Annuities Liscense
Seventy-year-old Patrice elects to annuitize her fixed deferred annuity under a straight life option. She had originally invested $25,000 in the contract; the contract was worth $80,000 at annuitization. According to IRS life expectancy tables, Patrice will live for 16 years. Her annual annuity income is $6,800. How much of that is taxable?
-$5,236 -That's correct! The amount excluded from annuity income is the proportional amount of the contract's principal. In this case, the amount invested in the contract (principal) is $25,000; the expected return is $108,800 ($6,800 annual income × 16 years). Therefore, for tax purposes, the annual amount excluded from taxation is 23 percent, or $1,564. The amount that is taxable is $5,236.
Mary, age 65, elects to annuitize her $150,000 variable annuity under a straight life income option. As specified in her contract, the AIR is 5 percent, which produces an initial payment of $950. If the values in her contract net a constant return of 5 percent, what will Mary's next income payment be?
-$950 -That's correct! If a variable annuity's values grow at the assumed interest rate, the annuitized payments will remain level.
When Geneva purchased her variable annuity, she directed $500 of her initial premium into the product's Subaccount A. The unit value at the time of her purchase was $10. How many Subaccount A units did Geneva acquire?
-50 -That's correct! The number of subaccount units purchased is determined by dividing the premium deposit by the value of an accumulation unit. In this case, Geneva's premium deposit of $500 purchased 50 accumulation units: $500 ÷ $10 = 50.
The primary reason a consumer should purchase an annuity is to provide a death benefit to his or her heirs.
-False -That's correct! Annuities are intended foremost to provide living benefits for the owner or annuitant: accumulation, income, or both. Providing a death benefit should not be the primary need.
One of the disadvantages to deferred annuity contracts is that they require annuitization as the only means to access the contract's full value.
-False -That's correct! Annuitization is an option; owners can access their funds through full or partial withdrawals from the contract.
A fixed annuity can be used to fund a qualified plan; a variable annuity cannot.
-False -That's correct! Any type of annuity can be used to fund a qualified plan. Doing so is appropriate as long as the owner seeks benefits other than tax deferral.
When Clyde elected to annuitize his variable annuity contract, he was credited with 100 annuity units in his equity subaccount. The market took a downswing, and Clyde's equity account lost value. To recalculate the current value of his subaccount, the insurer will reduce the number of annuity units associated with this subaccount.
-False -That's correct! Once a variable annuity is annuitized, the number of annuity units associated with each subaccount remains fixed. However, the value of those units changes, rising and falling with the value of the subaccount.
The NAIC Annuity Suitability model regulation applies only to fixed and indexed annuities; FINRA Rule 2330 applies to variable annuities.
-False -That's correct! The NAIC Annuity Suitability model applies to all annuities: fixed, indexed, and variable. It does provide a bridge to FINRA regulation, stipulating that a producer will be deemed compliant with the NAIC guidelines if he or she follows FINRA Rule 2330 when recommending and placing variable annuities.
Deferred annuity interest earnings are never subject to income taxation, regardless of whether the earnings are withdrawn or kept within the contract.
-False -That's correct! The interest earnings on annuity contracts are tax deferred, not tax free. Earnings are not subject to tax while accumulating within the contract; earnings are subject to tax when withdrawn. However, tax deferral enhances accumulation.
Which statement is true of FINRA Rule 2330?
-It imposes specific sales practice standards and supervisory requirements on variable annuity transactions. -That's correct! In recognition of the product's complex nature, Rule 2330 imposes specific sales practice standards and supervisory requirements on variable annuity transactions.
Which of the following correctly indicates the current tax treatment of annuity withdrawals?
-LIFO -That's correct! Annuity withdrawals are taxed on a last-in/first-out (LIFO) basis. Withdrawals are deemed to consist of interest earnings first and are fully taxable at ordinary rates to the extent of the contract's earnings.
Nonqualified annuities can be exchanged for qualified long-term care contracts under the tax-free exchange rules of Section 1035.
-True -That's correct! The Pension Protection Act added long-term care insurance contracts to Section 1035. As of 2010, life insurance and nonqualified annuity contracts can be exchanged tax free for qualified long-term care contracts.
Which of the following is a distinguishing feature between fixed and variable annuities?
-Variable annuity principal and earnings are not guaranteed by the insurer. -That's correct! One of the primary differences between fixed and variable annuities is how each product's premiums are invested and how the funds grow. Both product types provide for funding with single or flexible premium payments; both product types provide for annuitization. Fixed annuities guarantee a minimum rate of interest will be credited to the contract, thus securing the owner's principal. Variable annuities provide for the investment of the owner's premiums into nonguaranteed investment subaccounts.
The annuitization of a nonqualified annuity's funds is subject to taxation in accordance with:
-an exclusion ratio -That's correct! Annuitized income is taxed in accordance with an exclusion ratio, which proportions the income into return of principal (nontaxable) and earnings (taxable).
The basis for the interest credited to Angela's annuity is the growth of the S&P 500. What kind of annuity does Angela own?
-an indexed annuity -That's correct! Indexed annuities are tied to a market index, such as the S&P 500 or the Russell 1000. The interest that is credited to an indexed annuity is based on the performance of the market index to which it is tied.
Felipe owns an annuity that credits a rate of interest that is based on annual percentage changes in the S&P 500. If the index change is positive, the insurer will credit 90 percent of the percentage change to his contract for that year; if the index change is negative, the insurer will credit zero percent to the contract for that year. What kind of annuity does Felipe own?
