Series 6 3.10

If in the annuitization stage of a variable annuity:

-Number of annuity units remain the same -Value of annuity units may increase or decrease

When an investor receives payments during the annuity period of a nonqualified variable annuity, how will he be taxed?

At ordinary income rates on the growth portion.

In a variable annuity, the risk of a fluctuating market is borne by:

The annuitant

Index annuities include

The rate cap and participation rate

In a variable life annuity with ten-year period certain, a contract holder receives:

a minimum of ten years of variable payments, followed by additional variable payments for life.

Who assumes the investment risk in a variable annuity contract?

the annuitant

During the accumulation phase of a variable annuity, the value of the contract owner's portion of the separate account is equal to:

the number of accumulation units times the value per unit.

As ordinary income based on an exclusion ratio

-may have diversified portfolios of common stock. -give investors voting rights.

During the accumulation period of a variable annuity contract, an investor will receive which of the following?

A deferral of tax liability on investment income and capital gains earned in the separate account.

John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments?

His annuity payments are partly taxable and partly tax-free return of capital.

Which of the following statements about a straight-life variable annuity is TRUE?

The number of annuity units a client owns never changes.

Your 75-year-old customer has read many articles about variable annuities and would like you to choose one that would be appropriate for his $100,000 investment. Your customer has a well-diversified investment portfolio and is not currently in need of additional income. The most appropriate response to your customer's request in this situation is:

a variable annuity is probably not a suitable investment choice because of your investor's age and the contingent deferred sales charges that apply on withdrawals.

When evaluating the purchase of an immediate variable annuity for a retiree, the most important factor in determining suitability is:

the uncertainty of the amount of the monthly check.

A customer purchased a variable annuity from an agent five years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year seven, which coincides with the customer's anticipated need for the funds. In the fifth year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is:

unsuitable because of surrender fees.

Jeremy has been investing in a variable annuity for the past six months and has paid $800 in sales charges. If he owns 1,000 accumulation units valued at $5 each, the value of his interest in the separate account is:

$5,000.00 (sales charges are not a factor when calculating this value.)

Your client is interested in some of the tax ramifications of investing in variable annuities. You could tell her:

--partial withdrawals from nonqualified plans are taxed on a LIFO basis. --if she is dissatisfied with one company, Section 1035 of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed.

Similarities between an open-end investment company and the insurance company separate account used to fund a variable annuity include which of the following?

-Full-time portfolio management is provided. -Purchase payments are made in accordance with the forward pricing rule.

A 51 year old customer of a FINRA member firm has made periodic contributions to a variable annuity with a contingent deferred sales charge for the past two years. A registered representative recommends that the customer do a 1035 exchange and switch to a new annuity that offers more attractive separate account returns and a deferred sales charge. The exchange would:

-Not be taxable -probably not be considered a suitable recommendation.

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE?

-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.

Which of the following are advantages of a periodic payment deferred annuity over a lump-sum deferred annuity?

-Smaller individual payments spread out over time are easier to meet than a single large payment. -IV. With periodic payments, the investor's commitment is spread out over years and is easier to reverse if necessary than is payment of a lump sum.

Which of the following are advantages of a periodic payment deferred annuity over a lump-sum deferred annuity?

-Smaller individual payments spread out over time are easier to meet than a single large payment. -With periodic payments, the investor's commitment is spread out over years and is easier to reverse if necessary than is payment of a lump sum.

If a variable annuity has an assumed interest rate of 5% and the annualized return of the separate account is 4%, the value of the:

-accumulation unit will rise. -annuity unit will fall.

Your customer would like to do a 1035 exchange of his variable annuity for a life insurance policy and wants to be sure there will be no adverse tax consequences. You tell him:

1035 exchanges are not allowed from annuities to life insurance.

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?

As ordinary income based on an exclusion ratio

Your customer purchased a variable annuity with an immediate payout plan. In the first month, if she received a payment of $328, which of the following statements about her investment are TRUE?

II.She made a lump-sum investment. (Because her payments began immediately) III.She purchased the variable annuity from a registered representative.

A 75 year old customer asks if it is possible to sell his $500,000 variable life insurance policy to a party other than the insurance company that issued the policy. If a sale occurs, known as a life settlement, which of the following would be a violation of FINRA rules?

Quoting the price using an exclusive buyer that handles all the firm's life settlements

If your customer wants a source of retirement income that is both stable and will offer some protection against purchasing-power risk in times of inflation, you should recommend a:

combination annuity.

When discussing the benefits of a Section 1035 exchange with a client, it would be appropriate to point out that the main benefit is:

tax savings. (exchange of one annuity for another without incurring any current tax liability)

An investor purchased a variable annuity some years ago and has been making regular payments into it. He has encountered financial difficulties and asks his registered representative if he can arrange to delay his next few payments. The registered representative explains that:

the customer may pay in as much or as little, as frequently or as infrequently, as he pleases, with no penalty.

The 1035 exchange provision applies to transfers from fixed policies to variable policies and vice versa, but may not be used to transfer from an annuity to a life insurance policy.

variable annuity to life insurance policy.