RAA Annuity Products & Structures 3 — Questions and Answers
Question 1: In a variable annuity, sub-accounts are most analogous to which investment vehicle?
- Certificates of deposit
- Mutual funds (Correct answer)
- Treasury bonds
- Money market deposit accounts
Correct answer: Mutual funds
Variable annuity sub-accounts function like mutual funds — they are pooled investment portfolios whose value fluctuates with market performance and which offer no guaranteed return.
Question 2: Which living benefit rider on a variable or indexed annuity guarantees that the income base used to calculate withdrawals grows at a specified rate regardless of actual account performance?
- Guaranteed Minimum Accumulation Benefit (GMAB)
- Guaranteed Minimum Income Benefit (GMIB)
- Guaranteed Minimum Withdrawal Benefit (GMWB) (Correct answer)
- Return of Premium rider
Correct answer: Guaranteed Minimum Withdrawal Benefit (GMWB)
A GMWB guarantees the owner can withdraw a specified percentage of the income base (which may step up or roll up) for life, even if the actual account value falls to zero.
Question 3: A 'period-certain only' payout option differs from a 'life with period certain' option in that it:
- Pays for the annuitant's lifetime plus a minimum guarantee period
- Pays only for a fixed number of years regardless of whether the annuitant is alive (Correct answer)
- Pays a joint survivor benefit to a spouse
- Ceases if the annuitant outlives the period
Correct answer: Pays only for a fixed number of years regardless of whether the annuitant is alive
A period-certain only annuity pays for a set number of years (e.g., 10 or 20) regardless of the annuitant's life status; if the annuitant dies early, payments continue to the beneficiary.
Question 4: Which annuity type is specifically designed to address longevity risk by beginning income payments far in the future, such as at age 80 or 85?
- Single premium immediate annuity (SPIA)
- Deferred income annuity (DIA) / longevity annuity (Correct answer)
- Fixed indexed annuity with income rider
- Multi-year guaranteed annuity (MYGA)
Correct answer: Deferred income annuity (DIA) / longevity annuity
A deferred income annuity (DIA), sometimes called a longevity annuity, is purchased today but defers income payments until a future date, providing insurance against outliving assets in advanced age.
Question 5: An annuity owner exchanges a non-qualified deferred annuity for a new annuity contract without triggering current income tax. This transaction is known as a:
- Rollover
- Section 1035 exchange (Correct answer)
- Constructive receipt transfer
- Cost-basis swap
Correct answer: Section 1035 exchange
IRC Section 1035 allows tax-free exchanges of life insurance policies, endowments, and annuity contracts for like-kind replacements, preserving the original cost basis in the new contract.
Question 6: Under IRS rules, non-qualified annuity withdrawals before age 59½ are generally subject to:
- A 5% penalty plus ordinary income tax on gains
- A 10% penalty plus ordinary income tax on gains (Correct answer)
- Ordinary income tax on the entire withdrawal with no penalty
- Capital gains tax on the gain portion only
Correct answer: A 10% penalty plus ordinary income tax on gains
Non-qualified annuity withdrawals before age 59½ are subject to a 10% early withdrawal penalty on the taxable (gain) portion, in addition to ordinary income tax on that gain.
Question 7: Which of the following is the primary distinguishing characteristic of a multi-year guaranteed annuity (MYGA)?
- It credits interest based on a stock market index for a fixed term
- It guarantees a fixed interest rate for a specified multi-year period, similar to a CD (Correct answer)
- It provides lifetime income beginning immediately upon purchase
- Its premiums are invested in variable sub-accounts for a multi-year period
Correct answer: It guarantees a fixed interest rate for a specified multi-year period, similar to a CD
A MYGA locks in a declared fixed interest rate for the entire guarantee period (commonly 3–10 years), functioning much like a bank CD but within a tax-deferred annuity wrapper.
RAA Annuity Products & Structures 3
In a variable annuity, sub-accounts are most analogous to which investment vehicle?