RAA Risk Assessment & Mitigation 2 — Questions and Answers
Question 1: A 70-year-old client with moderate risk tolerance wants guaranteed income but is concerned about inflation eroding purchasing power. Which annuity feature most directly addresses this specific risk?
- Guaranteed minimum withdrawal benefit
- Cost-of-living adjustment (COLA) rider (Correct answer)
- Return of premium death benefit
- Enhanced surrender charge waiver
Correct answer: Cost-of-living adjustment (COLA) rider
A COLA rider increases annuity payments annually by a fixed percentage or CPI index, directly offsetting inflation erosion of purchasing power.
Question 2: Which risk is MOST relevant when evaluating a fixed annuity issued by a relatively unknown insurance carrier offering above-market rates?
- Longevity risk
- Market risk
- Counterparty (credit) risk (Correct answer)
- Reinvestment risk
Correct answer: Counterparty (credit) risk
Unusually high rates from an unknown carrier signal potential financial instability, raising counterparty/credit risk that the insurer may not meet future obligations.
Question 3: A client surrenders a deferred annuity in year 3 of a 7-year surrender schedule. The surrender charge is 7% declining by 1% per year. What is the surrender charge rate applied?
- 5% (Correct answer)
- 4%
- 3%
- 7%
Correct answer: 5%
Starting at 7% and declining 1% per year, by year 3 the surrender charge is 7% − 2% = 5%.
Question 4: Which suitability factor is MOST critical when recommending a deferred annuity to a client who may need liquidity within two years?
- The client's investment knowledge
- The length of the surrender charge period (Correct answer)
- The insurer's AM Best rating
- The annuity's underlying fund options
Correct answer: The length of the surrender charge period
Surrender charge periods typically last 5–10 years, so a client needing funds within two years faces significant liquidity risk and penalty exposure.
Question 5: An advisor recommends a variable annuity with aggressive subaccounts to a conservative 68-year-old retiree seeking stable income. Which risk management failure does this best illustrate?
- Failure to disclose fees
- Misalignment between risk tolerance and product selection (Correct answer)
- Improper beneficiary designation
- Neglecting the insurer's financial strength rating
Correct answer: Misalignment between risk tolerance and product selection
Placing a conservative retiree in aggressive variable subaccounts exposes them to market volatility that conflicts with their stated risk tolerance and income stability goals.
Question 6: A client owns a fixed indexed annuity with a 50% participation rate and a 10% cap. The index gains 25% in a year. What is the client's credited rate?
- 25%
- 12.5%
- 10% (Correct answer)
- 5%
Correct answer: 10%
50% participation × 25% index gain = 12.5%, but the 10% cap limits the credited rate to 10%.
Question 7: Which risk mitigation strategy involves splitting annuity premiums across multiple carriers to reduce exposure to any single insurer's insolvency?
- Dollar-cost averaging
- Laddering
- Carrier diversification (Correct answer)
- Annuitization
Correct answer: Carrier diversification
Carrier diversification spreads premium across multiple insurers so that insolvency of one carrier does not expose the full premium to loss.
RAA Risk Assessment & Mitigation 2
A 70-year-old client with moderate risk tolerance wants guaranteed income but is concerned about inflation eroding purchasing power.
Which annuity feature most directly addresses this specific risk?