CRPC Annuities and Insurance Products in Retirement 2 — Questions and Answers
Question 1: What does a guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity provide?
- A guarantee that the account value will never decline
- A guarantee of a minimum annual withdrawal percentage for life regardless of account performance (Correct answer)
- A waiver of surrender charges on all withdrawals
- A guaranteed minimum death benefit amount
Correct answer: A guarantee of a minimum annual withdrawal percentage for life regardless of account performance
A GMWB rider guarantees the contract owner can withdraw a specified percentage of the benefit base each year for life, even if the account value is fully depleted.
Question 2: What is the 'benefit base' in an annuity living benefit rider?
- The actual market value of the annuity account
- A notional value used to calculate guaranteed withdrawals, often growing at a set roll-up rate (Correct answer)
- The total premiums paid into the contract
- The current death benefit amount
Correct answer: A notional value used to calculate guaranteed withdrawals, often growing at a set roll-up rate
The benefit base is a separate notional account used only to calculate guaranteed withdrawal or income amounts, and may grow through roll-up credits even when the actual account value declines.
Question 3: Which annuity rider waives surrender charges if the owner is confined to a nursing home or hospital?
- Long-term care acceleration rider
- Confinement waiver rider (Correct answer)
- Disability income rider
- Return of premium rider
Correct answer: Confinement waiver rider
A confinement waiver rider suspends surrender charges if the annuity owner is confined to a nursing home or hospital for a qualifying period, providing liquidity during a health crisis.
Question 4: What is the typical surrender charge period for most deferred annuities?
- 1–2 years
- 5–10 years (Correct answer)
- 15–20 years
- No surrender charge period
Correct answer: 5–10 years
Most deferred annuities have surrender charge periods of 5–10 years, during which early withdrawals above free withdrawal allowances incur a declining surrender charge.
Question 5: Under LIFO (last in, first out) tax rules for non-qualified deferred annuities, how are withdrawals taxed?
- All withdrawals are tax-free until the cost basis is fully recovered
- Withdrawals are treated as earnings first and are fully taxable as ordinary income until earnings are depleted (Correct answer)
- Withdrawals are prorated between earnings and basis
- Withdrawals are subject to long-term capital gains rates
Correct answer: Withdrawals are treated as earnings first and are fully taxable as ordinary income until earnings are depleted
Under LIFO rules, withdrawals from non-qualified deferred annuities are treated as coming from earnings first, making them fully taxable as ordinary income until all earnings are distributed.
Question 6: What is a Section 1035 exchange in the context of annuities?
- A tax-free exchange of one annuity contract for another annuity contract (Correct answer)
- A taxable rollover from an annuity to a traditional IRA
- An exchange of a life insurance policy for a term policy
- A provision allowing annuity proceeds to be reinvested in stocks
Correct answer: A tax-free exchange of one annuity contract for another annuity contract
A Section 1035 exchange allows a tax-free transfer of an existing annuity into a new annuity contract, preserving the cost basis and deferring any accumulated gain.
CRPC Annuities and Insurance Products in Retirement 2
What does a guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity provide?