Ch 8: Variable Contracts and Municipal Fund Securities

What's the maximum contribution that can be made to a 529 plan without being subject to gift taxes?

$180,000 from a married couple if no additional contributions are made for the next five years.

municipal fund securities

- local government investment pools (LGIPs) created by state and local govt' to provide municipal entities a place to invest funds government entities purchase interest in the trust (LGIP) provides safety and diversification not open to plublic - prepaid tuition plans locks in tuition cost with credits a type of college savings not self directed - 529 plans college savings plan account owner chooses a plan but may alter investment direction

death during accumulation phase

-If the annuitant dies during the accumulation phase, the payout to the beneficiary will represent the greater of: *The total contributions made or *The current value of the contract -Amount above cost basis could be taxable

A customer wants to transfer her annuity investment from a fixed annuity to the growth and income separate account of the ABC variable annuity. Which of the following steps should be taken?

A Section 1035 exchange should occur Since the customer is transferring money out of one annuity and into a different annuity, he should execute a 1035 exchange to avoid taxes. There are no specific fees associated with a 1035 exchange; however, the customer may be required to pay a surrender fee. If a customer wants to move funds from one subaccount into another subaccount of the same variable annuity, he may simply contact the broker-dealer that sponsored the annuity. The Automated Customer Account Transfer Service (ACATS) is used to transfer securities positions (e.g., stocks and/or bonds) from one broker-dealer to another broker-dealer.

TRUE concerning periodic payment variable annuities?

A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

Which calculations describes the payout on a variable annuity?

A fixed number of annuity units multiplied by a variable dollar amount When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period.

A 529A or ABLE account is permitted for which of the following persons?

A person who has a significant disability

A 529A or ABLE account is permitted for persons?

A person who is disabled

accumulation phase 1

AKA Pay-in Period or Deposit Phase during this phase, account is valued in terms of "accumulation units" units are purchased after-tax, no deduction investment income is tax defffered until withdrawn the purchase price is referred to as an accumulation unit value (AUV) similar to a mutual fun'd's NAV unit value is calculated at the end of the business day (using forward pricing that's similar to mutual funds) accumulation units are invested in separate accounts AFTER TAX DOLLARS annuity is TAX DEFFERED not EXEMPT

annuity phase 2

AKA Payout, withdrawl or annuitization phase when receiving benefits at annuization, accumulation units are converted into a fixed number of annuity units unit value is based on: age and gender of the contract hodler life expectancy payout option selected value of the separate account payout is establishsed by multiplying the fixed number of annuity units by the flunctuating value

The earnings in Section 529 Savings Plans:

Accumulate on a tax-deferred basis as long as the money stays in the plan

An accumulation unit in a variable annuity contract is:

An accounting measure used to determine the contract owner's interest in the separate account

Which of the following amounts may a customer contribute each year to a 529 college savings plan without incurring any taxes?

An amount equal to the annual gift tax exclusion States that offer 529 plans determine the specific plan rules, such as allowable contributions, investment options (e.g., mutual funds), and the deductibility of contributions for state tax purposes. On an annual basis, in a 529 savings plan, a person may contribute an amount that equals the federal annual gift tax exclusion of $18,000 without paying a gift tax. (Note, in 2023, the annual gift tax exclusion was $17,000.) Alternatively, a contributor is able to front-load a 529 plan with five years' worth of the annual gift tax exclusion amount and avoid gift tax. This means that $90,000 can be contributed all at once (5 x $18,000). However, please notice that the question asks for what amount may be contributed each year; therefore, the answer is an amount that's equal to the annual gift tax exclusion.

separate account

An investment company product - Regulated under the investment company act of 1940 - Registered with SEC - Must be sold by prospectus - Investments, may be changed during accumulation phase

VARIABLE

Annuitant security separate account sub accounts that meet investor objectives superior inflation hedge

who can contribute to 529 plans?

Any person can contribute.

