7.4 Insurance-Based Products
Which of the following products are primarily offered by insurance companies? I.Term Life II.Universal Life III.Fixed Annuities IV.Variable Annuities
ALL All products listed are offered by insurance companies.
Which of the following types of risk would apply most to an investor that purchased a Variable Annuity Contract? [A] Mortality Risk [B] Interest Rate Risk [C] Investment Risk [D] Social Risk
C. The investor carries the investment risk, and could incur a loss if the value of the portfolio declines.
Fluctuations in the value of an annuity unit of a variable annuity corresponds most closely with changes in which of the following? [A] Dow-Jones Industrial Index [B] The value of securities held by the insurance company [C] Cost of living index [D] The value of the securities held in the separate account
D. Fluctuations in the value of an annuity unit of a variable annuity corresponds most closely with changes in the value of the securities held in the separate account. While the separate account of a variable annuity is primarily invested in common stocks, fluctuations in the separate account do not necessarily have to correspond with the Dow Jones Industrial Index.
Which of the following is TRUE regarding the variable universal life policy? [A] Premiums and death benefits are fixed. [B] Premiums are fixed but death benefits may fluctuate. [C] Premiums fluctuate but death benefits are fixed. [D] Premiums and death benefits may fluctuate.
D. On a Variable Universal Life Policy cash values and death benefits may vary or fluctuate based on the performance of the Separate Account. The premiums are flexible or adjustable by the policyholder within a range.
Which of the following life insurance policies is considered to be a "security" under federal securities laws? [A] Whole Life [B] Variable Life [C] Universal Life [D] Term Life
Variable Life involves an investment risk to the policyholder and therefore is considered to be a security. The other policies do not involve an investment risk to the policyholder and therefore are not considered to be "securities."
Premiums paid by the policyholder will be deposited in the insurer's General Account for all of the following policies, except: [A] Variable life [B] Term life [C] Whole life [D] Universal life
A. Premiums paid for variable life policies will be deposited into the Separate Account for the customer. The premiums paid for the other policies will be deposited in the insurer's General Account.
During the "pay-in" period of a variable annuity the units are referred to as [A] annuity units. [B] pay-in units. [C] accumulation units. [D] pay-out units.
C. During the pay-in period of a variable annuity the units received by the investor are referred to as accumulation units.
Which of the following types of life insurance offers an adjustable death benefit and flexible premium payments? [A] Term life insurance [B] Whole life insurance [C] Universal life insurance [D] Variable life insurance
C. Universal life insurance offers and adjustable death benefit and flexible premium payments .
Which of the following would be features of a variable annuity? I.Tax-deferral of earnings II.Participation in markets for securities III.A fluctuating future stream of income IV.A guaranteed payout
Variable annuities, whether tax-qualified or not, provide the ability to defer growth within the variable annuity until the product is annuitized. With a variable annuity, the annuity holder chooses various investments within the annuity and bears the investment risk, but gets to participate in markets for securities (such as the bond and stock markets). Once annuitized at a future date, the variable annuity will provide a fluctuating stream of income in the future which will be tied to the performance of the securities within the portfolio. In a generic variable annuity, there are no guaranteed minimum payouts. Payouts are purely related to the performance of the securities. Guaranteed minimums would be additional features added by the annuity holder.
A variable life contract would be an appropriate investment for all of the following EXCEPT: [A] A customer who has approximately 25 years until retirement and who has just started a family [B] A customer who has short-term goals in the market and who has already retired [C] A self-employed customer who feels that fixed life insurance policies do not have adequate returns [D] A customer who tolerates a high level of risk and fluctuation in the market
B. Variable life contracts are a form of life insurance and would not be suitable for a retired person with short-term investment goals.
A Capital Needs Analysis should be based on all of the following EXCEPT? [A] Inflation [B] Life Expectancy [C] Market volatility [D] Future Earning of the Client
C. All of the choices offered would be important factors to consider when doing a capital needs analysis, except market volatility will not affect the client's needs.