-an indexed deferred annuity -That's correct! Because the interest credited to the contract is based on changes in the S&P 500 stock index, Felipe owns a deferred indexed annuity.
"Using capital to purchase income" defines which of the following?
-annuitization -That's correct! The concept of annuitization is applying capital to purchase income-changing a principal amount of money into a series of ongoing, periodic income payments.
Under the DOL's rule, those who provide investment advice or recommendations concerning qualified ERISA plans and IRAs must serve clients in what capacity?
-as a fiduciary -That's correct! Under the DOL's rule, those who provide investment advice or recommendations concerning qualified ERISA plans and IRAs serve in the capacity as a fiduciary and must meet fiduciary standards.
Which annuity design is appropriate for a consumer who seeks a way to grow and accumulate funds for the future?
-deferred annuity -That's correct! Deferred annuities offer a way to grow and accumulate funds for the future. Immediate annuities are designed to produce an income stream for a guaranteed period.
All of the following are common conditions for which an annuity's surrender charge is waived EXCEPT:
-financial hardship -That's correct! Financial hardship is not a common condition for waiving an annuity's surrender charge.
According to the standards of both the NAIC Annuity Suitability model and FINRA Rule 2330, which of the following is the standard for a suitable annuity recommendation?
-reasonable basis to believe that the recommendation is suitable -That's correct! The standard that both the NAIC model and FINRA Rule 2330 apply to suitability determinations is a "reasonable basis to believe the product is suitable."
Franklin is using his variable annuity to support his income. Every quarter, 20 accumulation units are taken from his contract and then converted into cash at their then current value. What kind of distribution has Franklin elected?
-systematic withdrawal -That's correct! Franklin has elected a systematic withdrawal plan whereby a set number of his contract's accumulation units are periodically withdrawn and turned into cash distributions.
Which of the following best defines the annuity purchase rate?
-the amount of monthly income that each $1,000 of the contract's values will generate -That's correct! The annuity purchase rate is the amount of monthly income that each $1,000 of the contract's values will generate based on specified rates of interest and the annuity payout option (term, straight life, joint life, etc.).
What are fixed annuity premium deposits invested in?
-the insurer's general account -That's correct! Fixed annuity premiums are directed into the insurer's general account. This is an undivided investment account that supports the contractual obligations of the company's guaranteed products. Funds in the general account are invested by the insurer in generally safe, secure investments-primarily long-term quality bonds.
When are annuity owners limited as to the amount of premium they can contribute to their contracts?
-when the contract is the funding vehicle for a qualified plan -That's correct! Annuity contracts that fund a qualified plan, such as an IRA, impose the same limit on contributions that apply to the qualified plan.
At what point are an annuity's earnings subject to income tax?
-when they are withdrawn from the contract -That's correct! An annuity's earnings accumulate tax free until withdrawn or annuitized. Upon withdrawal or annuitization, the earnings are taxable at ordinary rates.
Mary purchased a variable annuity for $50,000. Upon her death ten years later, the contract was valued at $115,000. Assuming her contract provided for the standard death benefit, what amount does her beneficiary receive?
-$115,000 -That's correct! The standard death benefit in an annuity is the greater of the contract's invested premiums or its accumulated value as of the date of death.
Sal owns a fixed annuity that he purchased with a $28,000 premium payment. Three years into the contract, its values have grown to $32,000, and Sal wants to take a withdrawal. Assuming the contract has a standard free withdrawal provision, how much can Sal withdraw without incurring a surrender charge?
-$3,200 -That's correct! The standard free withdrawal provision in most annuity contracts provides for annual withdrawals of up to 10 percent of the contract's accumulated values. In this case, because Sal had accumulated $32,000, he can take a withdrawal of up to $3,200 without penalty from the insurer.
In which of the following circumstances would a producer have a suitability requirement under the NAIC Annuity Suitability model regulation?
-The buyer decides to exchange an existing annuity for a new annuity under the rules of Section 1035. -That's correct! Under the NAIC Annuity Suitability model, there are limited circumstances in which a producer does not have suitability requirements, including when no product is recommended, when the buyer does not or refuses to provide accurate suitability information, or when the buyer purchases an annuity that the producer did not recommend. However, the NAIC model applies to both the sale of new annuities and to the exchange of existing annuities.
The suitability standards of FINRA Rule 2330 apply to both the purchase of a variable annuity as well as the recommendations for subaccount investments.
-True -That's correct! FINRA Rule 2330 requires that the representative determine the investment suitability of the product as a whole as well as the investments in the underlying subaccounts at the time of purchase or exchange.
What are premium deposits in a variable annuity's subaccounts applied to purchase?
-accumulation units -That's correct! Premium deposits in a variable annuity contract purchase accumulation units in the selected subaccounts.
What is the primary difference between fixed and variable annuities?
-the ways in which their funds are invested for growth -That's correct! The primary distinction between fixed and variable annuities is how their funds are invested and how the funds grow.
When is a variable annuity CDSC charge imposed?
-when a withdrawal is made during the surrender charge period -That's correct! A CDSC, or contingent deferred sales charge, is assessed when a contract is surrendered or withdrawals are taken during the contract's surrender charge period. This period is typically the first seven to ten years after contract issue. Fixed deferred annuities also usually impose surrender charges that extend for a number of years after contract issue.
To what market segment does the current NAIC Suitability in Annuity Transactions model regulation apply?
to any prospective annuity buyer That's correct! As revised in 2006 and again in 2010, the NAIC model law applies suitability standards to the purchase of any annuity product by any individual, no matter what age he or she may be.