529A Plans Achieving a Better Life Experience

Available to individuals who are contribution: $10,000 earnings: $6,000 basis: $0 taxable: $16,000and are receiving social security disability or emedicaid or private insurance payments max contribution is $18,000 per year (no front loading) Disability payments conitnue if account value doesnt exceed $100,000 Distributions are tax free if used to pay qualified expenses mustve been declared disabled prior to age of 26

If an individual is considering moving to the payout phase of a variable annuity, she should understand that the payments will:

Be based on the performance of the subaccount products in the separate account When a person purchases a variable annuity, she assumes the investment risk. Once annuitized, the number of annuity units on which payments are based remains the same, but the payments will be influenced by the performance of the subaccount products in the separate account as well as the settlement option chosen. If the value of the separate account falls below the investor's cost basis, the payments may amount to less than the cost basis.

TRUE concerning a 529A or ABLE account?

Earnings will not be taxed if they're used for any qualified expense including basic living expenses, education, employment support, housing, financial management, legal fees, transportation, and wellness for disabled persons.

money is deposited into the general account

Fixed annuity

A person who invests in a fixed annuity is most concerned with the performance of the insurance company's:

General account what backs an insurance company's fixed annuities and traditional (guaranteed) insurance products. On the other hand, the performance of a variable annuity is related to the performance of the insurance company's separate account.

statements concerning a tax-qualified annuity is TRUE?

It has a zero cost basis and grows tax-deferred

A 72-year-old grandfather wants to buy an annuity for his son (age 45) and his grandchild (age 15). Which payout option BEST satisfies the grandfather's intentions?

Joint and last survivor life annuity A joint and last life survivor annuity will best satisfy the grandfather's intentions. In this payment option, benefit payments are made to the persons in the joint account, then to the survivor, as long as the survivor lives.

For variable annuities, which payout options provide the highest payout?

Life annuity Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.

The beneficiary of a Section 529 plan may make qualified withdrawals from the plan for:

Paying the tuition for an out-of-state college

TRUE about variable annuities

Payout is based on a number of annuity units, which remains fixed for the duration of the payout period A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.

When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:

Probate fees Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed.

A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?

Proceeds in excess of cost are taxable as ordinary income to the beneficiary.

A person who invests in a variable annuity would be MOST concerned with the performance of the insurance company's:

Separate account

One of your clients is looking to annuitize a contract and wants a payout option that will provide income for the later of 10 years or death. Which of the following choices is most suitable for this investor?

Straight life with period certain A period certain payout guarantees that a minimum number of payments will be made even if the annuitant dies before the period certain has elapsed.

The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that:

The account owner may lose financially if the student does not attend a public school in that state

When determining the suitability of the recommendation of a 529 college savings plan, which of the following should a registered representative consider?

The deductibility of contributions from state income taxes Contributions to a 529 plan are non-deductible at the federal level; however, if an investor uses his home state's plan, contributions are often deductible for state income taxes. If an investor uses assets from a 529 plan for qualified education expenses, the earnings are tax-free at the federal level (i.e., like a Roth IRA). Unlike an UGMA or UTMA account, 529 plan assets don't need to be transferred when the beneficiary reaches the age of majority.

A customer has a variable annuity and wants to transfer from the XYZ growth separate account to the ABC growth separate account. To do this, who should the customer contact?

The insurance company that sponsors her account

The guarantee that payments will be made from a variable annuity settlement option is made by:

The insurer that sold the annuity

An investor has annuitized a variable annuity and has realized that the payments he's receiving are falling below market return. If the investor wants to reallocate a portion of the investment portfolio within the separate account, which of the following statements is TRUE regarding this situation?

The investor is permitted to change the allocation of the investments within the separate account.

Which factor will impact the value of a variable life insurance policy?

The performance of the separate account. The cash value of a variable life insurance policy is primarily based on the performance of the separate account

characteristics of a 529 plan?

There are no income limits placed on contributors withdrawals from 529 plans used for educational purposes are not subject to federal taxation Earnings in the account are tax-deferred contributions are limited

TRUE about 529 Prepaid Tuition Plans

They are generally administered by the states They permit investors to pay for a child's tuition expenses at a state college in advance at a reduced rate The account owner is protected against future increases in tuition

the investor determines where the money is deposited

Variable annuity

While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:

Varying number of accumulation units When investors purchase a variable annuity contract, they are purchasing accumulation units.Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.

as it relates to the accumulation phase of an annuity

accumulattion units are purchased after-tax and grow tax-deffered basis at death of the annuitant, the death benefit is the greater of cost basis or the current value

