Life & Health Insurance Annuities and Retirement Plans Questions and Answers — Questions and Answers
Question 1: An individual is about to retire and wants to purchase an annuity that will provide a guaranteed income stream for them and their spouse for as long as either of them is alive. Which annuity payout option would be most suitable for this goal?
- Life with Period Certain
- Joint and Survivor (Correct answer)
- Fixed Period
- Life Only (Straight Life)
Correct answer: Joint and Survivor
A Joint and Survivor payout option is specifically designed to provide income payments for two or more people, typically a married couple. Payments continue as long as at least one of the annuitants is alive, making it the ideal choice to ensure income for a surviving spouse.
Question 2: In which type of annuity does the policyowner bear the investment risk, with the potential for higher returns but also the possibility of loss of principal?
- Fixed Annuity
- Equity-Indexed Annuity
- Variable Annuity (Correct answer)
- Single Premium Immediate Annuity (SPIA)
Correct answer: Variable Annuity
In a Variable Annuity, the contract's value fluctuates based on the performance of underlying investment sub-accounts chosen by the policyowner. This means the policyowner assumes the investment risk, facing potential losses in exchange for the possibility of higher returns compared to a fixed annuity.
Question 3: An employee leaves their job and receives a check for the entire balance of their 401(k). To avoid current taxation and penalties, what must they do?
- Deposit the funds into a new employer's 401(k) within 90 days.
- Complete a direct rollover to an IRA immediately.
- Deposit the full amount, including the 20% withheld, into a Rollover IRA within 60 days. (Correct answer)
- Pay income tax on the distribution and invest the remainder in a non-qualified annuity.
Correct answer: Deposit the full amount, including the 20% withheld, into a Rollover IRA within 60 days.
When an individual takes an indirect rollover (receiving a check), they have 60 days to deposit the funds into an eligible retirement account, like a Rollover IRA, to avoid it being treated as a taxable distribution. The original plan is required to withhold 20% for taxes, so the individual must use their own funds to make up that 20% to roll over the full amount and defer taxes on the entire balance.
Question 4: Which of the following statements correctly describes a key difference between a qualified and a non-qualified annuity?
- Qualified annuities are funded with after-tax dollars, and only the earnings are taxed upon withdrawal.
- Non-qualified annuities have IRS-imposed contribution limits, while qualified annuities do not.
- Qualified annuities are funded with pre-tax dollars, and the entire distribution is subject to ordinary income tax. (Correct answer)
- Withdrawals from non-qualified annuities before age 59 ½ are never subject to a 10% penalty.
Correct answer: Qualified annuities are funded with pre-tax dollars, and the entire distribution is subject to ordinary income tax.
Qualified annuities are used in tax-advantaged retirement plans (like a 401(k) or Traditional IRA) and are funded with pre-tax dollars. Because the contributions were not taxed initially, the entire amount withdrawn (both principal and earnings) is taxed as ordinary income.
Question 5: During which phase of a deferred annuity are premiums paid and the contract value grows on a tax-deferred basis?
- Payout Period
- Annuitization Period
- Liquidation Period
- Accumulation Period (Correct answer)
Correct answer: Accumulation Period
The Accumulation Period is the initial phase of a deferred annuity where the owner makes contributions (premiums) and the money grows with interest or investment gains. This growth is tax-deferred, meaning no taxes are paid on the earnings until they are withdrawn.
Question 6: A 45-year-old individual is covered by a retirement plan at work and has a high modified adjusted gross income (MAGI) that exceeds the limits for a deductible IRA contribution. They still want to save for retirement in an IRA. Which of the following is a permissible action?
- Make a fully deductible contribution to a Traditional IRA.
- Make a non-deductible contribution to a Traditional IRA. (Correct answer)
- Make a tax-deductible contribution to a Roth IRA.
- They are prohibited from contributing to any type of IRA.
Correct answer: Make a non-deductible contribution to a Traditional IRA.
While high income and coverage by an employer plan can limit or eliminate the ability to deduct Traditional IRA contributions, anyone with earned income can make non-deductible contributions to a Traditional IRA up to the annual limit. Roth IRA contributions also have income limitations.
Life & Health Insurance Annuities and Retirement Plans Questions and Answers
An individual is about to retire and wants to purchase an annuity that will provide a guaranteed income stream for them and their spouse for as long as either of them is alive.
Which annuity payout option would be most suitable for this goal?