Chapter 12 test
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are: A) 100% taxable. B) 100% tax free. C) 100% tax deferred. D) partially a tax-free return of capital and partially taxable.
D) partially a tax-free return of capital and partially taxable.
When may a variable annuity account be surrendered? A) During the accumulation period. B) During the annuity period. C) Any time before the accumulation period. D) Only during the payout period.
A) During the accumulation period.
With regard to a variable annuity, all of the following may vary EXCEPT: A) value of accumulation units. B) number of annuity units. C) value of annuity units. D) number of accumulation units.
B) number of annuity units.
Distributions from nonqualified variable annuities are: A) taxed as ordinary income. B) taxed as ordinary income only to the extent of earnings. C) tax free. D) taxed at a reduced rate.
B) taxed as ordinary income only to the extent of earnings
Your customer in his early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A) Tax-free municipal bonds B) Growth mutual funds C) A variable annuity D) Corporate debt securities
C) A variable annuity
Who assumes the investment risk in a variable annuity contract? A) The investment risk is shared between the insurance company and the policyowner. B) There is no risk in a variable annuity. C) The policyowner. D) The insurance company.
C) The policyowner.
If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: A) accumulation shares. B) mutual fund units. C) accumulation units. D) annuity units.
accumulation units.
For an insurance company, mortality risk turns out unfavorably if: an annuitant lives longer than expected. an annuitant dies sooner than expected. a life insurance holder lives longer than expected. a life insurance holder dies sooner than expected. A) II and IV. B) I and IV. C) I and III. D) II and III.
an annuitant lives longer than expected. a life insurance holder dies sooner than expected.
In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: A) expense guarantee. B) mortality guarantee. C) payment guarantee. D) insurance guarantee.
B) mortality guarantee.
The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? The separate account performance compared to last month's performance. The payout compared to the initial payout upon annuitization. The separate account performance compared to an assumed interest rate. The payout compared to last month's payout. A) I and III. B) II and IV. C) III and IV. D) I and II.
The separate account performance compared to an assumed interest rate. The payout compared to last month's payout.
Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 4 years ago; it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) 2800. B) 0. C) 3800. D) 4200.
A) 2800.
The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Life annuity. B) Life annuity with period certain. C) Joint and last survivor annuity. D) Joint tenants annuity.
A) Life annuity.
If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be most suitable? A) Life-only annuity B) Life annuity with period certain C) Unit refund life option D) Life annuity with 10-year period certain
A) Life-only annuity
Your customer, still working, informs you that she will be funding a variable annuity you have recommended from 2 sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another variable annuity that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. Based only on these facts, the variable annuity recommendation is A) not suitable B) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract C) suitable regardless of funding sources D) not suitable because a lifetime income rider is only for someone who is already retired
A) not suitable
Your client owns a variable annuity contract with an AIR of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would his April payment compare to his March payment? A) It cannot be determined until the April return is calculated. B) It will be higher. C) It will be lower. D) It will stay the same.
B) It will be higher.
Once a variable annuity has been annuitized: A) each annuity unit's value and the number of annuity units vary with time. B) each annuity unit's value varies with time, but the number of annuity units is fixed. C) each annuity unit's value is fixed, but the number of annuity units varies with time. D) the number of annuity units is fixed, and their value remains fixed.
B) each annuity unit's value varies with time, but the number of annuity units is fixed.
A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as A) minimum guaranteed death benefit B) waiver of premium C) life income D) early annuity phase-in
B) waiver of premium
ohn is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) None, because it is the proceeds from a life insurance company. B) The entire amount is taxed as ordinary income, because it is not life insurance. C) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. D) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59-½ years old.
C) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate.
Changes in payments on a variable annuity correspond most closely to fluctuations in the: A) Dow Jones Industrial Average. B) prime rate. C) value of underlying securities held in the separate account. D) cost of living.
C) value of underlying securities held in the separate account.
Which of the following are defined as securities? Fixed annuities. Variable Annuities. Options. CDs insured by the FDIC. A) I and IV. B) II and IV. C) II and III. D) I and III.
Variable Annuities. Options.
