South Carolina Life Insurance Practice Exam

What determines the amount of an annuity premium?

1. The age of the annuitant

2. The payment frequency

3. The cost of living adjustments

4. The total number of payments purchased

The correct answer is: The total number of payments purchased

The amount of an annuity premium is primarily determined by the total number of payments purchased. This is because the premium reflects the total amount the annuitant is willing to invest to receive a series of payments in the future. When purchasing an annuity, individuals choose how many payment periods they are interested in, which can significantly impact the total premium required. A higher number of payments generally means a larger total premium because the insurer will need to provide income for a longer duration. Other factors, such as the age of the annuitant and payment frequency, do influence the calculation of the annuity and the specific terms of the contract, but they don't directly determine the total premium amount. For example, younger individuals might pay a lower premium due to a longer life expectancy, but the actual premium is still based on the total number of payments they decide to purchase. Adjustments for cost of living may also affect the periodic payments but do not impact the upfront premium amount for the number of payments.