DC DC Annuities and Retirement Insurance Products 2 — Questions and Answers
Question 1: A DC equity-indexed annuity (EIA) credits interest based on:
- A fixed rate set at policy issue that never changes
- The performance of a specified market index, subject to a cap, floor, or participation rate (Correct answer)
- The insurance company's general account investment returns
- Random actuarial tables set each year by the insurer
Correct answer: The performance of a specified market index, subject to a cap, floor, or participation rate
Equity-indexed annuities credit interest linked to an external index (such as the S&P 500) but typically cap the upside and protect against negative returns via a floor.
Question 2: The 'accumulation phase' of a DC deferred annuity refers to:
- The period during which the annuitant receives income payments
- The period during which premiums are paid and interest or investment gains accumulate on a tax-deferred basis (Correct answer)
- The one-year period after the annuity is issued before surrender charges begin
- The period during which the insurer calculates the annuity's mortality tables
Correct answer: The period during which premiums are paid and interest or investment gains accumulate on a tax-deferred basis
During the accumulation phase, premiums are deposited and earnings grow tax-deferred until the contract owner decides to annuitize or take withdrawals.
Question 3: A DC annuity owner who withdraws funds during the surrender charge period will likely:
- Receive a bonus from the insurer for the early withdrawal
- Pay a surrender charge that reduces the amount received (Correct answer)
- Be required to reinvest the funds in a new annuity
- Receive the full account value with no penalty
Correct answer: Pay a surrender charge that reduces the amount received
Surrender charges are deducted from withdrawals made during the surrender period (typically 5–10 years) to compensate the insurer for early termination of the contract.
Question 4: Under DC tax rules, annuity earnings grow on a tax-deferred basis until withdrawn or distributed. When funds are withdrawn, they are generally taxed as:
- Capital gains at the preferential long-term rate
- Ordinary income (Correct answer)
- Tax-free income because annuities are insurance products
- DC local tax only, not federal income tax
Correct answer: Ordinary income
Annuity earnings are taxed as ordinary income when distributed because the IRS treats them as income, not as capital gains.
Question 5: A 'life with period certain' annuity settlement option in DC will:
- Pay income only for the annuitant's life with no minimum guarantee
- Pay income for the annuitant's life but guarantee payments for a minimum period even if the annuitant dies early (Correct answer)
- Pay the annuitant a lump sum at retirement
- Pay income only during a specified period, stopping at the annuitant's death
Correct answer: Pay income for the annuitant's life but guarantee payments for a minimum period even if the annuitant dies early
Life with period certain pays income for life but guarantees a minimum number of payments—if the annuitant dies before the period ends, payments continue to the beneficiary.
Question 6: In DC, an annuity owner who is under age 59½ and takes a taxable distribution from a non-qualified annuity may owe, in addition to income tax:
- A 10% federal early withdrawal penalty tax (Correct answer)
- A DC state excise tax of 5%
- An annuity surrender fee paid to the DC government
- No additional tax or penalty
Correct answer: A 10% federal early withdrawal penalty tax
The IRS imposes a 10% early withdrawal penalty on taxable distributions from non-qualified annuities taken before age 59½, in addition to ordinary income tax.
DC DC Annuities and Retirement Insurance Products 2
A DC equity-indexed annuity (EIA) credits interest based on: