1
Q
- An advisor selling an annuity should only be licensed in the state where his or her office is located.
A
False. The advisor should have a nonresident license in states where clients reside. (LO 10-1-1)
2
Q
- Most states have not adopted regulations based on the National Association of Insurance Commissioners (NAIC) model regulations concerning annuity suitability
A
False. Forty-eight states and DC have adopted either the model regulations or modified regulations. (LO 10-1-1)
3
Q
- An advisor should not inquire into a client’s age or intended use of the annuity because this information is sensitive
A
False. There is an exemption from the suitability requirements if the client refuses to provide this information. (LO 10-1-1)
4
Q
- One concern for an older client purchasing a deferred annuity is diminished capacity
A
True. The main concern is diminished capacity. (LO 10-1-1)
5
Q
- Regulators are concerned with deferred annuities that have a surrender charge period that exceeds a client’s life expectancy.
A
True. (LO 10-1-1)
6
Q
- While annuity contracts can be difficult for clients to understand, it is not the insurance producer’s job to ensure that clients understand all the key features of a deferred annuity
A
False. Producers are required to make sure clients understand the products they are purchasing. (LO 10-1-1)
7
Q
- A purchase or exchange of an annuity can only be recommended to a consumer by a producer if the annuity would benefit the consumer, regardless of its impact on the producer
A
True. The focus of an annuity should be on the consumer’s benefit and not the producer’s. (LO 10-1-1)
8
Q
- As the Neasham case demonstrated, suitability determinations regarding senior clients require an intensive inquiry into the client’s competency, understanding of the product, and liquidity needs
A
True. The Neasham case demonstrated concerns regarding the client’s competency, the producer’s potentially misleading advertisements, and that the client’s life expectancy was shorter than the surrender period. (LO 10-1-2)
9
Q
- The general rule is that a nonqualified annuity must be owned by a natural person in order to obtain the basic tax attributes of an annuity.
A
True. (LO 10-2-1)
10
Q
- The non-natural person rule that applies to annuities does not apply if the estate of the deceased contract owner becomes the beneficiary of the contract
A
True. (LO 10-2-1)
11
Q
- Annuities held in a qualified plan are subject to the non-natural person rule that applies to annuities
A
False. Annuities held in a qualified plan are exempt from the rule. (LO 10-2-1)
12
Q
- If a nonqualified annuity is held in trust, it is prudent to obtain legal advice about whether the annuity will be eligible for annuity tax treatment
A
True. (LO 10-2-1)
13
Q
- An annuity contract purchased in 2002 has a surrender value of $100,000 and cost basis of $50,000. If the owner gifts the policy to his daughter, there are no income tax consequences until distributions are made from the contract
A
False. This transaction is treated like a sale, and the owner incurs $50,000 of taxable income. (LO 10-2-1)
14
Q
- If a nonqualified annuity has not been annuitized by the contract owner or the death beneficiary, distributions to the beneficiary will be subject to LIFO tax treatment.
A
True. (LO 10-2-1)
15
Q
- If a nonqualified annuity has been annuitized by the contract owner, any remaining payments to the death beneficiary will be subject to LIFO tax treatment
A
False. In this case, the beneficiary uses the same exclusion ratio methodology as during the life of the contract owner. (LO 10-2-1)
16
Q
- A spouse who is the beneficiary of a nonqualified deferred annuity will have to begin required minimum distributions by the end of the year following death
A
False. A spousal beneficiary is not required to take withdrawals during his or her lifetime. (LO 10-2-1)
17
Q
- For a nonspousal beneficiary to stretch out payments of a nonqualified annuity, some insurance companies will require annuitization of the contract.
A
True. (LO 10-2-2)
18
Q
10.If John is the owner of the nonqualified annuity contract, his wife Sally is the annuitant and daughter Julie is the beneficiary, Sally inherits the annuity when John dies.
A
False. Julie, the beneficiary, inherits the annuity at the contract holder’s death. (LO 10-2-2)
19
Q
- A single premium immediate annuity (SPIA) provides a series of substantially equal periodic payments which cannot begin until at least 14 months after the initial premium deposit date
A
False. Payments for SPIAs must commence within 13 months of the initial premium deposit date. (LO 10-3-1)
20
Q
- A 50-year-old SPIA owner is not exempted from the 10 percent early withdrawal penalty tax.
A
False. SPIAs have a blanket exemption from the 10 percent early withdrawal penalty tax regardless of the contract owner’s age. (LO 10-3-1)
21
Q
- Lifetime income annuities provide insurance against the risk of outliving one’s money
A
True. Payments are made as along as the annuitant or one of the joint annuitants is still alive. (LO 10-3-1)
22
Q
- Because of the unique immediate payment nature of SPIAs, inflation protection is not available
A
False. Inflation riders are available for SPIAs and can be in the form of incremental annual increases in payments or even directly tied to the CPI index. (LO 10-3-1)
23
Q
- Unlike a bond ladder, no taxes are paid during the accumulation phase with a deferred income annuity
A
True. With a bond ladder, taxes are paid on earnings each year, while a deferred income annuity is only subject to taxes on its distributions. (LO 10-3-1)
24
Q
- Lower interest rates do not lower the available payout rates of income annuities.