Changes in the payout on a variable annuity will correspond most closely to changes in the [A] cost of living index. [B] Dow Jones Industrial Average. [C] the value of the underlying separate account. [D] the prime rate.
C. Changes in the value are related to the value of securities in the separate account of the variable annuity.
During the "pay-in" period of a variable annuity the units are referred to as [A] annuity units. [B] pay-in units. [C] accumulation units. [D] pay-out units
C. During the pay-in period of a variable annuity the units received by the investor are referred to as accumulation units.
How are returns measured in a variable annuity? [A] Returns are measured based on established interest rates such as the discount rate, the federal funds rate, and the prime rate. [B] Returns are measured by an analysis that is conducted by the company offering the variable annuity. [C] Returns are measured by determining gains and losses in the various sub or separate account investments chosen by the individual holding the contract. [D] Returns are measured based on the profitability of the company offering the variable annuity.
C. In a variable annuity, the contract holder, or policyholder, accepts the investment risk of the investments of the annuity. This means that the investor chooses various investments to hold in the annuity's sub-accounts or separate account(s). The investor will have gains or losses according to the performance of the various investments.
All of the following statements about Health Savings Accounts (HSAs) are TRUE, EXCEPT: [A] HSAs are individual accounts and are not established via an employer. [B] Withdrawals for non-health purposes can be subject to ordinary income taxation and a penalty tax of 20%. [C] Earnings within an HSA are taxable upon withdrawal for qualified medical expenses. [D] HSA withdrawals can be used for certain medical, dental, and vision expenses.
C. Earnings within an HSA are not taxable when withdrawn for a qualified medical expense. All of the other items listed are true.
The policyholder bears the investment risk in which of the following life insurance products? [A] Whole Life [B] Universal Life [C] Term Life [D] Variable Life
D. Premiums for variable life insurance are deposited in the life insurance company's Separate Account where it is invested in a portfolio of securities that are selected by the policyholder. Therefore, the policyholder bears the investment risk. Premiums for whole life, universal life and term life are deposited in the insurer's General Account which is managed by the insurer. Therefore, the insurer bears the investment risk.
Which of the following investments may provide a hedge against inflation? [A] Certificate of deposit [B] Treasury bill [C] Fixed annuity [D] Variable annuity
D. The portfolio of securities in a variable annuity could provide a hedge against inflation if the value of the securities rises. CDs and Treasury bills are short-term and would not therefore provide a hedge against inflation. A fixed annuity pays a fixed amount and would not provide a hedge against inflation.
When comparing a Mutual Fund to an Exchange Traded Fund which of the following is true? [A] Both are subject to market risk [B] Both are traded during the trading day [C] Both can be bought on Margin [D] Both have actively traded portfolios
A. Both Mutual Funds and Exchange Traded Funds are subject to Market Risk but Mutual Funds are not traded during the trading day, they are only priced at the end of the trading day. ETF's can be bought on Margin but Mutual Funds cannot be bought on Margin. Since the portfolio of ETF's mirrors a specific index, they do not have actively traded portfolios.
Which of the following is FALSE about variable annuities? [A] They provide the annuitant with professional management of the portfolio. [B] The holders may vote to change the investment objectives of the variable annuity. [C] The shares of other mutual funds may be held in the portfolio. [D] The portfolio protects the annuitant against capital loss.
D. When investing in Variable Annuities the investor carries the investment risk, and could incur a loss if the value of the portfolio declines.
Which of the following terms is associated with a variable annuity? [A] Special Account [B] Investment Account [C] Separate Account [D] General Account
C. The Separate Account of a life insurance company is where the premium for variable products are deposited and invested, where the variable annuity contract holder has a choice of investment options and where the earnings in the account accumulate on a tax deferred basis.
