CRPC Annuities and Insurance Products in Retirement 1 — Questions and Answers
Question 1: What is the key distinction between a fixed annuity and a variable annuity?
- Fixed annuities are only available in qualified accounts
- Fixed annuities guarantee a minimum interest rate while variable annuities invest in market-linked subaccounts (Correct answer)
- Fixed annuities have no surrender charges
- Variable annuities cannot provide lifetime income
Correct answer: Fixed annuities guarantee a minimum interest rate while variable annuities invest in market-linked subaccounts
Fixed annuities credit a guaranteed minimum interest rate, whereas variable annuities allow investment in market-linked subaccounts with no return guarantee.
Question 2: What is the primary retirement planning benefit of a single premium immediate annuity (SPIA)?
- Tax-free investment growth
- Guaranteed lifetime income beginning within one year of purchase (Correct answer)
- Unrestricted access to the full account value
- No surrender charges on withdrawals
Correct answer: Guaranteed lifetime income beginning within one year of purchase
A SPIA converts a lump sum into guaranteed income payments that can begin within one month and continue for the annuitant's lifetime.
Question 3: What is a deferred income annuity (DIA)?
- An annuity that defers taxes on investment gains
- An annuity purchased today with income payments beginning at a specified future date (Correct answer)
- An annuity that defers surrender charges
- An annuity that delays required minimum distributions
Correct answer: An annuity purchased today with income payments beginning at a specified future date
A DIA (also called a longevity annuity) is funded with a lump sum today, with income payments starting at a future date—often an advanced age—to hedge against longevity risk.
Question 4: How does a fixed indexed annuity (FIA) credit interest?
- It directly participates in all stock index gains and losses
- It credits interest linked to an index subject to caps or participation rates while protecting principal from losses (Correct answer)
- It invests directly in index mutual fund subaccounts
- It pays a fixed percentage of the index's annual value
Correct answer: It credits interest linked to an index subject to caps or participation rates while protecting principal from losses
FIAs credit interest linked to an index such as the S&P 500, subject to caps or participation rates, while protecting the principal from negative index returns.
Question 5: What is the exclusion ratio used to calculate for a non-qualified immediate annuity?
- The tax-free portion of each payment as a return of after-tax cost basis (Correct answer)
- The percentage subject to the 10% early withdrawal penalty
- The ratio of earnings to principal in a deferred annuity
- The surrender value reduction percentage
Correct answer: The tax-free portion of each payment as a return of after-tax cost basis
The exclusion ratio determines what portion of each annuity payment is a tax-free return of the owner's after-tax cost basis.
Question 6: What is the 'free look' period for annuity contracts?
- A period during which the annuity earns a higher bonus interest rate
- A state-mandated period (typically 10–30 days) to cancel the contract for a full refund (Correct answer)
- A one-year period with no surrender charges
- A period during which all fees are waived
Correct answer: A state-mandated period (typically 10–30 days) to cancel the contract for a full refund
The free look period gives annuity buyers a window after purchase to review the contract and cancel for a full refund if it does not meet their needs.
CRPC Annuities and Insurance Products in Retirement 1
What is the key distinction between a fixed annuity and a variable annuity?