17 Free Arizona Life & Health Practice Questions: Annuities; Federal Tax Considerations (2026)

Answer: D

D is correct because a life with period certain option guarantees payments for a minimum period (here, 10 years) regardless of the annuitant's survival. If the annuitant dies during the period certain, the beneficiary receives the remaining guaranteed payments. A is incorrect because the period certain guarantee overrides the life contingency. B is incorrect because annuitization converts the accumulated value into a stream of payments; the lump sum is no longer available. C is incorrect because the beneficiary receives payments, not a return of premiums.

Answer: D

D is correct. Withdrawals from a non-qualified deferred annuity before annuitization are taxed last-in, first-out: earnings are deemed withdrawn first and are ordinary income, and a 10% penalty applies to the taxable portion if the owner is under 59½. A describes the first-in, first-out treatment that applies to pre-1982 contracts and to withdrawals from non-MEC life insurance, not to annuities. B is wrong because LIFO applies before annuitization; after annuitization each payment is split by the exclusion ratio. C is wrong because there is no medical-expense exemption.

Answer: D

D is correct because equity indexed annuities are insurance products that provide a minimum guaranteed interest rate while offering potential returns based on the performance of a specified equity index, such as the S&P 500. A is incorrect because EIAs are not securities and are not registered with the SEC; they are regulated by state insurance departments. B is incorrect because the annuitant does not own the underlying stocks; returns are based on index performance. C is incorrect because EIAs are insurance products subject to state insurance regulation, not exempt from it.

Answer: D

D is correct because, like all annuities, variable annuities provide tax-deferred growth during the accumulation period. Earnings are not taxed until they are withdrawn or the contract is annuitized. A and B are incorrect because there is no annual taxation of growth inside the annuity. C is incorrect because annuity growth is tax-deferred, not tax-free, and holding period does not change the tax character upon withdrawal.

Answer: D

D is correct because life insurance dividends are considered a return of premium and are not taxable when received or left on deposit. However, any interest earned on those dividends while held with the insurer is taxable as ordinary income when credited or withdrawn. A is incorrect because the dividends themselves are not taxable. B is incorrect because the interest is taxable. C is incorrect because dividends are not taxed as capital gains.

Answer: A

A is correct because a joint and survivor annuity with a 50% survivor benefit means that upon the death of the primary annuitant, the survivor continues to receive 50% of the original payment amount for the remainder of their life. B is incorrect because payments do not stop; the survivor benefit ensures continuity. C is incorrect because the survivor benefit is 50%, not 100%. D is incorrect because there is no provision for increasing payments beyond the original amount in this option.

Answer: A

The exclusion ratio for a non-qualified immediate annuity is the percentage of each payment that is a return of principal and thus not taxable. It is calculated by dividing the investment in the contract (total premium paid) by the expected return (based on the annuitant's life expectancy using IRS actuarial tables). For a life annuity, life expectancy is indeed determined by IRS tables, making A correct. Option B is incorrect because it describes the inverse (expected return over investment). Option C is incorrect because the exclusion ratio is the non-taxable portion, not the taxable portion. Option D is incorrect because after the exclusion ratio is exhausted (i.e., after the investment is fully recovered), subsequent payments are fully taxable, but the exclusion ratio itself is not 'exhausted' in that way—it is a fixed percentage applied to each payment until the investment is recovered.

Answer: D

A Health Reimbursement Account (HRA) is an employer-funded account that reimburses employees for qualified medical expenses. Employees do not contribute to the HRA; it is funded solely by the employer. Unused funds at the end of the plan year typically revert to the employer and are not available for cash-out or rollover by the employee (unless the plan design allows rollover for future medical expenses, but cashing out is not permitted). The HRA does not need to be paired with an HDHP—this requirement applies only to Health Savings Accounts (HSAs). Therefore, option D is correct. Option A is incorrect because employees cannot contribute to an HRA. Option B is incorrect because unused funds cannot be cashed out. Option C is incorrect because an HRA does not require an HDHP.