A registered representative explaining variable annuities to a customer would be CORRECT in stating that: a variable annuity guarantees an earnings rate of return. a variable annuity does not guarantee an earnings rate of return. a variable annuity guarantees payments for life. a variable annuity does not guarantee payments for life. A) II and III. B) I and III. C) I and IV. D) II and IV.
a variable annuity does not guarantee an earnings rate of return. a variable annuity guarantees payments for life.
A prospectus for a variable annuity contract: must provide full and fair disclosure. is required by the Securities Act of 1933. must be filed with FINRA. must precede every sales presentation. A) III and IV. B) I and II. C) I and III. D) II and IV.
must provide full and fair disclosure. is required by the Securities Act of 1933.
Once a customer annuitizes a variable annuity, which of the following statements are TRUE? The number of annuity units is fixed. The number of annuity units varies. The value of the annuity units is fixed. The value of the annuity units varies. A) I and III. B) II and III. C) II and IV. D) I and IV.
the number of annuity units is fixed. The value of the annuity units varies.
A joint life with last survivor annuity: covers more than one person. continues payments as long as one annuitant is alive. continues payments only as long as all annuitants are still alive. guarantees payments for a certain period of time. A) III and IV. B) I and II. C) I and III. D) II and IV.
covers more than one person. continues payments as long as one annuitant is alive.
Universal variable life policies have investment risk that is assumed by the investor do not have a separate account can be sold by someone with only an insurance license are purchased primarily for their insurance features A) III and IV B) I and IV C) I and II D) II and III
have investment risk that is assumed by the investor are purchased primarily for their insurance features
Of the four client profiles below which might be the best suited for a variable annuity recommendation? A) A 25year old public school teacher who would like to save enough for the purchase of her first home within the next 3 to 5 years. B) A 50 year old individual with $50,000 cash to invest who has already made the maximum contributions to an IRA and the 401(k) plan at his place of employment and would like to minimize some of the tax consequences of his currently high tax bracket. C) A 75 year old women, who is a former executive retired for over ten years who wants to preserve as much capital as she can to leave to her two grandchildren. D) A 30 year old construction worker recently unemployed who wants to invest his severance pay amounting to 9 months salary.
B) A 50 year old individual with $50,000 cash to invest who has already made the maximum contributions to an IRA and the 401(k) plan at his place of employment and would like to minimize some of the tax consequences of his currently high tax bracket.
A registered representative recommends a variable annuity with an income rider to a client. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased 2 years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information the RR should: A) contact the issuer of the clients existing VA contract to facilitate the clients surrender of the contract. B) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase. C) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. D) complete all paper work to purchase the annuity contract and obtain the clients signature immediately.
reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment.
Variable annuities must be registered with: the state banking commission. the state insurance commission. the SEC. FINRA. A) II and IV. B) III and IV. C) II and III. D) I and III.
the state insurance commission. the SEC.
If the owner of a variable annuity dies during the accumulation period, any death benefit will: A) be paid to a designated beneficiary. B) be paid to any legal heirs as recognized by the annuitant's state of domicile. C) be returned to the separate account. D) be paid to the issuing company to complete the plan.
be paid to a designated beneficiary.
A variable annuity's separate account is: used for the investment of funds paid by contract holders. used to escrow late or otherwise delinquent premium payments. required to be located off of the company's premises. regulated under both securities and insurance laws. A) I and IV. B) I and III. C) II and III. D) II and IV.
used for the investment of funds paid by contract holdersregulated under both securities and insurance laws
All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. B) the rate of return is determined by the underlying portfolio's value. C) such an annuity is designed to combat inflation risk. D) the number of annuity units becomes fixed when the contract is annuitized.
A) a minimum rate of return is guaranteed.
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? A) Ordinary income tax on earnings exceeding basis. B) 10% penalty plus payment of ordinary income tax on all funds withdrawn. C) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis. D) Capital gains tax on earnings exceeding basis.
A) Ordinary income tax on earnings exceeding basis.
