed rate of return

B) They involve higher fees

C) Investment risk is fully borne by the policyholder

D) None of the above

B) They involve higher fees

. [Topic 9-32] Which type of pension plan allows both the employer and employee to contribute and the final retirement benefit depends on the performance of the investments?

A) Cash Balance Plan

B) Defined Benefit Plan

C) Defined Contribution Plan

D) None of the above.

C) Defined Contribution Plan

[Topic 9-49] (Exactly One Correct Answer) Many state and local governments have severely under-funded pension plans. This situation is caused by which of the following?

A) Plans assume rates of return on plan assets which are too high. B) Plans assume rates of return on plan assets which are too low. C) Taxes are too high.

D) State and local governments have high administrative costs.

A) Plans assume rates of return on plan assets which are too high.

[Topic 9-33] Which type of pension plan provides a specified benefit to employees upon retirement based on factors like years of service and salary?

A) Defined Contribution Plan

B) Cash Balance Plan

C) Defined Benefit Plan

D) None of the above.

B) Cash Balance Plan

C) Defined Benefit Plan

. [Topic 9-7] Regarding the nature of life insurance and annuities, which statements are correct?

A) Life insurance policies typically have regular premium payments.

B) Life insurance is primarily an investment vehicle.

C) Annuities are designed to provide protection against lost income.

D) Annuities insure against dying too early.

E) None of the above.

A) Life insurance policies typically have regular premium payments.

[Topic 9-28] (Exactly One Correct Answer) Which of the following establishes minimum standards for retirement plans provided by employers in private industries?

A) OASDI.

B) ERISA.

C) COBRA.

D) PBGC

B) ERISA.

[Topic 9-40] What is the main risk basic annuities insure against?

A) Longevity Risk.

B) Interest Rate Risk.

C) Investment Risk.

D) Death Risk.

E) None of the above.

A) Longevity Risk.

[Topic 9-35] (Exactly One Correct Answer) All the following are characteristics of 401(k) plans EXCEPT:

A) They are offered by tax-exempt organizations.

B) The employee bears the investment risk.

C) The employer often matches a portion of employee contributions.

D) The employer offers a lump sum payment.

A) They are offered by tax-exempt organizations.

[Topic 9-48] (Exactly One Correct Answer) An employer currently maintains a fully funded defined benefit pension plan. Suppose price of a life annuity increases. What impact will this have on this plan?

A) None of these options are correct.

B) This would cause the plan to become over-funded.

C) This would cause retirees to receive less pension benefits.

D) This would cause the plan to become under-funded.

A) None of these options are correct.

[Topic 9-21] How do life insurers profit from variable annuities?

A) By hedging with life insurance.

B) Through performance-based bonuses

C) By charging high management fees

D) Investing in high-risk market ventures

E) None of the above.

C) By charging high management fees

6. [Topic 9-6] What historical aspect is true about basic (fixed) annuities?

A) They were often priced without considering age-related death risk.

B) Basic annuities were introduced in the 20th century.

C) Basic annuities were based on accurate statistical models.

D) They were used to fund wars in the Middle Ages.

E) None of the above.

A) They were often priced without considering age-related death risk.

D) They were used to fund wars in the Middle Ages.

Topic 9-4] What reasons explain why the decrease in life expectancy did not significantly impact life insurance companies?

A) Life insurers primarily deal with investment risks.

B) Systematic underwriting errors were made by actuaries.

C) Insurers dramatically underestimated lapse rates.

D) Half of the life insurance sales are actually annuities.

E) None of the above.

D) Half of the life insurance sales are actually annuities.

[Topic 9-2] What types of risks are associated with life insurance and pensions?

A) Systemic risk from rapid interest rate increases causing a bank run like effect.

B) Systematic investment risk for pensions.

C) Systematic risk due to long-term interest rate decreases.

D) Systemic risk from natural disasters.

E) None of the above.

B) Systematic investment risk for pensions.

C) Systematic risk due to long-term interest rate decreases.

[Topic 9-27] Which of the following is (are) TRUE concerning plan termination insurance sold by the PBGC?

A) It is required for defined benefit plans.

B) It is necessary, but not required for defined contribution plans.

C) It is not necessary and not required for defined contribution plans.

D) None of the above.

A) It is required for defined benefit plans.

C) It is not necessary and not required for defined contribution plans.

[Topic 9-52] Todd has just been hired at a California company – PB Livin. He is deciding between a traditional vs. a Roth 401(k). Which of the following would lead him to invest in a Roth as opposed to a traditional? California has a high-state income tax rate.

A) He expects the minimum age of retirement for OASDI to be pushed back to 70 by the time he retires.

B) He believes his federal income tax rate will be higher when he retires than it is now.

C) He is planning on moving to Florida (a low-income tax state) when he retires.

D) He expects average OASDI payouts to be lower by the time he retires.

E) None of the above.

B) He believes his federal income tax rate will be higher when he retires than it is now.

[Topic 9-34] (Exactly One Correct Answer) American Airlines and US Airways merged due to American’s failing pension plan. This merger was forced, in part, by:

A) The PBGC.

B) FSAs.

C) OASDI.

D) The ACA.

A) The PBGC.

[Topic 9-16] What is true about death benefits in annuities?

A) Beneficiaries receive the greater of account value or premiums paid.

B) Applies only during the accumulation phase.

C) It replaces the need for life insurance.

D) A death benefit is rarely included.

E) None of the above.

A) Beneficiaries receive the greater of account value or premiums paid.

B) Applies only during the accumulation phase.

[Topic 9-15] What options do holders of variable annuities have upon retirement?

A) Maintain the annuity as a basic 401(k).

B) Withdraw a lump sum.

C) Convert to a basic annuity.

D) None of the above.

A) Maintain the annuity as a basic 401(k).

B) Withdraw a lump sum.

C) Convert to a basic annuity.

[Topic 9-36] (Exactly One Correct Answer) The largest financial obligation Detroit had which contributed to its bankruptcy was:

A) Pension and healthcare payment obligations to government employees including future liabilities.

B) Interest payments to bondholders for municipal bonds issued by the city.

C) A declining auto industry.

D) Public utilities such as water and sewer.

A) Pension and healthcare payment obligations to government employees including future liabilities.

[Topic 9-9] What are some characteristics of systematic risks?

A) They often involve contagion effects, leading to systemic risk.

B) They can lead to widespread economic downturns.

C) They are easily mitigated through diversification.

D) They are specific to some companies in an industry.

E) None of the above.

A) They often involve contagion effects, leading to systemic risk.

B) They can lead to widespread economic downturns.