Annuity Products & Structures Flashcards

In a variable annuity, sub-accounts are most analogous to which investment vehicle?

Answer: Mutual funds

Variable annuity sub-accounts function like mutual funds — they are pooled investment portfolios whose value fluctuates with market performance and which offer no guaranteed return.

Which living benefit rider on a variable or indexed annuity guarantees that the income base used to calculate withdrawals grows at a specified rate regardless of actual account performance?

Answer: Guaranteed Minimum Withdrawal Benefit (GMWB)

A GMWB guarantees the owner can withdraw a specified percentage of the income base (which may step up or roll up) for life, even if the actual account value falls to zero.

A 'period-certain only' payout option differs from a 'life with period certain' option in that it:

Answer: Pays only for a fixed number of years regardless of whether the annuitant is alive

A period-certain only annuity pays for a set number of years (e.g., 10 or 20) regardless of the annuitant's life status; if the annuitant dies early, payments continue to the beneficiary.

Which annuity type is specifically designed to address longevity risk by beginning income payments far in the future, such as at age 80 or 85?

Answer: Deferred income annuity (DIA) / longevity annuity

A deferred income annuity (DIA), sometimes called a longevity annuity, is purchased today but defers income payments until a future date, providing insurance against outliving assets in advanced age.

An annuity owner exchanges a non-qualified deferred annuity for a new annuity contract without triggering current income tax. This transaction is known as a:

Answer: Section 1035 exchange

IRC Section 1035 allows tax-free exchanges of life insurance policies, endowments, and annuity contracts for like-kind replacements, preserving the original cost basis in the new contract.

Under IRS rules, non-qualified annuity withdrawals before age 59½ are generally subject to:

Answer: A 10% penalty plus ordinary income tax on gains

Non-qualified annuity withdrawals before age 59½ are subject to a 10% early withdrawal penalty on the taxable (gain) portion, in addition to ordinary income tax on that gain.

Which of the following is the primary distinguishing characteristic of a multi-year guaranteed annuity (MYGA)?

Answer: It guarantees a fixed interest rate for a specified multi-year period, similar to a CD

A MYGA locks in a declared fixed interest rate for the entire guarantee period (commonly 3–10 years), functioning much like a bank CD but within a tax-deferred annuity wrapper.