Unit 3- Annuity Part 2

When may a variable annuity account be surrendered? A)During the accumulation period. B)Only during the payout period. C)During the annuity period. D)Any time before the accumulation period.

A)During the accumulation period. A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option.

A customer establishes a nonqualified periodic payment deferred annuity and makes payments for three years. If the customer suddenly dies, which of the following statements correctly identifies the tax consequences to the beneficiary? A)The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis. B)All proceeds received by the beneficiary are taxable as ordinary income. C)All proceeds received by the beneficiary are tax free. D)The beneficiary must pay capital gains tax on proceeds exceeding the cost basis.

A)The beneficiary must pay ordinary income tax on proceeds exceeding the cost basis. When an annuitant dies during the accumulation period of a nonqualified annuity, the proceeds exceeding the annuity's cost basis are taxable as ordinary income to the beneficiary.

All of the following statements regarding variable annuities are true EXCEPT: A)although investors bear the investment risk, the insurance company provides a minimum return guarantee. B)when funding a variable annuity, accumulation units are purchased in a separate account. C)upon annuitization, the investor selects the settlement options. D)all account earnings must be reinvested.

A)although investors bear the investment risk, the insurance company provides a minimum return guarantee.

A nonqualified variable annuity valued at $400,000 is annuitized and the annuitant received $220,000 in payments until his death. At his death, if his wife received a lump sum payment of $180,000, this example illustrates a: A)unit refund annuity. B)cash balance annuity. C)joint and last survivor annuity. D)straight life annuity.

A)unit refund annuity. When the unit refund option is chosen, the insurer guarantees, at minimum, to distribute the amount of money that funded the annuity. At the annuitant's death, if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account; typically, in a lump sum payment.

Separate accounts are similar to mutual funds in that both: I-may have diversified portfolios of common stock. II-offer tax deferral on realized growth. III-give investors voting rights. IV-require scheduled payments. A)I and II. B)II and IV. C)III and IV. D)I and III.

D)I and III. Separate accounts and mutual funds both contain a diversified portfolio of securities and provide voting rights for changes in investment policy and management elections.

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: I-not be taxable. II-be taxable. III-probably be considered a suitable recommendation. IV-probably not be considered a suitable recommendation. A)I and IV. B)II and IV. C)II and III. D)I and III.

A)I and IV. The switch from a variable contract with a deferred sales charge in the second year of the contract is most likely unsuitable under the Conduct Rules because the customer would be subject to surrender charges and the back-end load. The 1035 exchange between annuities is not a taxable event.

An investor has contributed $50,000 to a nonqualified variable annuity over the years. She dies before retirement, when the total value of the annuity is $75,000. On how much must her beneficiary pay income tax? A)$50,000.00 B)$25,000.00 C)It depends on the payout option. D)$75,000.00

B)$25,000.00 If an annuitant dies during the accumulation period, the annuity goes to the beneficiary, who must pay tax on the growth and accumulation portion of the total. In this case, the annuitant paid $50,000 in after-tax money and experienced growth of $25,000. The beneficiary is taxed on the $25,000.

An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A)the yield is always higher than mortgage yields. B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. C)the yield is always higher than bond yields. D)the safety of the principal invested.

B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation.

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: A)variable annuity. B)combination annuity. C)fixed annuity. D)portfolio of common stocks and municipal bonds.

B)combination annuity. Because the investor wants the advantages provided by both a fixed and variable annuity, a combination annuity would be suitable.

During the accumulation period of a periodic payment deferred variable annuity, the number of accumulation units: A)increases and the value per unit remains constant. B)increases and the value per unit varies. C)remains fixed and the value per unit remains constant. D)remains fixed and the value per unit varies.

B)increases and the value per unit varies. A periodic payment deferred variable annuity is one in which the investor makes more than one payment. Thus, the number of accumulation units increases. The value of each unit will vary according to the performance of the separate account.

The main benefit that variable life insurance has over whole life insurance is: A)the availability of policy loans. B)an adjustable premium. C)the potential for a higher cash value and death benefit. D)a lower sales charge.

C)the potential for a higher cash value and death benefit. Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.

An individual who purchased an SPDA 20 years ago with an investment of $100,000 has passed the age of 59½ and is considering annuitizing his account. At the time of the investment, the account was credited with 10,000 accumulation units. The account is now valued at $400,000. If the annuity is annuitized, how many annuity units will be used to calculate the monthly check? A)40,000 units. B)More than 10,000 but fewer than 40,000 units. C)0 units. D)10,000 units.

D)10,000 units. When an annuity is annuitized, the accumulation units are replaced with annuity units. Since this annuity was funded with a single premium that purchased 10,000 units, no additional units have been purchased and therefore, when annuitized, will have 10,000 annuity units.

Your customer owns a variable annuity contract, and the AIR stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and he received a check based on this return for $200. In February, the rate of return was 10%, and he received a check for $210. To maintain the same payment he received in February, what rate of return would the separate account have to earn in March? A)10%. B)3%. C)7%. D)5%.

D)5%. If the actual rate of return equals the assumed interest rate, the check will stay the same.

Bob Smith, who is in his 40s, has just been placed into an extremely generous defined benefit plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the years, he has invested $60,000 in the annuity, and its total value is now $80,000. How much will Bob owe in taxes and penalties if he cashes it in? A)Capital gains tax on $20,000 and a $2,000 penalty B)Capital gains tax on $60,000 and a $6,000 penalty C)Income tax on $60,000 and a $6,000 penalty D)Income tax on $20,000 and a $2,000 penalty

D)Income tax on $20,000 and a $2,000 penalty If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% tax penalty on the growth withdrawn, a penalty of $2,000 in this case.

A single premium immediate annuity will pay $2,000 a month for life. What is the annuitant's greatest risk? A)Market risk B)Interest rate risk C)Capital risk D)Inflation risk

D)Inflation risk Also known as purchasing power risk, inflation risk is the effect of continually rising prices on investments. A client who annuitizes a fixed annuity, receiving $2,000 per month, will likely find the monthly check has less purchasing power as time goes on.

A variable annuity contract holder commences the payout period, receiving an initial benefit of $400 based on an assumed interest rate of 4%. In the second month, the contract holder receives $425 on the basis of an annualized rate of return of 10% earned by the separate account. If the separate account experiences an annualized net investment rate of 8% during the third month, the payout to the contract holder will be: A)less than $400. B)$425.00 C)less than $425 but more than $400. D)more than $425.

D)more than $425. The assumed interest rate (in this case, 4%) serves as a base of projection for calculating periodic payments. If the actual return is greater than the AIR, the next month's benefit check will increase in value. Because the account actually earned 8%, which is higher than the AIR, the value of the check would increase again (greater than $425). Always compare the actual return to the AIR, not to the previous month's performance.

All of the following statements regarding contract exchanges under Internal Revenue Code Section 1035 are true EXCEPT: A)policyholders can exchange a variable life policy for another variable life policy of a different company without generating any tax consequences. B)permanent life insurance can be exchanged for an annuity contract without generating any tax consequence. C)a fixed annuity policyholder cannot use a transfer under Section 1035 to exchange it for a life insurance policy. D)under Section 1035, an exchange can occur tax free only if it is made between policies of the same company.

D)under Section 1035, an exchange can occur tax free only if it is made between policies of the same company.