DC Annuities and Retirement Insurance Products Flashcards

A DC equity-indexed annuity (EIA) credits interest based on:

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.

The 'accumulation phase' of a DC deferred annuity refers to:

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.

A DC annuity owner who withdraws funds during the surrender charge period will likely:

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.

Under DC tax rules, annuity earnings grow on a tax-deferred basis until withdrawn or distributed. When funds are withdrawn, they are generally taxed as:

Answer: Ordinary income

Annuity earnings are taxed as ordinary income when distributed because the IRS treats them as income, not as capital gains.

A 'life with period certain' annuity settlement option in DC will:

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.

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:

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.