RAA Case Analysis & Practical Application 3 — Questions and Answers
Question 1: A 45-year-old high-income professional wants tax deferral beyond 401(k) limits. She already maxes her qualified plans. Which annuity feature is most relevant here?
- Non-qualified annuities offer unlimited contribution amounts with tax-deferred growth (Correct answer)
- Qualified annuities allow additional contributions above IRS limits
- Variable annuities eliminate income taxes on gains permanently
- Fixed annuities provide a tax deduction on premiums paid
Correct answer: Non-qualified annuities offer unlimited contribution amounts with tax-deferred growth
Non-qualified annuities have no IRS contribution limits, making them a useful tax-deferral vehicle once qualified plan limits are exhausted.
Question 2: A client owns a variable annuity with a guaranteed minimum withdrawal benefit (GMWB) rider. After a market downturn, her contract value falls to $0 but she has not exceeded her benefit base. What happens?
- The insurer continues paying the guaranteed withdrawal amount for life (Correct answer)
- Withdrawals stop because the contract value is depleted
- The client receives a lump-sum death benefit equal to the benefit base
- The rider automatically resets the contract value to the benefit base
Correct answer: The insurer continues paying the guaranteed withdrawal amount for life
A GMWB rider guarantees that the insurer will continue paying the contractually specified withdrawal amount even after the account value is fully depleted.
Question 3: An advisor recommends a B-share variable annuity with a 7-year surrender schedule to a 74-year-old client who may need liquidity within 3 years. This is most likely a violation of:
- FINRA suitability and Reg BI best interest standards (Correct answer)
- SEC registration requirements for the product
- State insurance premium tax rules
- IRS distribution rules for annuities
Correct answer: FINRA suitability and Reg BI best interest standards
Recommending a long surrender-charge product to an elderly client with near-term liquidity needs violates the best interest standard requiring advisors to match product features to client circumstances.
Question 4: A client holds a qualified longevity annuity contract (QLAC) inside her IRA. Which statement best describes a key advantage?
- QLAC premiums are excluded from RMD calculations, deferring income until age 85 (Correct answer)
- QLACs allow unlimited IRA contributions beyond annual limits
- QLAC distributions are tax-free like a Roth IRA
- QLACs eliminate the 10% early withdrawal penalty for IRA holders
Correct answer: QLAC premiums are excluded from RMD calculations, deferring income until age 85
QLACs allow up to the IRS-allowed premium to be excluded from RMD calculations, enabling the owner to defer that income stream until as late as age 85.
Question 5: Two clients both purchase $200,000 SPIAs at age 70. Client A chooses life only; Client B chooses life with 20-year certain. Which statement is accurate?
- Client A receives a higher monthly payment because there is no death benefit guarantee (Correct answer)
- Client B receives a higher monthly payment because of the additional guarantee period
- Both clients receive identical monthly payments
- Client A receives lower payments because single life is riskier for the insurer
Correct answer: Client A receives a higher monthly payment because there is no death benefit guarantee
Life-only payouts are higher because the insurer bears no obligation to pay beneficiaries; adding a period-certain guarantee reduces the monthly amount.
Question 6: A client wants to use her non-qualified annuity to fund long-term care expenses. Which relatively recent product innovation directly addresses this need?
- Hybrid annuity with a long-term care or chronic illness rider (Correct answer)
- Variable annuity with equity subaccounts
- Immediate annuity with life-only payout
- Fixed-rate deferred annuity with a return-of-premium guarantee
Correct answer: Hybrid annuity with a long-term care or chronic illness rider
Hybrid annuities combine traditional annuity accumulation with an LTC or chronic illness rider that multiplies the benefit when qualifying care is needed.
Question 7: A client's estate plan requires that annuity assets pass directly to heirs outside of probate. Which contract feature accomplishes this?
- A named beneficiary designation on the annuity contract (Correct answer)
- Placing the annuity inside a revocable living trust
- Electing a life-only payout option
- Choosing a fixed rather than variable annuity
Correct answer: A named beneficiary designation on the annuity contract
Annuity contracts with a named beneficiary transfer the death benefit directly to that beneficiary by contract, bypassing the probate process entirely.
RAA Case Analysis & Practical Application 3
A 45-year-old high-income professional wants tax deferral beyond 401(k) limits.
She already maxes her qualified plans.
Which annuity feature is most relevant here?