Practice Test Geeks(EXAMFX) Exam FX Insurance Practice Test
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Annuity Concepts and Uses Flashcards

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  1. Under IRC Section 72, the exclusion ratio applied to annuity payments determines:

    Answer: What portion of each payment represents a tax-free return of cost basis

    The exclusion ratio divides the investment in the contract by the expected return, identifying the non-taxable portion of each payment.

  2. Which type of annuity is most appropriate for a retiree who wants guaranteed income but is concerned about outliving savings?

    Answer: Immediate life annuity

    An immediate life annuity begins income right away and continues for the annuitant's lifetime, directly addressing longevity risk.

  3. The 'free look' provision in an annuity contract allows the buyer to:

    Answer: Surrender the contract for a full refund within a specified period after delivery

    The free-look period, typically 10–30 days, lets the buyer cancel the contract and receive a full refund if not satisfied.

  4. When a non-qualified annuity is surrendered before age 59½ and the owner receives a taxable gain, the IRS imposes a:

    Answer: 10% premature distribution penalty in addition to ordinary income tax

    Taxable distributions from non-qualified annuities before age 59½ are subject to a 10% early withdrawal penalty plus ordinary income tax on the gain.

  5. A joint and 100% survivor annuity option means:

    Answer: The full payment amount continues to the surviving annuitant for life

    With 100% joint and survivor, the surviving annuitant receives the same payment amount that was being paid when both were living.

  6. An annuity owner changes the contract's beneficiary. Who must approve this change?

    Answer: The owner alone, provided no irrevocable beneficiary is designated

    The owner controls beneficiary designations; no approval is needed unless an irrevocable beneficiary was previously named.

  7. Which feature distinguishes a variable annuity from a fixed annuity?

    Answer: The accumulation value in a variable annuity fluctuates based on subaccount performance

    Variable annuity values depend on the performance of chosen subaccounts, meaning the account value can rise or fall.