CRPC Annuities and Insurance Products in Retirement 5 — Questions and Answers
Question 1: A married couple uses a 'joint and 100% survivor' annuity payout option. How does this compare to a 'joint and 50% survivor' option at inception?
- Both options provide identical initial payments
- The 100% survivor option provides higher initial payments
- The 100% survivor option provides lower initial payments (Correct answer)
- The 50% survivor option terminates when the first spouse dies
Correct answer: The 100% survivor option provides lower initial payments
A joint and 100% survivor option provides lower initial monthly payments than a joint and 50% survivor option because the insurer must fund full payments for both lifetimes.
Question 2: A fixed indexed annuity (FIA) credits interest based on an index with a 'participation rate' of 70% and no cap. If the index returns 10%, what is the credited rate?
- 10%
- 7% (Correct answer)
- 3%
- 0%
Correct answer: 7%
With a 70% participation rate and no cap, the FIA credits 70% of the 10% index gain, resulting in a 7% credited interest rate.
Question 3: Under HIPAA, a long-term care insurance policy qualifies as a 'tax-qualified' contract if it meets which of the following requirements?
- It must cover only nursing home care
- Benefits must trigger based solely on cognitive impairment
- It must require inability to perform at least 2 of 6 ADLs or cognitive impairment (Correct answer)
- Premiums must be paid by the employer
Correct answer: It must require inability to perform at least 2 of 6 ADLs or cognitive impairment
HIPAA requires tax-qualified LTC policies to trigger benefits when the insured cannot perform at least 2 of 6 activities of daily living (ADLs) or has severe cognitive impairment.
Question 4: Which type of life insurance is most commonly used in a retirement income plan to provide both a death benefit and a tax-advantaged accumulation vehicle?
- Term life insurance
- Group life insurance
- Permanent cash value life insurance (Correct answer)
- Credit life insurance
Correct answer: Permanent cash value life insurance
Permanent cash value life insurance (whole, universal, or variable universal life) builds tax-deferred cash value that can supplement retirement income while maintaining a death benefit.
Question 5: A client exchanges an old annuity for a new one under a 1035 exchange. Which outcome correctly describes the tax treatment?
- All gains are immediately taxable at ordinary income rates
- The exchange is tax-free and the cost basis carries over to the new contract (Correct answer)
- The cost basis resets to the new contract's value
- A 10% early withdrawal penalty applies if the client is under 59½
Correct answer: The exchange is tax-free and the cost basis carries over to the new contract
A Section 1035 exchange allows a tax-free transfer between annuity contracts, with the original cost basis carrying over to the new contract.
Question 6: Which of the following best describes a 'hybrid' long-term care insurance product linked to a life insurance policy?
- A policy that covers only skilled nursing facility care
- A life insurance policy with an accelerated benefit rider for long-term care expenses (Correct answer)
- A standalone LTC policy sold alongside a life insurance policy
- A life insurance policy that converts to an annuity at age 65
Correct answer: A life insurance policy with an accelerated benefit rider for long-term care expenses
Hybrid LTC products are life insurance policies with an accelerated death benefit rider that allows the policyholder to use the death benefit to pay for qualifying long-term care expenses.
Question 7: A retiree's immediate annuity payments exceed the exclusion ratio calculation over time. What happens after the 'expected return' is fully recovered?
- Payments become tax-free for the remainder of the annuitant's life
- All subsequent payments are fully taxable as ordinary income (Correct answer)
- The annuitant must stop receiving payments
- A flat 20% tax applies to all future payments
Correct answer: All subsequent payments are fully taxable as ordinary income
Once the investment in the contract is fully recovered through the exclusion ratio, 100% of all subsequent annuity payments are taxable as ordinary income.
CRPC Annuities and Insurance Products in Retirement 5
A married couple uses a 'joint and 100% survivor' annuity payout option.
How does this compare to a 'joint and 50% survivor' option at inception?