All of the following are examples of a fixed annuity EXCEPT [A] $1000 per month to the annuitant for the rest of his life. [B] $1000 per month to the annuitant for the rest of his life, with payments continuing to his designated beneficiary if the annuitant dies within a "period certain" (eg.10 years) measured from the date of the contract. [C] $1000 per month to the annuitant and his spouse continuing up to the second to die. [D] $1000 in January, $1030 in February, $990 in March 20XX.
D. This is an example of a variable annuity rather than a fixed annuity.
All of the following are characteristics of Universal Life insurance EXCEPT: [A] The cash values are interest sensitive (sometimes with a guaranteed minimum). [B] Policyholders do not choose the underlying investments. [C] Flexible premium payments are available. [D] Premium payments are deposited into the Separate Account of the life insurance company.
D. Premium payments are deposited into the General Account of the life insurance company. Policyholders do not have control over the investments.
All of the following are characteristics of Whole Life insurance EXCEPT: [A] The death benefit is adjustable. [B] The cash value is based on a schedule of fixed amounts. [C] Policy loans are available up to the amount of the cash value. [D] Premium payments are deposited into the General Account of the insurance company.
A. The death benefit is fixed; however; universal life provides an adjustable death benefit.
What is Point to Point indexing? [A] It is a valuation method used for managers, to determine if they are managers which product profits for a Hedge Fund [B] It is a valuation method used for Equity Index Annuities, in which, it compares the change of the index at one point in time to another point in time [C] It is the timeframe used to tax individuals on their investments [D] It is used for Futures to determine the profit of the investment
B. Choice B is the definition of Point to Point.
Predicting the future return on a variable annuity is allowed [A] if it is based on results obtained over the last year [B] if an explanation of the basis of the prediction is included [C] if the projections are approved by the NASD [D] It is never allowed.
D. Projections and predictions on Variable Annuities is never allowed under any circumstances.
A Variable-Universal Life Insurance Policy is a type of permanent life insurance that has which of the following characteristics? I.Combines variable death benefits and cash values II.Has surrender charges III.A sub-account which includes the investments IV.Flexible premiums payments
I, II, III, IV All choices are true with regard to a Variable-Universal Life Insurance Policy. Also, keep in mind that VUL Policies do NOT offer a "term" feature. Term Life Insurance is its own type of insurance which offers a death benefit only.
What is Annual Reset? [A] It is a valuation method used for Equity Index Annuities, in which the annuitant locks in gains from the beginning of the year to the end of the year [B] It measures the movements from a high point of an index and compares it to the index value at the beginning of the period [C] It is a valuation method used for managers, to determine if they are managers which produce profits for a Hedge Fund [D] It is when securities in an account are rebalanced to keep the original asset allocation
A. Choice A is the definition on Annual Reset. The annuitant locks in gains every year the index is positive.
Which of the following would be features of a variable annuity? I.Tax-deferral of earnings II.Participation in markets for securities III.A fluctuating future stream of income IV.A guaranteed payout
I, II and III Variable annuities, whether tax-qualified or not, provide the ability to defer growth within the variable annuity until the product is annuitized. With a variable annuity, the annuity holder chooses various investments within the annuity and bears the investment risk, but gets to participate in markets for securities (such as the bond and stock markets). Once annuitized at a future date, the variable annuity will provide a fluctuating stream of income in the future which will be tied to the performance of the securities within the portfolio. In a generic variable annuity, there are no guaranteed minimum payouts. Payouts are purely related to the performance of the securities. Guaranteed minimums would be additional features added by the annuity holder.
Which of the following is true regarding variable annuities? [A] Investment risk is borne by the insurance company as in the fixed annuity. [B] Variable annuity payments may be decreased because of an increase in the expenses of the insurance company. [C] Salespeople are not required to register with the SEC or NASD. [D] Variable annuities are registered under the Investment Company Act of 1940.
