CRPC Annuities and Insurance Products in Retirement 4 — Questions and Answers
Question 1: 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?
- Surrender charge waiver
- Life with period-certain option (Correct answer)
- Market value adjustment
- Bailout provision
Correct 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.
Question 2: Under IRC Section 72, what portion of each annuity payment is considered the 'exclusion ratio'?
- The entire payment amount
- Only the earnings portion
- The ratio of investment in the contract to expected return (Correct answer)
- The portion attributable to interest credits
Correct 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.
Question 3: 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?
- Sequence-of-returns risk
- Longevity risk (Correct answer)
- Inflation risk
- Credit risk
Correct answer: Longevity risk
DIAs are specifically designed to hedge longevity risk by providing guaranteed income if the annuitant lives well beyond average life expectancy.
Question 4: Which provision in a variable annuity allows the contract owner to withdraw up to 10% annually without incurring surrender charges?
- Free look provision
- Nursing home waiver
- Free withdrawal allowance (Correct answer)
- Annuitization credit
Correct 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.
Question 5: 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?
- $0 — basis is recovered first
- $15,000 — all earnings are withdrawn first (Correct answer)
- $8,333 — pro-rata between basis and gain
- $6,667 — only basis is returned
Correct answer: $15,000 — all earnings are withdrawn first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.
Question 6: What distinguishes a GMWB (Guaranteed Minimum Withdrawal Benefit) rider from a GMIB (Guaranteed Minimum Income Benefit) rider on a variable annuity?
- GMWB requires annuitization; GMIB does not
- GMIB requires annuitization; GMWB allows withdrawals without annuitization (Correct answer)
- GMWB guarantees a minimum account value; GMIB guarantees withdrawals
- Both riders function identically but differ in cost
Correct 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.
Question 7: 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?
- The daily benefit increases by a flat $5 each year
- The daily benefit doubles every 5 years regardless of starting amount
- The daily benefit grows by 5% of the original amount annually
- The daily benefit compounds at 5% annually, accelerating over time (Correct answer)
Correct 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.
CRPC Annuities and Insurance Products in Retirement 4
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?