Answer: D

A Qualified Longevity Annuity Contract (QLAC) is a type of deferred annuity that can be purchased with funds from a retirement account like an IRA or 401(k). One of the key features of a QLAC is that the amount used to purchase it is excluded from the account balance when calculating required minimum distributions (RMDs), allowing the owner to defer receiving payments until a later age (up to 85). This applies whether the funds come from a traditional or Roth IRA. Therefore, option D is correct. Option A is incorrect because distributions from a QLAC are taxable as ordinary income (they are not tax-free, even if funded by a Roth IRA—once distributed, they are treated as ordinary income). Option B is incorrect because while distributions are taxable as ordinary income, the key point is the RMD exemption, not the taxability. Option C is incorrect because the amount used to purchase the QLAC is excluded from RMD calculations, so it is not subject to RMD rules while the deferral period is in effect.

Answer: A

A is correct because HSA contributions are tax-deductible (or pre-tax if through payroll), earnings grow tax-deferred, and withdrawals for qualified medical expenses are tax-free. B is incorrect because contributions are not taxable income. C is incorrect because qualified medical expense withdrawals are tax-free. D is incorrect because contributions are tax-deductible and qualified withdrawals are tax-free.

Answer: D

D is correct because, upon the owner's death during the accumulation period, the death benefit received by the beneficiary is taxable as ordinary income only to the extent that it exceeds the total premiums paid (i.e., the gain). A is incorrect because the gain portion is taxable. B is incorrect because the 10% early withdrawal penalty does not apply to death benefits. C is incorrect because annuities use LIFO, not FIFO, for taxation of non-MEC contracts; however, the death benefit is taxed based on gain, not via LIFO/FIFO accounting at the time of death.

Answer: A

A is correct. Withdrawals from a modified endowment contract are taxed last-in, first-out: earnings are deemed to come out first. The gain in the contract is $70,000 - $50,000 = $20,000, so the whole $10,000 withdrawal is treated as earnings and is taxable as ordinary income, with a 10% penalty on the taxable amount if the owner is under 59½. B would be the result under the first-in, first-out treatment of a non-MEC policy, C has no basis, and D is the total gain rather than the amount withdrawn.

Answer: C

HSA distributions used to pay for qualified medical expenses are always tax-free and penalty-free, regardless of the account holder's age. This is a key advantage of HSAs. Option A is incorrect because non-medical distributions before age 65 are subject to ordinary income tax AND a 20% penalty (not tax-free). Option B is incorrect because qualified medical distributions are tax-free, not taxable. Option D is incorrect because after age 65, while non-medical distributions are taxable as ordinary income, there is no penalty; qualified medical distributions remain tax-free and penalty-free.

Answer: C

C is correct. A premium bonus is credited by the insurer to the contract's accumulation value, so $5,000 is added to the $50,000 and the whole amount grows tax-deferred. The owner's investment in the contract (cost basis) stays at the $50,000 actually paid, so the bonus is gain that will be taxed when withdrawn. A is wrong because nothing is taxed at the time the bonus is credited. B is wrong because vesting schedules exist in some contracts but are not a universal feature. D is wrong because the bonus does not increase the owner's basis.

Answer: A

A is correct. To open and fund an HSA an individual must be covered by a qualifying high-deductible health plan; an HRA is an employer-funded arrangement with no such plan requirement. B reverses the funding: HRAs are employer-funded, HSAs may be funded by the employee, the employer or both. C is wrong because unused HRA amounts generally stay with the employer while HSA funds are portable. D reverses ownership: the HSA belongs to the individual, the HRA is the employer's arrangement.

Answer: C

For group disability income policies, if the employer pays any portion of the premium, the benefits received by the employee are taxable as ordinary income to the extent of the employer's contribution. If the employee pays 100% of the premium with after-tax dollars, benefits are tax-free. Option A is incorrect because employer payment makes benefits taxable. Option B is incomplete—it only applies if the employee pays 100% with after-tax dollars, which is not stated. Option D is incorrect because pre-tax employee payments (e.g., via Section 125) also result in taxable benefits.

Answer: A

A is correct because when the employer pays 100% of the premium for a group disability income policy, the benefits are considered to be paid with pre-tax or tax-deductible dollars, making the entire benefit taxable as ordinary income to the employee. B is incorrect because taxability is not based on salary level. C is incorrect because disability income can be taxable depending on premium payment. D is incorrect because there is no general tax exclusion for disability benefits used for medical expenses.