D. Variable Annuities are structured like an investment company and are regulated by the Investment Company Act of 1940.
When Jake was 45, he started contributing to a non-qualified variable annuity. He is now 65 and wishes to start taking withdrawals. His cost basis in his variable annuity is $75,000 and the annuity value is now $100,000. Which of the following are true of Jake's withdrawals? [A] Since Jake contributed money pre-tax or was able to deduct when making contributions, all of the money withdrawn will be taxable as ordinary income in the year received. [B] Since Jake contributed money on an after-tax basis, the earnings in the account will be taxed as long-term capital gains in the year received and Jake's contributions will be tax-free when withdrawn. [C] Since Jake contributed money pre-tax or was able to deduct when making contributions, all of the money withdrawn will be taxable as capital gains in the year received. [D] Since Jake contributed money on an after-tax basis, the earnings in the account will be taxed as ordinary income first and Jake's contributions will be tax-free when withdrawn.
D. Jake opened a non-qualified variable annuity (also known as a non-tax-qualified variable annuity). This means that he will be contributing after-tax dollars to the plan and have a cost basis in the account. Assuming Jake is over 59 1/2 and the withdrawals are not subject to penalty for any reason, his earnings will be taxable as ordinary income in the year received and his cost basis in the annuity will not be taxable.
The face amount of a life insurance policy is usually paid to the beneficiary at the death of the insured as a lump sum. In the alternative, all of the following settlement options are available EXCEPT: [A] A variable annuity [B] Interest only paid annually with the principal left on deposit [C] Fixed annual installments until the funds (principal and interest) are exhausted [D] Fixed period equal installment payments until the period ends
A. A traditional fixed annuity paid as a straight life income payable to death is available, but not a variable annuity. The other answer choices are all correct.
A registered equity-indexed annuity is sold with a prospectus by a registered representative. Of the following statements, which is TRUE regarding this situation? [A] The sale is subject to the same supervision requirements that apply to transactions in other securities. [B] Training related to such products is only required for those supervising sales. [C] Rules require heightened surveillance of this type of product. [D] A principal must approve each sale of an equity-indexed annuity
A. Equity indexed annuities provide annuity payments linked to a specific stock index, like the S&P 500. Supervision of sales of this product is required similar to any other securities transaction.
An investment that is made up of a portfolio of mutual funds or other professionally managed securities held in a special, tax-deferred account called a separate account would be known as which of the following? [A] Open-end investment company [B] Closed-end investment company [C] Variable annuity [D] Hedge fund
C. A Variable Annuity is an investment that is made up of a portfolio of mutual funds or other professionally managed securities held in a special, tax-deferred account called a separate account.
All of the following are characteristics of annuities EXCEPT: [A] Annuity contracts are issued by life insurance companies. [B] They are frequently used to provide retirement income. [C] They provide a series of guaranteed periodic payments usually for life. [D] They must be bought and paid for by a single premium payment.
D. They may be bought and paid for by either a single premium or by periodic payments.
A viatical settlement agreement relating to a life insurance policy generally includes all of the following provisions EXCEPT: [A] An investor buys a life insurance policy from a policyholder who has a terminal illness with a life expectancy of less than two years. [B] The purchase price will generally be more than the cash surrender value but less than the face amount of the policy. [C] The original policyholder is required to continue to pay the premiums. [D] The investor becomes the beneficiary and collects the death benefit.
C. The investor, who purchased the policy, not the policyholder, will now pay the premiums going forward. The investor is now the policy owner and the beneficiary of the policy. The insured remains unchanged.
A client is looking for growth and future income in an investment product, but does not want to pay taxes on earnings until they are withdrawn. How should this client invest? [A] The client should begin trading options with advanced option strategies such as spreads and combinations. [B] The client should research and purchase several municipal bonds issued by stable local and state governments. [C] The client should open up a variable annuity and begin contributions immediately. [D] The client should begin trading in gold and commodities.
C. The variable annuity is the only investment that meets the criteria listed in the question. Earnings are tax-deferred in such an account and the investor can participate in growth of the underlying securities. Income is provided at a later date when the plan is annuitized and the investor will pay taxes on earnings at that time.
