EXAMFX Annuity Concepts and Uses 3

Question 1

Under IRC Section 72, the exclusion ratio applied to annuity payments determines:

Accepted Answer

What portion of each payment represents a tax-free return of cost basis

Answer

The exclusion ratio divides the investment in the contract by the expected return, identifying the non-taxable portion of each payment.

Question 2

Which type of annuity is most appropriate for a retiree who wants guaranteed income but is concerned about outliving savings?

Accepted Answer

Immediate life annuity

Answer

An immediate life annuity begins income right away and continues for the annuitant's lifetime, directly addressing longevity risk.

Question 3

The 'free look' provision in an annuity contract allows the buyer to:

Accepted Answer

Surrender the contract for a full refund within a specified period after delivery

Answer

The free-look period, typically 10–30 days, lets the buyer cancel the contract and receive a full refund if not satisfied.

Question 4

When a non-qualified annuity is surrendered before age 59½ and the owner receives a taxable gain, the IRS imposes a:

Accepted Answer

10% premature distribution penalty in addition to ordinary income tax

Answer

Taxable distributions from non-qualified annuities before age 59½ are subject to a 10% early withdrawal penalty plus ordinary income tax on the gain.

Question 5

A joint and 100% survivor annuity option means:

Accepted Answer

The full payment amount continues to the surviving annuitant for life

Answer

With 100% joint and survivor, the surviving annuitant receives the same payment amount that was being paid when both were living.

(EXAMFX) Exam FX Insurance Practice Test