Unit 24 - Insurance Based Products

Do not confuse the voting rights of variable annuities and variable life.

*Variable annuities and mutual funds are the same: one vote per unit (share). *Variable life is one vote per $100 of cash value.

Three testable facts about the contract exchange provision are listed here: 1) The contract exchange provision must be available for a minimum of ____. 2) No ______ is required for the exchange. 3) The new policy is issued as if everything were ______.

1) 24 months or 2 years 2) No medical underwriting (evidence of insurability) 3) Retroactive, that is, the age of the insured as of the original date is the age used for premium calculations for the new policy.

List the frequency of certain calculations associated with variable life insurance policies: 1) Death benefits are calculated _____ 2) Cash value is calculated _______ 3) Separate account unit values are calculated ______ (in the event there's a withdrawal of cash value).

1) Annually 2) Monthly 3) Daily

A variable annuity annuitant bears all of the following risks except A) mortality risk B) market risk C) inflation risk D) interest rate risk

A is the answer - Explanation The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The primary risk to the investor in a variable annuity is market risk. Although variable annuities attempt to keep up with inflation, there is no assurance that the performance of the separate account, after expenses, will do so. To the extent that the selected subaccounts contain fixed income securities, there will also be interest rate risk. LO 24.a

Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be A) $100,000. B) $96,400. C) $96,000. D) $103,600.

A is the answer: Explanation Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.

Exclusion ratio

Annuitized payouts are typically made monthly and are taxed according to an exclusion ratio. The exclusion ratio expresses the percentages of the annuity's value upon annuitization of contribution basis to the total.

Even when the distribution is from a nonqualified annuity, if it's made before the age of 59 1/2, it is or is not subject to the 10% additional tax (unless it meets one of the exceptions, which are?

Even when the distribution is from a nonqualified annuity, if it's made before the age of 59 1/2, IT IS subject to the 10% additional tax (unless it meets one of the exceptions, death disability or are part of a life-income option plan with fixed payouts (the contract is annuitized).

A 35-year-old client purchased a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is A) 9% per premium payment. B) 9% of premium per year, computed over a 20-year period. C) 8.5% per premium payment. D) 8.5% of total premiums over the life of the plan.

Explanation B is the answer: A variable life insurance plan may include a maximum sales charge of 9% over a period not to exceed 20 years. It may be loaded as much as 50% of the first year's premium but must average no more than 9% over the first 20 years. LO 24.g

Are there capital gains on an annuity?

No, there is never a capital gain with an annuity.

Annuity Unit

When a VA contract is annuitized, accumulation units are exchanged for annuity units. An annuity unit is a measure of value used only during an annuitized contract's payout period. It's an accounting measure that determines the amount of each payment to the annuitant during the payout period.

If an index annuity has a participation rate of 80%, it means A) the investor's account will be credited with 80% of the growth of the index. B) the investor's account will participate in 80% of the gains and losses of the index. C) the investor's account will never be less than 80% of the initial investment. D) the investor's account will be charged with 80% of the amount lost by the index.

A is the answer: Explanation The participation rate of an index annuity is the percentage of the growth of the index credited to the investor's account. For example, if the index had a return of 10% and the participation rate is 80%, the investor's account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn't one. One of the benefits of an index annuity is that it only shares in the growth, never any losses.

Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose A) a whole life policy. B) a decreasing term policy. C) a universal life policy. D) a 5-year renewable term policy.

A is the answer: Explanation Whole life insurance is permanent insurance with a level premium and a level death benefit. The renewable term policy may have a level death benefit, but every 5 years, the premium will increase. Universal life has flexible premiums and, depending on the option chosen, the death benefit can increase. Decreasing term insurance, which is often called mortgage life insurance, reduces the death benefit over the life of the policy, as the name implies.

(AIR) Assumed Interest Rate

(AIR) Assumed Interest Rate is a basis for determining distributions from a variable annuity. The rate, usually estimated conservatively, provides an earnings target for the separate account. Simply put, if the actual earnings exceed the AIR, the annuity payments increase, if they fall short of the AIR, the payments decrease.

Several testable facts about policy loans: 1) A minimum of ____% of the cash value must be available for a policy loan after the policy has been in force for ___ years. 2) The insurer is never required to loan ____% of the cash value. Full cash value is obtained by _____? 3) If the insured dies with a loan outstanding, what happens to the death benefit? 4) If the insured surrenders the contract with a loan outstanding, what happens to the cash value?

1) 75%, 3 years 2) 100%. Full cash value is obtained by surrendering the policy to the insurer. 3) The death benefit is reduced by the amount of the loan. 4) The cash value is reduced by the amount of the loan.

A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It increases because the client's mortality risk is higher at the older age B) It ceases C) It continues D) It continues but at a reduced rate

B is the answer - Explanation The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account. There may be an internally computed charge, but unlike the accumulation period, the charge is not broken out separately.

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

D is the answer: Explanation All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit of a variable life policy, not to cash value. Variable annuities earning more or less than the AIR affects the value of the accumulation unit. Scheduled premium variable life has premiums that are fixed, but no such requirement exists with variable annuities.

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, A) monthly payments will remain fixed until age 78 and then reduce until death. B) monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. C) monthly payments will cease at age 78. D) monthly payments will continue until death.

D is the answer: Explanation When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years.

The (AIR) has no effect on cash value accumulation in a variable life policy. The cash value will grow whenever the separate account has positive performance. The AIR, however, does affect the ______ benefit

Death Benefit *If the separate account performance for the year is greater than the AIR, the death benefit will increase, *If the separate account performance for the year is equal to the AIR, the death benefit will stay the same *If the separate account performance for the year is less than the AIR, the death benefit will decrease (but never below the guaranteed minimum)

Which charges are deducted from the gross premium and which are deducted from the separate account (the net premium) of a VLI, Variable Life Insurance contract

The charges deducted from the gross premium are (SAS): *Sales load *Administrative fee *State premium taxes Any other charges such as cost of insurance, expense risk fees, and investment management fees are deducted from the net premium, which is invested in the separate account.

As with any variable product, the ______ bears the investment risk.

The investor bears the investment risk.

Upon annuitization, there is or is not a 10% penalty, if annuitization commences prior to age 59 1/2?

Upon annuitization, there is never a 10% penalty, even if annuitization commences prior to age 59 1/2.