Joe came into a sizeable inheritance about 5 years ago. His investment advisor representative recommended putting the majority if the inheritance into a variable annuity, once Joe had maxed out other tax-deferred products. Joe has seen the funds in the variable annuity grow over the past 5 years, but he wants to know more about how the variable annuity works and where the increases in value originate. Which of the following is a good statement from the IAR related to how variable annuities grow? [A] "Variable annuities appreciate in value as the stock of the issuer of the variable annuity goes up." [B] "Variable annuities have a fixed pay-out rate which is determined at the time of investment. Investors can look back at their original documents related to the variable annuity to see what this pre-determined rate of growth is." [C] "Variable annuities include investments in various products, normally mutual funds, so the value of the variable annuity will fluctuate with increases or decreases in the values of the products held within the variable annuity." [D] "You should contact the issuer of the variable annuity to find out more information on how it works. I am simply your investment advisor."
C. Joe's IAR has a duty to discuss recommendations with Joe. If the customer calls in requesting more information, Joe has a fiduciary obligation to discuss how the variable annuity works. Variable annuities are a type of investment vehicle. They typically allow the deferral of taxation on growth to a later date. Variable annuities are called variable, because the investor holding the annuity chooses the investments within the portfolio and takes risks associated with variations in the prices of those investments in the sub-accounts or separate accounts of the annuity. This is the key difference between variable and fixed products. Typically variable annuity issuers offer different types of mutual funds for investments within a variable annuity. As the value of those shares increase or decrease, so will the variable annuity. Variable annuity units are not fixed, and are not dependent upon the value of the stock of the issuing company (typically an insurance company).
An investor looking for which of the following investment goals would be BEST served by a deferred variable annuity? [A] Investors who prefer a fixed rate of return [B] Investors seeking capital appreciation over a long period of time [C] Investors looking to maximize their current level of income [D] Investors interested in receiving inflation adjusted returns
B. Deferred variable annuities are designed to provide long-term capital appreciation. They do not provide immediate income. They do not adjust their returns for inflation and they are not fixed rate securities.
Whole Life is also known as all of the following EXCEPT [A] straight life. [B] permanent life. [C] ordinary life. [D] term life.
B. Term life is temporary life insurance and has no cash value. It is not another name for whole life, which is permanent insurance and has a cash value.
A retiree buys an equity indexed annuity from a life insurance company. The annuity contract credits an annual interest rate that is linked to the performance of the S&P 500 index. The contract specifications are as follows: the movement of the index is measured by the annual reset method; participation rate is 80%; the interest rate cap is 5% and the guaranteed minimum interest rate is 3%.The principal and credited interest are protected from loss. If the S&P 500 index increases by 5% using the annual reset method, how much will be credited to the retiree's account? [A] 3% [B] 4% [C] 5% [D] None of the above
B. Today's equity indexed annuity products are structured like a fixed annuity with a fluctuating credited interest rate that is linked to the performance of an index. The performance of an index can be measured in three ways depending on the insurance company issuing the contract: annual reset, high water mark and point-to point. In this case, we assume the index has increased by 5%.based on whatever method was used. How much of the 5% increase will be credited to a client's account depends on the participation rate, any subtracted "fees" and the cap rate. In this case, the participation rate is 80%. Therefore, 4% will be credited to the client's account (5% x 80%). In this case, there are no 'fees" to subtract and the interest rate cap (maximum) is 5%. The 4% credited rate is higher than the 3% guaranteed minimum interest rate..
A type of life insurance which offers a death benefit only, has no cash value build-up in the policy, and has a set expiration date would most likely be which of the following? [A] Variable-Universal Life Insurance [B] Whole Life Insurance [C] Term Life Insurance [D] Universal Life Insurance
C. A Term Life Insurance policy is a type of insurance which offers a death benefit only, has no cash value build-up, and has a set date of expiration. Every time a term policy is renewed, the premium is higher because the policyholder is older.
