CAS CAS Annuity Distribution and Payout Strategies 2

Question 1

A 1035 exchange allows an annuity owner to:

Accepted Answer

Transfer the cash value of one annuity to another annuity tax-free

Answer

Under IRC Section 1035, an annuity owner can transfer the value from one annuity contract to another annuity on a tax-free basis, allowing repositioning without triggering immediate income tax on accumulated gains.

Question 2

What is 'annuitization' in the context of annuity contracts?

Accepted Answer

Converting the contract's accumulated value into a stream of periodic income payments

Answer

Annuitization is the process of converting a deferred annuity's accumulated value into a series of regular income payments, based on the payout option selected, which may last for a lifetime or a defined period.

Question 3

The 'Last In, First Out' (LIFO) tax treatment for non-qualified annuity withdrawals means:

Accepted Answer

Withdrawals are considered to come from earnings first and are fully taxable until all gain is depleted

Answer

Under LIFO rules, withdrawals from a non-qualified deferred annuity are treated as coming from earnings (gain) first, making them fully taxable as ordinary income until the entire gain is withdrawn before basis is returned.

Question 4

What is the federal income tax penalty for withdrawing from a non-qualified annuity before age 59½?

Accepted Answer

10% penalty on the taxable (gain) portion of the withdrawal

Answer

Withdrawals from a non-qualified annuity before age 59½ are subject to a 10% federal tax penalty on the taxable (earnings) portion of the withdrawal, in addition to ordinary income tax on that amount.

Question 5

When a deferred annuity owner dies before annuitization, the 'five-year rule' for non-spouse beneficiaries requires that:

Accepted Answer

The entire death benefit must be distributed within five years of the owner's death

Answer

Under the five-year rule, a non-spouse beneficiary of a non-qualified deferred annuity must take the entire death benefit distribution within five years of the original owner's death.

(CAS) Certified Annuity Specialist Practice Test

(CAS) Certified Annuity Specialist Practice Test

CAS CAS Annuity Distribution and Payout Strategies 2