RAA Advanced Professional Practice 2 — Questions and Answers
Question 1: A client in a high tax bracket wants to maximize tax deferral in retirement. Which annuity strategy best addresses this goal?
- Purchase a qualified annuity inside a 401(k)
- Purchase a non-qualified deferred annuity with after-tax dollars (Correct answer)
- Purchase a SPIA for immediate income
- Use a fixed annuity with a short surrender period
Correct answer: Purchase a non-qualified deferred annuity with after-tax dollars
Non-qualified deferred annuities allow after-tax contributions to grow tax-deferred without IRS contribution limits, making them ideal for additional tax deferral beyond qualified plans.
Question 2: Under the NAIC Suitability in Annuity Transactions Model Regulation, which factor is NOT required to be documented in a suitability analysis?
- Client's financial situation
- Client's tax status
- Client's favorite financial institution (Correct answer)
- Client's investment objectives
Correct answer: Client's favorite financial institution
The NAIC model regulation requires documentation of financial situation, tax status, investment objectives, and other needs—a client's preferred institution is not a required suitability factor.
Question 3: A producer recommends replacing an existing annuity contract. Which document must be provided to the client in most states?
- A comparative information form (Correct answer)
- A 1099-R form
- A Schedule D worksheet
- A Form 5329
Correct answer: A comparative information form
Most states require a comparative information form (or replacement form) that discloses differences between the existing and proposed annuity so the client can make an informed decision.
Question 4: Which scenario best illustrates a potential churning violation in annuity sales?
- Recommending a higher-yield bond fund
- Replacing a fully-surrendered annuity with a new one to earn a fresh commission (Correct answer)
- Moving a client from a fixed to a variable annuity for better growth potential
- Suggesting a QLAC to reduce required minimum distributions
Correct answer: Replacing a fully-surrendered annuity with a new one to earn a fresh commission
Churning occurs when a producer replaces annuity contracts primarily to generate new commissions rather than to benefit the client.
Question 5: A client wishes to transfer an IRA annuity to a new annuity provider without triggering taxes. The appropriate mechanism is a:
- 1035 exchange
- Direct rollover
- Indirect rollover
- Trustee-to-trustee transfer (Correct answer)
Correct answer: Trustee-to-trustee transfer
A trustee-to-trustee transfer moves IRA assets directly between custodians without the client taking constructive receipt, avoiding taxes and the 60-day rollover rule.
Question 6: When is a Section 1035 exchange most advantageous for a client with a life insurance policy?
- When exchanging to a higher-premium policy
- When exchanging to an annuity to access cash value without immediate taxation (Correct answer)
- When the life insurance policy has a large outstanding loan
- When the client needs to increase the death benefit
Correct answer: When exchanging to an annuity to access cash value without immediate taxation
A 1035 exchange allows tax-free transfer of life insurance cash value into an annuity, deferring any gain that would otherwise be taxable upon surrender.
Question 7: A 78-year-old client is considering a deferred annuity with a 10-year surrender period. Which professional practice concern is most critical?
- The annuity's expense ratio
- Whether the surrender period extends beyond the client's reasonable life expectancy (Correct answer)
- The insurer's AM Best rating
- The state premium tax applicable to the purchase
Correct answer: Whether the surrender period extends beyond the client's reasonable life expectancy
Recommending a long surrender period to an elderly client raises significant suitability concerns since the client may need liquidity or die before surrenders charges expire.
RAA Advanced Professional Practice 2
A client in a high tax bracket wants to maximize tax deferral in retirement.
Which annuity strategy best addresses this goal?