CAS CAS Annuity Distribution and Payout Strategies 1 — Questions and Answers
Question 1: What is the key difference between the 'accumulation phase' and the 'distribution phase' of an annuity?
- Premiums are paid during distribution and income is received during accumulation
- Money grows tax-deferred during accumulation and income payments are made during distribution (Correct answer)
- The distribution phase is only available in variable annuities
- Surrender charges apply only during the distribution phase
Correct answer: Money grows tax-deferred during accumulation and income payments are made during distribution
During the accumulation phase, premiums are deposited and grow tax-deferred; the distribution (payout) phase begins when the owner starts receiving income payments from the contract.
Question 2: Which annuity payout option provides the highest monthly income but offers no residual benefit to beneficiaries after the annuitant's death?
- Joint and 100% survivor
- Life only (straight life) (Correct answer)
- Life with 10-year period certain
- Installment refund
Correct answer: Life only (straight life)
A life-only (straight life) annuity provides the highest monthly payment because payments cease at the annuitant's death with nothing passing to beneficiaries, eliminating the cost of survivor benefits.
Question 3: What is a 'systematic withdrawal' strategy in the context of an annuity distribution?
- Annuitizing the contract for lifetime income
- Taking regular, predetermined withdrawals from the annuity over time without annuitizing (Correct answer)
- Using the GMWB rider to generate income
- Converting the deferred annuity to an immediate annuity
Correct answer: Taking regular, predetermined withdrawals from the annuity over time without annuitizing
A systematic withdrawal strategy involves taking periodic, scheduled withdrawals from a deferred annuity contract without formally annuitizing, allowing the remaining balance to continue growing tax-deferred.
Question 4: For a non-qualified annuity, the exclusion ratio is used to determine:
- How much of each payment is taxable as ordinary income vs. tax-free return of basis (Correct answer)
- The percentage of funds excluded from Required Minimum Distribution rules
- The portion of the contract value excluded from estate taxes
- How much can be withdrawn annually tax-free
Correct answer: How much of each payment is taxable as ordinary income vs. tax-free return of basis
The exclusion ratio for a non-qualified annuity divides the investment in the contract (basis) by the expected return, determining what fraction of each annuity payment represents a tax-free return of after-tax premiums and what fraction is taxable income.
Question 5: Required Minimum Distributions (RMDs) generally apply to which type of annuity?
- Non-qualified deferred annuities
- Qualified annuities held inside IRAs or employer retirement plans (Correct answer)
- Immediate income annuities funded with after-tax dollars
- All fixed annuities regardless of tax status
Correct answer: Qualified annuities held inside IRAs or employer retirement plans
RMDs apply to qualified annuities (those held inside IRAs or employer-sponsored retirement plans) because these accounts are funded with pre-tax dollars subject to IRS distribution requirements starting at age 73.
Question 6: Which distribution option would best suit a client who needs lifetime income but also wants to ensure at least their full premium is returned to heirs if they die early?
- Life only annuity
- Life with installment refund (Correct answer)
- Period certain only annuity
- Joint and 50% survivor annuity
Correct answer: Life with installment refund
A life with installment refund option guarantees lifetime income and also ensures that if the annuitant dies before receiving payments equal to the total premium, the remaining balance is paid out to beneficiaries in installments.
CAS CAS Annuity Distribution and Payout Strategies 1
What is the key difference between the 'accumulation phase' and the 'distribution phase' of an annuity?