A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) The entire $10,000 is taxable as ordinary income. B) There is no tax as the withdrawal is considered return of capital. C) Two-thirds of the withdrawal is taxable as ordinary income. D) Any tax due is deferred.
A) The entire $10,000 is taxable as ordinary income.
If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? A) Purchasing power risk. B) Investment risk. C) Mortality risk. D) Value of each annuity unit each month.
Purchasing power risk
An investor who has purchased a nonqualified variable annuity has the right to: vote on proposed changes in investment policy. approve changes in the plan portfolio. vote for the investment adviser. withdraw funds without any tax consequences. A) II and III. B) II and IV. C) I and III. D) I and IV.
vote on proposed changes in investment policy. vote for the investment adviser.
Variable annuity salespeople must register with all of the following EXCEPT: A) FINRA. B) the state insurance department. C) the state banking commission. D) the SEC.
the state banking commission.
Your 55-year-old client invested $50,000 four years ago in a nonqualified variable annuity. The original investment has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will the tax liability to the IRS be? A) 0. B) 3000. C) 4500. D) 4000.
4000
You have 4 clients each expressing interest in a variable annuity contract. Which 2 of the 4 client profiles would a VA be least suitable for? A 45-year-old employed individual with no other retirement accounts in place A 58-year-old individual near retirement who is in good health and anticipates a lengthy retirement A 32-year-old with a company-sponsored 401k plan who will need a lump sum soon to finance graduate school tuition A 60-year-old individual, nearing retirement who has both IRAs and a 401k in place, is comfortable with market risk associated with the stock market, and has a lump sum in cash available to fund the annuity A) I and II B) II and III C) II and IV D) I and III
A 45-year-old employed individual with no other retirement accounts in place A 32-year-old with a company-sponsored 401k plan who will need a lump sum soon to finance graduate school tuition
A registered representative's (RR) customer is speaking of a variable life insurance contract he owns. He makes several statements regarding the contract. Which of the following is NOT an accurate statement concerning a variable life insurance contract? A) The death benefit cannot ever be more than the guaranteed benefit. B) The portion of the premium invested in the insurance company's general account is used to provide for the minimum guaranteed amount of the death benefit. C) There is no guarantee regarding the investment results of the separate account. D) The policy provides a minimum guaranteed death benefit.
A) The death benefit cannot ever be more than the guaranteed benefit.
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. B) the safety of the principal invested. C) the yield is always higher than bond yields. D) the yield is always higher than mortgage yields.
A) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices.
A joint-and-last-survivor annuity is a payout option where: A) two people are covered and payments continue until the second death. B) payments continue until the death of the primary owner. C) payments continue for a pre-determined period of time. D) payments continue until age 70-½.
A) two people are covered and payments continue until the second death.
Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. He makes the following four statements, all of which are true EXCEPT A) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed B) a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant C) a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero D) with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually
A) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A) Capital gains taxation on the earnings withdrawn in excess of the owner's basis. B) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. C) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. D) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis.
B) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis.
An annuity may be purchased under all of the following methods EXCEPT: A) single payment immediate annuity. B) periodic payment deferred annuity. C) periodic payment immediate annuity. D) single payment deferred annuity.
C) periodic payment immediate annuity.
All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A) the client may vote for the board of directors or board of managers. B) the client assumes the investment risk. C) the payout plans provide the client income for life. D) the investment portfolio is managed professionally.
C) the payout plans provide the client income for life.
Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? A) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children B) Age 40, currently unemployed C) Age 27, saving for first home D) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan
D) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan
In a variable life annuity with 10-year period certain, a contract holder receives: A) variable payments for 10 years, followed by fixed payments for life. B) fixed payments for 10 years, followed by variable payments for life. C) 10 years of variable payments. D) a minimum of 10 years of variable payments, followed by additional variable payments for life.
D) a minimum of 10 years of variable payments, followed by additional variable payments for life.