A variable annuity guarantees [A] dollar payments based on a fixed value of a fixed number of units each month. [B] lifetime payments of a fixed amount in dollars each month. [C] lifetime payments based on fluctuating dollar value of a fixed number of units each month. [D] payments of a fixed amount in dollars each month for a specific number of years.
C. A Variable Annuity guarantees lifetime payments based on a fluctuating dollar value of a fixed number of units each month.
When performing a capital needs analysis to find out a client's minimum level of insurance needs, an IAR relies heavily on volatility projections in the market to figure out what the customer might expect in returns. Which of the following is true? [A] The IAR has performed the analysis properly. [B] The IAR should be using volatility and sector expectations to fund client needs. [C] The IAR should not be relying heavily on volatility projections when performing capital needs analysis. [D] The IAR should not be focused on what the client's future needs are, but rather what the client's immediate needs may be.
C. Capital needs analysis should not be focused on volatility. It should be focused on future needs, expected future situations, inflation expectations, and general life expectancy.
One of your clients with moderate to low risk tolerance comes to you and is looking to invest extra money for retirement in the market. The client has already maxed out their IRA and 401(k) but would like to defer current taxes until they retire and have a lower income. Because of the fact that they already have retirement funds in place, the money that they intend to invest is not going to go toward income needs and is supplemental. What should this investor do with these additional funds that they wish to invest for retirement? [A] The investor should invest the money in mutual funds specializing in growth. [B] The investor should invest the money into a second Traditional IRA to get the additional tax deduction. [C] The investor should invest the money into a variable annuity. [D] The investor should forego the market and buy rental properties.
C. This investor would be best suited with a variable annuity. This will allow for market participation with tax-deferral of growth within the annuity. The investor does not have any income needs that are fixed, so a variable annuity should be suitable for their level of risk tolerance and their needs. Mutual funds will carry tax burdens for dividends and distributions. A second Traditional IRA would not allow additional tax deductions, as there is a maximum deductible amount of $5,500 on a Traditional IRA. The investor specified investments in the market. Rental properties in real estate would bring current taxation and may also require property management costs, etc.
A variable annuity contract is similar to a life insurance policy because it may contain all of the following EXCEPT [A] death benefits. [B] beneficiary designation. [C] loan provisions. [D] guaranteed cash values
D. Variable annuities do not have guaranteed cash values.
One of your clients is looking over their options when it comes to retirement. The client is looking for investment vehicles which will allow their money to grow on a tax-deferred basis. The investor also wishes to be able to take money out of this investment vehicle or receive payouts on a monthly basis once retired in order to supplement income. Which of the following investment vehicles would satisfy this investor's specified needs? I.A Traditional IRA (Individual Retirement Account) II.A diversified portfolio including stocks, bonds, and other assets such as commodities and holdings in gold and silver III.A variable annuity IV.Investments in mutual funds with an emphasis in municipal bond funds
I and III The investor is looking for tax-deferred growth. This limits your selection to the Traditional IRA and the variable annuity. Both of these products provide deferral of taxes of growth and allow for investments in the market. The diversified portfolio and the mutual funds would be subject to taxation on an annual basis. Remember that even a municipal bond fund will have taxes related to the purchase and sale of bonds and gains and losses associated with bonds that mature, but that were purchased at a premium or discount. The interest income from these funds will, however, be tax-free.
Which of the following is a characteristic of a variable annuity? [A] Investment risk is assumed by the annuitant. [B] Annuity payments are fixed. [C] The investment account portfolio consists primarily of debt securities. [D] Interest payments are guaranteed.
A. In a variable annuity, the amount of the benefit payments made out of the annuity varies with the investment performance of the separate account. The separate account is mainly invested in equity securities, with no return guaranteed. The hope is that the equity securities will keep pace with inflation but the annuitant assumes the investment risk of the plan.
