Annuities and Retirement Planning Flashcards
6 cards from real CLU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Annuities and Retirement Planning flashcards as text
What is the primary purpose of an annuity in the context of retirement planning?
Answer: To convert accumulated assets into a guaranteed stream of income
An annuity's core function is to liquidate a principal sum into periodic income payments, providing protection against outliving one's assets (longevity risk).
Which phase of an annuity contract is characterized by the owner making premium payments and the contract value growing tax-deferred?
Answer: Accumulation phase
During the accumulation phase, the contract owner pays premiums and the account value grows on a tax-deferred basis until the annuity is annuitized or surrendered.
Under the annuity exclusion ratio, what portion of each annuity payment received is excludable from gross income?
Answer: A proportionate amount representing the after-tax investment in the contract
The exclusion ratio (investment in contract ÷ expected return) determines the nontaxable portion of each payment, representing the pro-rata recovery of the owner's after-tax cost basis.
What is a 'straight life annuity' payout option?
Answer: Payments for the annuitant's lifetime with no refund at death
A straight life (life-only) annuity pays income for the annuitant's entire lifetime but ceases at death with no remaining benefit to heirs, providing the highest per-payment amount.
How are withdrawals from a nonqualified deferred annuity taxed prior to annuitization?
Answer: Last-in, first-out (LIFO) — gain withdrawn first, then cost basis
Under IRC Section 72(e), pre-annuitization withdrawals from nonqualified deferred annuities are taxed LIFO — gain is deemed distributed first, making withdrawals fully taxable until all gain is exhausted.
Which annuity type credits interest based on the performance of an external market index while protecting against negative index returns?
Answer: Fixed indexed annuity
A fixed indexed annuity (FIA) links interest crediting to an external index like the S&P 500 but includes a floor (usually 0%) that prevents negative returns, offering upside potential with downside protection.