A
False. Lower interest rates do lower the payout rates. While most of the payout is related to the principle and the mortality pool, some of the return is due to interest rates. (LO 10-3-1)
25
7. SPIAs are taxed according to exclusion ratio rules and not first-in last-out tax treatment
True. Deferred annuities are subject to FIFO tax treatment while income annuities are subject to exclusion ratio rules. (LO 10-3-1)
26
8. Deferred income annuities allow one to project with certainty the current cost of providing a specified income
True. One benefit of DIAs is that concrete answers can be provided to clients of whether their assets can meet their income needs. (LO 10-3-2)
27
9. While DIAs were widely used in the past, the current trend has been a move towards less acceptance and awareness.
False. DIAs have been gaining more acceptance by consumers, advisors and government regulators as awareness of their existence grows. (LO 10-3-2)
28
10.DIAs are identical to SPIAs in that they are both eligible for a total exemption from the 10 percent early withdrawal penalty tax.
False. DIAs are not subject to the exemption. (LO 10-3-2)
29
11.The internal rate of return for a term certain annuity cannot be calculated with any degree of accuracy.
False. A term certain annuity’s internal rate of return can be calculated because the relevant factors are known. (LO 10-3-2)
30
12.In addition to providing flexible start dates and distribution options, DIAs can include inflation and liquidity protections for the contract owner
True. DIAs give the advisor full control over the start date, distributions options, liquidity options, and some liquidity protections for the contract owner. (LO 10-3-2)
31
13.Annuity return rates are more comparable to returns on equities when the equities’ nominal rates of return are adjusted for fees, inflation, and taxes.
True. The IRR for income annuities compare favorably with adjusted rates of return for equities. (LO 10-3-2)
32
14.A guaranteed minimum accumulation benefit rider promises a guaranteed amount on a specified date that can be cashed out as a single sum.
True. (LO 10-3-3)
33
15.Guaranteed minimum income benefit riders are the most common type of benefit riders for deferred variable annuities
False. Withdrawal benefit riders are the most common type and guaranteed minimum accumulation benefit riders are no longer widely available. (LO 10-3-3)
34
16.A rollup rate for a GLWB rider is the same thing as a rate of return.
False. A rollup rate is more similar to a phantom growth rate of return for the initial account balance. (LO 10-3-3)
35
17.When determining a GLWB withdrawal benefit, bonuses are added to the initial phantom income account
True. If a contract includes an initial bonus, it is added to the initial phantom account balance for purposes of determining the withdrawal benefit. (LO 10-3-3)
36
18.Fees can apply against the phantom account as well as the real account
True. Fees can be applied against both accounts so it is important for advisors to look into where fees apply. (LO 10-3-3)
37
19.A deferred variable annuity with a GLWB rider generally allows a contract owner to take withdrawals during the accumulation/deferral period without income benefits being reduced during the distribution period
False. Any amounts withdrawn during the accumulation period impacts and reduces the income benefits received during the distribution period. (LO 10-3-3)
38
20.A deferred variable annuity with GLWB rider can be a more cost efficient method of creating an income floor than a deferred income annuity approach for younger clients.
