Life & Health Insurance Exam Life & Health Insurance Annuities and Retirement Plans 5 — Questions and Answers
Question 1: What provision in a variable annuity guarantees that the annuity's income base will increase to a specified percentage each year, regardless of market performance?
- Enhanced death benefit rider
- Guaranteed minimum income benefit (GMIB) (Correct answer)
- Guaranteed minimum withdrawal benefit (GMWB)
- Guaranteed minimum accumulation benefit (GMAB)
Correct answer: Guaranteed minimum income benefit (GMIB)
A GMIB rider guarantees that the income base used to calculate future annuity payments will grow at a specified rate, providing a floor for future income regardless of market performance.
Question 2: If a participant takes a loan from their 401(k) and fails to repay it according to plan terms, what happens?
- The loan is forgiven and the balance is reduced
- The outstanding balance is treated as a taxable distribution subject to penalty (Correct answer)
- The participant is banned from future contributions
- The employer must make up the difference
Correct answer: The outstanding balance is treated as a taxable distribution subject to penalty
A defaulted 401(k) loan is treated as a deemed distribution, making the unpaid balance subject to ordinary income tax and the 10% early withdrawal penalty if under age 59½.
Question 3: Which annuity type is most appropriate for a retiree who wants to begin receiving income payments immediately after making a single premium payment?
- Deferred fixed annuity
- Variable deferred annuity
- Single premium immediate annuity (SPIA) (Correct answer)
- Flexible premium deferred annuity
Correct answer: Single premium immediate annuity (SPIA)
A single premium immediate annuity (SPIA) begins making income payments within one period (usually one month) after the single lump-sum premium is paid.
Question 4: What is the maximum annual contribution limit for a Health Savings Account (HSA) used in conjunction with a high-deductible health plan primarily for?
- Funding life insurance premiums
- Paying qualified medical expenses on a tax-advantaged basis (Correct answer)
- Supplementing Social Security income
- Purchasing annuity contracts
Correct answer: Paying qualified medical expenses on a tax-advantaged basis
HSAs allow individuals enrolled in high-deductible health plans to contribute pre-tax dollars specifically for qualified medical expenses, with triple tax advantages.
Question 5: A variable annuity's separate account is significant because it:
- Guarantees a fixed rate of return to the annuitant
- Is kept apart from the insurer's general assets, protecting it from insurer insolvency (Correct answer)
- Is managed exclusively by the state insurance department
- Provides FDIC insurance on the account balance
Correct answer: Is kept apart from the insurer's general assets, protecting it from insurer insolvency
The separate account is legally segregated from the insurance company's general account assets, meaning it cannot be used to satisfy the insurer's general creditors.
Question 6: Which of the following is true about a stretch IRA strategy?
- It allows a spouse to roll over an inherited IRA and defer distributions over their own lifetime (Correct answer)
- It permits any beneficiary to stretch distributions over their own lifetime indefinitely
- It eliminates all required minimum distributions for non-spouse beneficiaries
- It converts a traditional IRA to a Roth IRA over a 10-year period
Correct answer: It allows a spouse to roll over an inherited IRA and defer distributions over their own lifetime
A spousal rollover allows a surviving spouse to treat an inherited IRA as their own, deferring RMDs based on the spouse's own life expectancy — a true 'stretch' strategy still available post-SECURE Act.
Question 7: What does 'vesting' mean in the context of an employer-sponsored retirement plan?
- The employee's right to take a loan from the plan
- The employee's ownership rights in employer contributions over time (Correct answer)
- The process of converting traditional IRA funds to a Roth IRA
- The annual increase in the employee's salary deferral limit
Correct answer: The employee's ownership rights in employer contributions over time
Vesting refers to the schedule by which an employee earns non-forfeitable ownership rights to employer contributions made on their behalf.
Life & Health Insurance Exam Life & Health Insurance Annuities and Retirement Plans 5
What provision in a variable annuity guarantees that the annuity's income base will increase to a specified percentage each year, regardless of market performance?