All of the following are true about premium payments for a life insurance policy EXCEPT: [A] They are generally tax deductible. [B] The policyholder may discontinue premium payments and elect to receive a reduced paid up policy. [C] They can usually be made in installments such as monthly, quarterly, or annually. [D] They are calculated based on the age and gender of the insured.
A. Life insurance premiums are generally not tax deductible. They are normally paid with after tax dollars. The other three choices are true about premiums.
Of the following, which is a feature of a generic variable annuity? [A] Tax Advantages [B] Fixed Payouts [C] Minimum Values [D] No Commissions, Expenses, or Fees
A. Variable annuities are just that, variable. The values of the annuity are tied to the value of the underlying investments in the separate or subaccount. For this reason, it is inaccurate to state that a generic variable annuity will have fixed payouts or minimum values, as those two features would vary depending on the value of investments. Variable annuities are accompanied by expenses and fees, and commissions can be charged on transactions within the annuity. The one feature listed that IS true of a generic variable annuity is the tax advantage. Variable annuities allow tax-deferral in relation to investments until the product is annuitized and annuity payments begin.
As a financial planner, part of your job would include a Capital Needs Analysis to determine the amount of life insurance required by each of your clients. Which of the following would not be a consideration when doing such an evaluation? [A] The percentage of fluctuation over the last 2 years of securities owned by your client [B] The current and expected earnings of your client [C] The number of children your client has now and expects to have in the future [D] The current long term debt obligations of the client including their mortgage
A. When determining Capital Needs Analysis, expected income, life expectancy, rate of inflation, number of children, mortgage obligations, savings, and debt would all be considerations. You would not consider fluctuations or volatility in the market value of securities since that changes daily.
Heather receives a large sum of money from a lawsuit settlement. She goes to her IAR for advice on how to invest the money. Heather doesn't like a lot of risk, but wants to take some risk with the money, because she still plans on working and doesn't need the money until she retires. She would like monthly payouts upon retirement for a 20-year period. She wants to minimize tax liabilities until she does retire. Heather wants flexibility and some control over what investments are placed in this investment product, but doesn't want to have to pay close attention or regularly trade in the account. She has regularly maxed out her contributions to her Traditional IRA, and has done so this year already. Which of the following is best in this scenario? [A] The IAR should recommend a fixed annuity for Heather. [B] The IAR should recommend a variable annuity for Heather. [C] The IAR should recommend a hedge fund for Heather. [D] The IAR should recommend a limited partnership for Heather.
B. Of the choices listed, the best answer with Heather's needs taken into consideration would be the variable annuity. It provides investment return (related to her risk), monthly payouts after annuitization (wants a 20-year period certain feature), minimizes current tax liabilities (tax deferral), and provides Heather with a certain level of control over investments (she chooses which products/funds to buy in the variable annuity). Heather wants some control over investments within the product. She has little or no control over the fixed annuity, hedge fund, or limited partnership. Taxation would be an issue with both the hedge fund and the limited partnership. The fixed annuity does not allow any control for Heather. It is a fixed product which is not a security and does not carry the opportunity for market gains.
Is market volatility normally a key consideration in a client's capital needs analysis? [A] Yes, because with proper diversification, it is possible to eliminate all risk associated with volatility from a client's portfolio. [B] Yes, because with proper market timing, an investor can see significant gains related to playing market volatility. [C] No, because a capital needs analysis focuses on more predictable, long-term numbers such as inflation and future earnings. [D] No, because the consideration of market volatility exceeds the importance of a capital needs analysis for the majority of clients.
C. A capital needs analysis focuses on client needs and the needs of the client's beneficiaries upon the client's death, most often for insurance coverage purposes. Anticipated inflation, anticipated life expectancy, anticipated earnings from employment, and anticipated earnings from investments would all be considerations. As well, the needs of beneficiaries, such as a remaining spouse with a mortgage and higher education for children would be considerations.