A registered person recommends the purchase of a variable annuity to one of his clients. He wants to ensure that the client, in addition to meeting suitability requirements, is aware of certain variable annuity contract characteristics. All of the following are accurate statements to make to the client EXCEPT A) a variable annuity contract does not guarantee any type of return B) a variable annuity contract is subject to fluctuating values due to market fluctuations of the underlying separate accounts C) a variable annuity contract will provide a fluctuating monthly check upon the annuitization of the contract D) a variable annuity contract is not required to be sold by prospectus because it is an insurance contract
D) a variable annuity contract is not required to be sold by prospectus because it is an insurance contract
An accumulation unit in a variable annuity contract is: A) an accounting measure used to determine payments to the owner of the variable annuity. B) fixed in value until the holder retires. C) none of these. D) an accounting measure used to determine the contract owner's interest in the separate account.
D) an accounting measure used to determine the contract owner's interest in the separate account.
All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A) IRAs. B) Keogh plans. C) defined contribution plans. D) variable annuities.
D) variable annuities.
Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and social security benefits. As part of his profile he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Based on the clients profile which of the following would be the best recommendation? A) Exchange traded Funds (ETFs) or Exchange traded Notes (ETNs) B) Mutual fund portfolio consisting of blue chip stocks C) Variable Annuity D) Fixed Annuity
Fixed Annuity
If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? It was a lump-sum purchase. Distribution of dividends occurs during the accumulation period. Distributions to the annuitant will fluctuate during the payout period. The investor purchased accumulation units. A) I and III. B) I and II. C) II and IV. D) III and IV.
It was a lump-sum purchase. Distributions to the annuitant will fluctuate during the payout period.
An investor owning which of the following variable annuity contracts would hold accumulation units? Periodic payment deferred annuity. Single payment deferred annuity. Immediate life annuity. Immediate life annuity with 10-year period certain. A) II and IV. B) I and II. C) I and III. D) II and III.
Periodic payment deferred annuity. Single payment deferred annuity.
If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? She will receive the annuity's entire value in a lump-sum payment. She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. The annuity unit's value represents a guaranteed return. A) II and IV. B) II and III. C) I and III. D) I and IV.
She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account.
For an investor, which of the following is the most important factor in determining the suitability of a variable annuity investment? A) The investor's marital status. B) The investor's concerns about taxes. C) The fact that periodic payments into the contract may increase or decrease. D) The fact that the annuity payment may increase or decrease.
The fact that the annuity payment may increase or decrease.
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty. A) II and III. B) III and IV. C) II and IV. D) I and IV.
The growth portion is taxed as ordinary income.The growth portion is subject to a 10% penalty.
Which of the following statements regarding variable annuities are TRUE? The number of accumulation units is always fixed throughout the accumulation period. The number of accumulation units can rise during the accumulation period. The number of annuity units is fixed at the time of annuitization. The number of annuity units rises once annuitization begins. A) II and III. B) I and III. C) I and IV. D) II and IV.
The number of accumulation units can rise during the accumulation period. The number of annuity units is fixed at the time of annuitization.
For a retired person, which of the following investments would provide the greatest protection against inflation? A) Fixed annuities. B) Municipal bonds. C) Corporate bonds. D) Variable annuities.
Variable annuities.
A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would best meet the customer profile? A) Money market fund. B) IPO. C) Universal variable life policy. D) Variable annuity.
Variable annuity.
A separate account will invest in a number of different securities. The separate account is NOT likely to invest in: A) money market funds. B) municipal bonds. C) equity funds. D) corporate stock.
municipal bonds.
An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is: A) suitable due to the relative safety of the investment. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. C) suitable due to the death benefit features of a variable annuity. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.
unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.
All of the following statements regarding variable annuities are true EXCEPT: A) variable annuities may only be sold by registered representatives. B) variable annuities offer the investor protection against capital loss. C) variable annuities are classified as insurance products. D) insurance companies keep variable annuity funds in separate accounts from other insurance products.
variable annuities offer the investor protection against capital loss.
All of the following statements concerning a variable annuity are correct EXCEPT: A) the invested money will be professionally managed according to the issuers' investment objectives. B) separate account may consist of mutual funds. C) variable annuities will protect an investor against capital loss. D) a majority vote from the shareholders is required to change the investment objectives.
variable annuities will protect an investor against capital loss.