RAA Risk Assessment & Mitigation 2

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?

Accepted Answer

Cost-of-living adjustment (COLA) rider

Answer

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?

Accepted Answer

Counterparty (credit) risk

Answer

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?

Accepted Answer

5%

Answer

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?

Accepted Answer

The length of the surrender charge period

Answer

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?

Accepted Answer

Misalignment between risk tolerance and product selection

Answer

Placing a conservative retiree in aggressive variable subaccounts exposes them to market volatility that conflicts with their stated risk tolerance and income stability goals.

(RAA) Registered Annuity Advisor Practice Test

(RAA) Registered Annuity Advisor Practice Test

RAA Risk Assessment & Mitigation 2