True. A GLWB rider approach can be a very effective method of creating an income floor for younger clients with a long life expectancy, with a long period of deferral, and a late in life withdrawal period. (LO 10-3-3)
39
21.A deferred variable annuity with a GLWB rider can also be used to provide downside protection for the growth portion of a portfolio and ability to change investments over time into other annuities without any short or long-term tax consequences
True. (LO 10-3-3)
40
22.When relying on a deferred variable annuity with a GLWB rider to provide a floor, distributions (other than under the rider) may reduce the floor amount provided under the rider
True. Withdrawals during the accumulation period will reduce the future payout and any withdrawals over the floor amount in the future will also reduce the amount available. (LO 10-3-3)
41
23.Multiyear fixed term deferred fixed annuities are an alternative for senior clients who traditionally invested in 3-7-year CDs
True. They can be a good alternative because they compete with CDs primarily based on rates of return and can provide good continuing floor rates. (LO 10-3-4)
42
24.Fixed indexed annuities generally provide both an upper level cap for gains and a lower level floor for losses but at the same time allowing some participation in the growth of market returns
True. Fixed indexed annuities allow owners to participate in some market returns but typically the principal is guaranteed. However, these products typically have an upper level cap and any growth over that cap goes to the insurance provider. (LO 10-3-4)
43
25.One downside to fixed deferred annuities is that they are not offered with guaranteed level withdrawal benefit (GLWB) riders
False. While the interest rate environment might make the fixed deferred annuities with GLWB riders not competitive, they are still offered and can create higher implied yields than other available options. (LO 10-3-4
44
26.A deferred fixed indexed annuity can have a negative interest crediting rate if the corresponding index suffers a loss
False. Fixed indexed annuities are unique in that the lowest possible credited interest rate is 0. (LO 10-3-5)
45
27.A limitation of a deferred fixed indexed annuity is that the terms of the contract will typically cap the potential gain
True. (LO 10-3-5)
46
28.A fixed indexed annuity based on changes in the Dow Jones Industrial Index is likely to perform better than investing directly in an indexed mutual fund invested in the Dow Jones Industrial Average during a down market
True. (LO 10-3-5)
47
29.Even a simple change in the start date of a deferred fixed indexed annuity can have a significant impact on how much interest is credited under the contract
True. (LO 10-3-5)
48
30.Minimum interest rates in a deferred fixed indexed annuity always apply to 100% of the initial premium amount
False. In many cases, the interest rate only applies to a percentage (for example 85%) of the initial premium. (LO 10-3-5)
49
31.Premium bonuses in deferred fixed indexed annuities usually have a recapture period if distributions begin too soon.
True. (LO 10-3-5)
50
32.About one-fourth of deferred fixed indexed annuities are sold with GLWB riders
False. About three-fourths of contracts are sold with GLWB riders. (LO 10-3-5)
51
33.Deferred fixed indexed annuities with GLWBs are often purchased primarily for the benefits of the withdrawal benefit rider
True. (LO 10-3-5)
52
34.A GLWB rider in a fixed indexed annuity with a lower interest crediting (roll-up) rate that is compounded may provide better results over time than a slightly higher rate that is credited with simple interest
True. (LO 10-3-5)
53
35.Payout percentages with a GLWB rider in a fixed indexed annuity will depend upon the owner’s age when payments begin and whether the payments are for a single or joint lifetime.
True. (LO 10-3-5)
54
36.Payout amounts with a GLWB rider in a fixed indexed annuity will increase ratably for each year of deferral
False. As the withdrawal rate typically changes in 5-year increments, waiting one year more has a lot more impact if it is at the end of the 5-year period and it jumps to the next withdrawal rate. (LO 10-3-5)
55
37.The cost of the GLWB rider in a fixed indexed annuity is a percentage of the income value but it is typically only deducted from the accumulation value
True. (LO 10-3-5)
56
1. A viable flooring option with annuities is combining term certain annuities with a deferred life annuity that begins payments at the end of the term certain annuities.
True. (LO 10-4-1)
57
2. One limitation of a life contingent deferred income annuity that begins well into the future is that you are locked into the strategy and lose flexibility.
True. (LO 10-4-1)
58
3. For some clients, it may make sense to consider income flooring as a fail-safe strategy if the market drops below a certain point
True. Note that is just one of several viable ways to look at reasons for income flooring. (LO 10-4-1)
59
4. Using a deferred income annuity allows you to know the cost of income with certainty and the ability to discount the cost if purchased well in advance of retirement
True. (LO 10-4-2)
60
5. For the client with a large tax-deferred account, limited nonqualified resources, and no tax exempt accounts, a term certain annuity in early retirement may be an effective way to get value from the limited nonqualified assets
True. (LO 10-4-2)
61
6. Stretching out the payment of income taxes under the exclusion ratio with a nonqualified income annuity may allow the client to be able to convert tax-deferred assets to a Roth IRA at a low tax rate
True. (LO 10-4-2)
62
7. A term certain income annuity may be a better option for a client with a short anticipated life expectancy.
True. (LO 10-4-2)
63
8. For a client in bad health, a medically underwritten life annuity is an option worth exploring.
True. (LO 10-4-3)
64
9. An advantage of a deferred income annuity (DIA) over a fixed indexed annuity (FIA) with a GLWB rider is the complete flexibility in the income start date
False. FIAs have more flexibility than DIAs. DIAs will have a set start date with an option to change that date a limited number of times (generally once). (LO 10-4-4)
65
10.With a FIA with an income rider, there is an available death benefit as long as there is an account value
True. (LO 10-4-4)
66
11.There are many more companies offering DIAs than FIAs.
False. The market for FIAs is more robust than the market for DIAs. (LO 10-4-4)
67
12.The FIA with a GLWB rider has more favorable tax treatment in a nonqualified environment than a DIA.
False. The opposite is true. A DIA is taxed using an exclusion ratio approach. With a FIA, the first withdrawals are treated as taxable earnings. (LO 10-4-4)