An ideal prospect for a universal life insurance policy is someone who foresees a possible future need to adjust the amount of the death benefit and/or the premium for the policy. Also, the prospect should understand all of the following key terms of such a policy EXCEPT: [A] The policyholder does not control the investments in the policy and has no investment risk. [B] The cash values accrue based on credited interest rates that change annually, but subject to a minimum guaranteed interest rate. [C] The death values may only be adjusted up or down at certain times stated in the policy. [D] The premium payments are deposited into the Separate Account of the life insurance company.
D. The premium payments are deposited into the General Account of the life insurance company, not the Separate Account. The life insurance company controls the investments, not the policyholder. The other answer choices are all correct.
At age 50, an investor decided to put their money into a variable annuity that was not tax-qualified. After-tax money was contributed and the investor has seen a good amount of gains in their annuity. The investor set up the annuity to begin distributions at 65, but at 64, the investor is in need of funds. The investor takes a withdrawal from the variable annuity. Which of the following are TRUE of this scenario? I.This investor can expect to pay surrender charges with regards to the amount that was withdrawn. II.This investor can expect to pay capital gains taxes on gains that are withdrawn. III.This investor can expect to pay ordinary income taxes on gains that are withdrawn. IV.This investor can expect to pay the 10% penalty tax for early withdrawal.
I and III only Even with non-tax qualified variable annuities, investors will receive tax deferral until withdrawals or annuity payments take place. If a withdrawal takes place prior to annuitization, the investor can expect to pay surrender charges to the issuer of the annuity. On top of any surrender charges, the investor will also be responsible for ordinary income taxes on gains that are withdrawn. Remember, the investor has already paid taxes prior to pay-in, so the investor will have to calculate their cost basis and will not be responsible for taxes on after-tax contributions. They will be responsible for taxes on all gains on a last-in, first-out basis however, meaning gains are taxed first and are taxed as ordinary income. All withdrawals and annuity payments from a variable annuity are subject to ordinary income tax, NOT capital gains taxes. Since our investor is 64, he would not be subject to the 10% penalty that would apply to tax-deferral and tax-qualified plans when funds are withdrawn before age 59 ½.
Which of the following represent characteristics of a Universal Life Insurance Policy? I.It offers adjustable death benefits. II.Cash values are based on fluctuating interest rates. III.It offers flexible premium payments. IV.Policyholders do not choose investments.
I, II, III, IV All choices offered represent characteristics of a Universal Life Insurance Policy. The fact that the policy has an adjustable death benefit means that the coverage can change as needed and could make it more attractive to a potential buyer.
Which two of the following would be true when considering an investment in a Variable Annuity? I.The insurance company bears the investment risk. II.The annuity owner bears the investment risk. III.The premiums paid by the owner of the account are deposited into a "separate account". IV.The premiums paid by the owner of the account are deposited into a "general account".
II and III When investing in a Variable Annuity, the contract holder or owner of the account bears the investment risk and makes investment choices. The premiums deposited by the contract holder are deposited into a "separate account". It is the fixed annuity where the insurance company bears the investment risk and the premiums are deposited into a "general account".
Louie purchased an equity indexed annuity four years ago. The annuity has a 3.5% guaranteed minimum return on an annual basis. It has a participation rate of 75% and a interest rate cap of 12.5% on annual return. The following are the index returns for the four years that the index was held: Year 1 - 15% Year 2 - -3% Year 3 - 8% Year 4 - 2.5% What was Louie's average annual return on the equity indexed annuity for the four years that the annuity was held? [A] 22.5% [B] 5.625% [C] 24.25% [D] 6.0625%
In years where the minimum return was not met, Louie can expect the minimum guaranteed return of 3.5%. This covers years 2 and 4. In years where the minimum is exceeded, Louie can expect 75% participation in index returns. This would be 11.25% in year 1 and 6% in year 3. Louie's overall return when added together would be 24.25%, but the question asks for the average annual return, so we divide this by 4 years, giving us 6.0625%. (15% x 75% participation) + 3.5% minimum + (8% x 75% participation) + 3.5% minimum = 24.25% / 4 years = 6.0625%
