Case Analysis & Practical Application Flashcards

A client approaches you after receiving a notice that her annuity carrier's financial strength rating was downgraded to 'B'. What is the most prudent immediate action?

Answer: Review the state guaranty association coverage limits and evaluate a 1035 exchange to a higher-rated carrier

State guaranty associations provide limited protection (typically $250,000), so checking coverage and potentially exchanging to a stronger carrier via 1035 is the prudent step.

A couple, ages 67 and 72, has $800,000 and wants guaranteed income for life while preserving some assets for heirs. Which strategy best balances both goals?

Answer: Allocate a portion to a joint-life SPIA for income and retain the remainder in a deferred annuity or investment account for legacy

Splitting assets between an income annuity for longevity protection and a separate accumulation vehicle preserves legacy potential while guaranteeing core living expenses.

A client rolled $300,000 from a 401(k) into a variable annuity IRA. His advisor charges a 1% advisory fee on top of the annuity's 1.5% M&E expense. What is the most accurate concern?

Answer: Layering advisory fees on an annuity already charging M&E creates redundant cost drag that may be difficult to justify under Reg BI

Reg BI requires advisors to demonstrate that the total cost is in the client's best interest; stacking an advisory fee on top of annuity expenses can be difficult to justify without clear additional value.

A 63-year-old client wants to start 72(t) SEPP distributions from his IRA annuity to avoid the early withdrawal penalty. Which statement is correct?

Answer: He must take substantially equal periodic payments for at least 5 years or until age 59½, whichever is later

Under IRC 72(t), SEPP distributions must continue for the longer of 5 years or until the owner reaches 59½; modifying the schedule before that point triggers back penalties and interest.

A client owns a fixed annuity with a market value adjustment (MVA) feature and wants to surrender it after two years when interest rates have risen 200 basis points. What happens?

Answer: The MVA reduces the surrender value because rising rates lower the market value of the insurer's bond portfolio

An MVA adjusts surrender values to reflect current interest rate conditions; when rates rise, the MVA is negative, reducing the amount the policyholder receives upon early surrender.

An 80-year-old client wants to gift her $150,000 deferred annuity to her adult son. What is the immediate tax consequence of this gratuitous transfer?

Answer: The client must recognize all deferred gain as ordinary income in the year of the gift

IRC Section 72(e)(4)(C) treats gratuitous transfers of non-qualified annuities as deemed distributions, triggering immediate recognition of all deferred gain by the donor.

A prospect compares two deferred annuity contracts: one from a stock insurer and one from a mutual insurer. He asks whether the ownership structure affects contract safety. What is the most accurate response?

Answer: Both structures can be financially sound; safety depends on the insurer's financial strength ratings and reserves, not its ownership form

Whether an insurer is stock or mutual does not determine safety; independent financial strength ratings from agencies like A.M. Best are the proper measure of claims-paying ability.