1035 exchange

allows for movement from one annuity to another without a taxable event

unit refund life annuity

annuitant receives an amount at least equal to his original invstment at death, any remaining amount is paid to a beneficiary

straight life annuity

annuitant receives payments for life highest possible payout with highest risk no benificiary

annuities

annuities = paying out annuities are products that are sponsored by insurance companies in which investment income grows TAX DEFFERED; they may be fixed or variable

non qualified annuities

available to any person through either an insurance company or a broker dealer non deductable (after-tax) contributions, which established the basis contribution amount is NOT limited state and local govt' offer their employees 457 plans which have qualified features

qualified annuity

distributions are fully FLEXIBLE (pre tax dollar)

insurance company asssumes the investment risk

fixed

annuity suitability issues

generally for investors within the age range of 30 - 55 persons seeking more tax-deferred growth or to offset inflation persons who have maximized qualified plan contributions (401k etc) unsuitable for: senior citizens or people who are seeking IMMEDIATE tax benefits investors with short investment time horizons concerns with 1035 exchanges: customer must benefit from the annuity any benefits potentially lost in the exchange whether the RR recommedning the exchange has signed off and the appliaction was approved by principal

mortality risk expense

guranteed payments for life regardless of life expecctancies

a 62 y/o retured individal has contributed $10,000 into an annuity. This year, she received a lump sum payment from th eannuity of $16,000. How is this distribution taxed?

if qualified: contribution: $10,000 earnings: $6,000 basis: $0 taxable: $16,000 if non-qualified: contribution: $10,000 earnings: $6,000 basis: $10,000 taxable: $6,000

FIXED

insurance company not a security general account portfolio safe, secure, predictable investments poor hedge fund

annuity charges and expenses

like mutual funds, annuities have charges and expenses that are not invested in the separate account; including: - sales charges -> no maximum; but must be reasonable and fair expenses - insurance companies deduct various expensses from the investment income such as: - mgt fee - adviser's fee for making investment decisions in the separate account -- expense risk charges admin expenses mortality risk charges - guarantee that anuiitants o=ill be paid for life even if they live beyodn life expectancies

college savings plans

local government Investment Pools are investments for municipal enitties a 529 plan allows investors to front load the plan with five years worth of contributions ($85k for individausl and avoid gift tax) 529 ABLE account permits disabled individuals to continue receiveing Mesidcare payments

529 plans

may be direct-sold (sold directly no salesperson) or adviser-sold (sold through broker dealer)

What is TRUE regarding an equity-indexed annuity (EIA)?

not a security

qualified annuities

offereed to emplloyees of tax exempt organization sor public schools (403b PLAN) deductible (pre-tax) contibutions, which results in a zero-cost basis contribution amount is limited

joint and last survivor annuity

payments are made for life so long as annuitant is living (2 individuals regardless of age)

life annuity with period certain

payments are made to annuitant for life or to beneficieary (in the case of annuitant's death) specified for minimum number of years

equity indexed annuity

provides a potntial return above a guaranteed minimum amount

529 plans

qualified tuition plans that provide families a federal tax-free way to save money for college investments grows tax defffered money invested in one's state plan may be used in another state to avoid gift tax, the maximum contribution is $18,000 per person, per year (doubled for married couples)- can fron load five years of contirbutions (90k or 180k joint) a federal tax ecemption is provided to the beneficiary for qualified withdrawls college tuition, books and supplies, room and board, max withdrawal of $10,000 per tuition and books for grades K-12 and up to 10,000 lifetime limit to repay a qualified student loan or expenses related to certain apprenticeship programs

straight life annuity

settlemetn option with the greatest risk

equity indexed annuities (EIAs)

similar to fixed annuities since they offer a guranteed maximum return variable annuities since they offer retruns which vary (based on Index performance) investor's return: -if the index performs poorly, the investor will still earn the maximum guaranteed rate - if the index performs above a preset value, the investor will earn a return that exceeds the minimum guaranteed rate some contracts are issued with a participation rate which limits the amount of the index's appreciation that the client will earn

investor assumes invetsment risk

variable

withdrawals

while in the accumulation phase: - annuitants may choose to take withdrawals from their annuity - annuitants control the timing and amount of their withdrawals - earnings are withdrawn first and taxable premature withdrawals: withdrawlas of earnings prior to age 59 1/2 are subject to a 10% penalty the gross amount is also added to taxable income