Life & Health Insurance Exam Life & Health Insurance Annuities and Retirement Plans 3 — Questions and Answers
Question 1: What is the IRS penalty for taking a distribution from a qualified retirement plan before age 59½, absent an exception?
- 5%
- 10% (Correct answer)
- 15%
- 20%
Correct answer: 10%
The IRS imposes a 10% early withdrawal penalty on distributions from qualified plans before age 59½, in addition to ordinary income tax.
Question 2: Which type of annuity credits interest based on the performance of an external market index, with a floor protecting against loss?
- Fixed annuity
- Variable annuity
- Indexed annuity (Correct answer)
- Immediate annuity
Correct answer: Indexed annuity
Fixed indexed annuities link credited interest to an external index like the S&P 500 while guaranteeing the principal will not decline due to index losses.
Question 3: What is the required beginning date for taking required minimum distributions (RMDs) from a traditional IRA under current law?
- April 1 of the year following the year the owner turns 70½
- April 1 of the year following the year the owner turns 73 (Correct answer)
- December 31 of the year the owner turns 72
- January 1 of the year the owner turns 70
Correct answer: April 1 of the year following the year the owner turns 73
Under the SECURE 2.0 Act, RMDs must begin by April 1 of the year following the year the IRA owner turns 73.
Question 4: A deferred annuity in its accumulation phase is best described as:
- Making immediate monthly payments to the annuitant
- Building up value before income payments begin (Correct answer)
- Paying a death benefit only upon the annuitant's death
- Distributing funds in a lump sum at contract issue
Correct answer: Building up value before income payments begin
During the accumulation phase of a deferred annuity, premium payments and earnings accumulate on a tax-deferred basis before income payments commence.
Question 5: Which retirement plan type allows employees to make pre-tax salary deferral contributions and is commonly offered by private sector employers?
- 457(b)
- 403(b)
- 401(k) (Correct answer)
- SIMPLE IRA
Correct answer: 401(k)
The 401(k) plan is the most common employer-sponsored retirement plan in the private sector, allowing employees to defer pre-tax salary into the plan.
Question 6: What does the exclusion ratio determine in a non-qualified annuity?
- The surrender charge applicable to early withdrawals
- The portion of each annuity payment that is tax-free return of basis (Correct answer)
- The maximum annual contribution allowed
- The death benefit payable to beneficiaries
Correct answer: The portion of each annuity payment that is tax-free return of basis
The exclusion ratio identifies what percentage of each annuity payment represents a tax-free return of the owner's after-tax investment (cost basis).
Question 7: An annuity owner dies during the accumulation phase. Which provision ensures the beneficiary receives at least the total premiums paid?
- Waiver of premium rider
- Minimum death benefit guarantee (Correct answer)
- Period certain option
- Cost of living adjustment rider
Correct answer: Minimum death benefit guarantee
Most deferred annuities include a minimum death benefit guarantee ensuring the beneficiary receives at least the total premiums paid, even if the account value is lower.
Life & Health Insurance Exam Life & Health Insurance Annuities and Retirement Plans 3
What is the IRS penalty for taking a distribution from a qualified retirement plan before age 59½, absent an exception?