Unit 15: Insurance-based Products (NOT DONE)

Non security Derivatives

-Forward Contracts -Futures

With an annuity, 1.taxes on earned dividends, interest, and capital gains are paid annually until the owner withdraws money from the contract. 2.random withdrawals are taxed on a LIFO basis. 3.money invested in a nonqualified annuity represents the investor's cost basis. 4.upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

2. 3. 4. Money randomly withdrawn (not annuitized) is handled under LIFO tax rules. Money invested in an annuity represents the investor's cost basis and on withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income. Taxes on earned dividends, interest, and capital gains are not paid annually. They are deferred and paid later, when the owner withdraws money from the contract.

Forward contracts

A direct commitment between one buyer and one seller. -nonstandardized. -Terms are determined by contract parties, without third party intervention. -Ensures a ready market, or supply source because it presumes delivery. -not easily transferred and are considered illiquid. -Each party risks the credit and trustworthiness of other.

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose

A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

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. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be a tax penalty of an additional 10%.

In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A) a minimum cash value B) a minimum death benefit C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months D) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years

A) a minimum cash value In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage.

One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is NOT used as a method to compute the amount of interest to be credited to the account?

Although the participation rate is a component of the computation, it is not a method of computing the interest credit. In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. Using the high-water mark, the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. And finally, with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term. In each of these, the insurance company will specify the participation rate (what percentage of the increase will be credited) and a cap rate (the maximum amount to be credited).

An owner of an annuity that has been annuitized, can do all of the following EXCEPT A) have a joint life with last survivor clause with payments paid until the death of the last survivor B) receive monthly payments for a defined period and then 2 years later change the contract to payment for life C) receive payments on a monthly basis until the time of death D) receive payments for life with a certain minimum period of time guaranteed

B) receive monthly payments for a defined period and then 2 years later change the contract to payments for life. The contract is annuitized when the investor converts from the accumulation (pay-in) stage to the distribution (payout) stage. Once a payout option is selected, it cannot be changed. An annuity owner can elect to receive the benefits on a monthly basis until the time of death. An annuity owner can elect to receive the benefits for life with a certain minimum period of time guaranteed. In addition, an annuity owner can have a joint life with last survivor clause with payouts made until the death of the last survivor.

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that A) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing B) you will receive a statement of your death benefit no less frequently than semiannually C) premiums will vary based upon performance of the separate account D) by surrendering the policy, its cash value may be obtained

D)

Which of these features are common to both variable annuities and scheduled premium variable life insurance? I.Income earned in the separate account is tax deferred. II.Separate account performance below the AIR causes a reduction in cash value. III.Fixed contributions are required. IV.Contract owners have voting rights.

I. Income earned in the seperate is tax deffered Iv. Contract owners have voting rights.

Flexible premium payments are a feature of

Universal Variable Life

Conversion Policy client who purchased a variable life insurance policy 15 months ago has suffered a stroke. In addition, he has developed adult onset diabetes. When receiving treatment for the stroke, he was diagnosed with lung cancer. He has decided to convert his variable policy to a whole life policy. Which of the following statements is CORRECT?

Variable Life insurance The new policy will bear the same issue date and age as the original policy. The face amount must remain the same. Variable life insurance offers a unique conversion policy. Anytime during the first 24 months after policy issue, the policy may be exchanged for a whole life policy (or some similar form of permanent insurance if the company doesn't offer whole life) using the age and medical condition at issue, regardless of the insured's current health. However, the face amount cannot be changed from its original amount.

One way in which universal life and variable life are similar is that both

permit loans against the cash value As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease

to the original face value The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.