RAA Risk Assessment & Mitigation 3 — Questions and Answers
Question 1: A client is concerned about the risk of outliving income if they live past age 90. Which annuity payout option is specifically designed to eliminate this concern?
- Period-certain annuity
- Life-only annuity (Correct answer)
- Installment refund annuity
- Joint and 50% survivor annuity
Correct answer: Life-only annuity
A life-only annuity provides guaranteed income for the annuitant's entire lifetime, no matter how long they live, directly mitigating longevity risk.
Question 2: Rising interest rates after a client locks into a fixed annuity represent which type of risk?
- Inflation risk
- Opportunity cost risk (Correct answer)
- Reinvestment risk
- Liquidity risk
Correct answer: Opportunity cost risk
When rates rise after locking in a fixed annuity, the client misses the opportunity to earn higher returns, representing opportunity cost (interest rate) risk.
Question 3: A client's fixed annuity credited rate is 3% while inflation runs at 4%. Over time, what is the PRIMARY risk the client faces?
- Sequence of returns risk
- Counterparty risk
- Purchasing power erosion (Correct answer)
- Mortality risk
Correct answer: Purchasing power erosion
When the credited rate trails inflation, the real value of annuity payments declines each year, eroding the client's purchasing power.
Question 4: Which annuity rider is specifically designed to protect a client's income base from stock market downturns in a variable annuity?
- Guaranteed minimum income benefit (GMIB) (Correct answer)
- Enhanced death benefit rider
- Return of premium rider
- Nursing home waiver
Correct answer: Guaranteed minimum income benefit (GMIB)
A GMIB guarantees a minimum income base that grows at a set rate regardless of subaccount performance, protecting against market downturns reducing future income.
Question 5: A client asks how state guaranty associations protect annuity owners. What is the MOST accurate description of this protection?
- They provide unlimited protection for all annuity contracts
- They guarantee annuity values up to state-specified dollar limits if the insurer becomes insolvent (Correct answer)
- They are funded by the federal government through FDIC
- They protect only variable annuity subaccount values
Correct answer: They guarantee annuity values up to state-specified dollar limits if the insurer becomes insolvent
State guaranty associations cover annuity contract values up to statutory limits (commonly $250,000) in the event of insurer insolvency, with no federal backing.
Question 6: A couple aged 65 and 62 wants income that continues as long as either spouse is alive. Which annuity option is MOST appropriate?
- Single life annuity with 10-year certain
- Joint and survivor annuity (Correct answer)
- Period-certain annuity
- Straight life annuity on the older spouse
Correct answer: Joint and survivor annuity
A joint and survivor annuity continues payments for the lifetimes of both covered lives, ensuring income persists even after the first spouse dies.
Question 7: Which risk assessment step involves reviewing a client's existing insurance policies, pensions, and Social Security before recommending an annuity?
- Net worth calculation
- Needs analysis / income gap analysis (Correct answer)
- Tax bracket analysis
- Risk capacity scoring
Correct answer: Needs analysis / income gap analysis
An income gap analysis inventories all guaranteed income sources to determine how much additional guaranteed income an annuity needs to provide.
RAA Risk Assessment & Mitigation 3
A client is concerned about the risk of outliving income if they live past age 90.
Which annuity payout option is specifically designed to eliminate this concern?