PSI Life Exam Practice Test

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In which fixed annuity feature is the surrender value linked to interest rates?

Guaranteed minimum withdrawal
Market value adjustments
Flexible premium payments
Lifetime income options

The correct answer is: Market value adjustments

The feature where the surrender value of a fixed annuity is linked to interest rates is known as market value adjustments. This type of adjustment is applied when a policyholder withdraws their funds or surrenders the annuity before its maturity or specified term. The market value adjustment takes into account current prevailing interest rates compared to the rates guaranteed in the annuity contract. When interest rates rise, the market value of the annuity typically decreases, leading to a lower surrender value. Conversely, if interest rates fall, the market value may increase, resulting in a higher surrender value. This mechanism protects the insurance company from the financial impact of policyholders withdrawing funds when interest rates shift unfavorably. The other options, while related to fixed annuities, do not involve a direct adjustment based on interest rates. Guaranteed minimum withdrawal refers to a feature that allows the policyholder to withdraw a specified amount regardless of the account's performance, while flexible premium payments pertain to the ability to vary the amount and timing of premium payments. Lifetime income options relate to how payments are structured during the payout phase but do not affect the surrender value.