Annuities and Insurance Products in Retirement Flashcards

A retiree wants guaranteed lifetime income but also desires the ability to leave a death benefit to heirs. Which annuity feature best addresses both goals?

Answer: Life with period-certain option

A life with period-certain annuitization option provides lifetime income while guaranteeing payments for a minimum period, ensuring heirs receive the remaining benefit if the annuitant dies early.

Under IRC Section 72, what portion of each annuity payment is considered the 'exclusion ratio'?

Answer: The ratio of investment in the contract to expected return

The exclusion ratio equals the investment in the contract divided by the expected return, determining the tax-free portion of each annuity payment.

A 70-year-old client purchases a deferred income annuity (DIA) that will begin payments at age 85. What is the primary risk this product is designed to hedge against?

Answer: Longevity risk

DIAs are specifically designed to hedge longevity risk by providing guaranteed income if the annuitant lives well beyond average life expectancy.

Which provision in a variable annuity allows the contract owner to withdraw up to 10% annually without incurring surrender charges?

Answer: Free withdrawal allowance

Most variable annuities include a free withdrawal allowance permitting annual withdrawals of up to 10% of the account value without surrender charges.

A client holds a non-qualified annuity with a $50,000 cost basis and $90,000 current value. If they take a $15,000 partial withdrawal, how much is taxable under LIFO rules?

Answer: $15,000 — all earnings are withdrawn first

Non-qualified annuity withdrawals follow LIFO (last in, first out) taxation, meaning earnings of $40,000 must be fully withdrawn before any tax-free basis recovery occurs.

What distinguishes a GMWB (Guaranteed Minimum Withdrawal Benefit) rider from a GMIB (Guaranteed Minimum Income Benefit) rider on a variable annuity?

Answer: GMIB requires annuitization; GMWB allows withdrawals without annuitization

A GMIB requires the owner to annuitize to access the guaranteed benefit, while a GMWB provides guaranteed annual withdrawals without requiring annuitization.

When a long-term care insurance policy uses an 'inflation protection' rider based on 5% compound growth, what does this mean for the daily benefit?

Answer: The daily benefit compounds at 5% annually, accelerating over time

Compound inflation protection increases the daily benefit by 5% of the prior year's benefit amount, causing accelerating growth that better tracks actual long-term care cost inflation.