PSI Life Exam Practice Test

Which statement regarding a group annuity is INCORRECT?

1. Each employee pays the same premium

2. Each employee signs and receives an individual contract

3. Payments are made to a single entity

4. Group annuities are typically less expensive

The correct answer is: Each employee signs and receives an individual contract

In the context of group annuities, it is important to understand how they are structured and how they operate. The statement that "each employee signs and receives an individual contract" is indeed incorrect. Group annuities are designed to cover a group of individuals, such as employees of a company, under a single contract issued to the employer or another entity. In this arrangement, individual employees do not receive separate contracts; instead, they participate in the overall group plan. This means that the employer or the sponsoring organization holds the single contract with the insurance company, and the terms of the annuity apply collectively to all participants. This structure makes group annuities more efficient and often reduces administrative costs, which is one of the reasons they can be less expensive overall compared to individual annuities. The other statements reflect accurate characteristics of group annuities: members may contribute the same premium, payments are typically directed to a single entity (the insurance company), and the collective nature of the plan usually results in lower costs.