Units Eleven & Twenty Eight: Annuities & Variable Contracts
Kirk Thomas is about to buy a variable annuity contract. He wants to select an annuity that will give him the largest possible monthly payment. Which of the following payout options would do so?
Life only annuity Life only annuity will provide the largest monthly check because there is no refund option. When the annuitant dies, any principle remaining is kept by the company
Mildred purchased a variable annuity with an immediate payout plan in the first month, she received a payment of $328. Which of the following statements about Mildred's investment is are true?
She made a lump-sum investment She purchased a Single Payment Immediate Variable Annuity from a licensed agent, who is also registered with the NASD
Cosmo Insurance Cmpany is facing a poor business year and a period of steep economic decline in general Cosmo's income payments to its fixed annuity contract holders will likely
Stay the same Income payments are guaranteed in a fixed annuity contract.
Which of following statements about tax sheltered annuitites is true?
Taxes on earnings are deferred Tax deferral is a feature of an annuity Choice "A" is wrong. There is a policy 10% penalty for early withdrawal Choice "B" is wrong because payouts are taxable as ordinary
All of the following individuals would be eligible to particpate in a tax sheltered annuity EXCEPT
The Vice President of ABC Corporation Designed for non profit charitable, educational, religious and other 501(c)(3) organizations, including teachers in public school systems
A mutual fund and a variable annuity's sepereate account are similar in that
The investment portfolio is professionally managed The mutual fund has no guarantees. The variable annuity will guarantee an income for life. Both are professionally managed
An Annuity is designed to proivde which of the following financial features?
The liquidation of principal and interest The Portion of the income considered to be the principal is received tax-free. The portion considered to be interesting is taxable. An annuity is simply a vehicle for liquidating a sum of money
An investor is in the annuity stage of a variable annuity purchased 15 years ago. During the present month, the annuitant recieves a check for an amount that is less than the previous month's payment. Which of the following events would have caused the annuitant to receive the smaller check?
The performance of the account was less than the previous month's performance The income will vary depending on the performance of the securities in the "special account"
The value of an individuals variable annuity is directly related to
The performance of the portfolio of the seperate account The value of the variable annuity will increase or decrease according to the investment performance of an underlying portfolio of equity investments
At retirement, Miller decides to annuitize his variable annuity contract. After his final purchase payment, he had 1,857 accumulation units. Which of the following factors will be considered when determining the amount of payout he will receive?
The value of one annuity unit & The number off annuity units Once the conversion is made, the number of annuity units remain the same
Ms. Davis invests in a variable annuity at age 65, she chooses to annuitize. Which of the following statements is true?
The value of the accumulation unit will be used to calculate the total number of annuity units. The number of units then remains the same. The annuitant receives payments for life.
Which of the following are true regarding BOTH variable annuities and mutual funds?
They contain managed portfolios Both are regulated by the Act of 1940. Upon the death of the owner, variable annuitites pass to the owner's designated beneficiary Variable Annuitites grow tax-deferred
John has been making periodic payments into a deferred annuity John's annuity value is $1,200, and the current value of an accumulation units $3. How many accumulation units does John have?
400 Formula: Value divided by unit value = # of units $1,200 / $300 = 400
Which of the following factors may determine the amount of payout from a variable annuity?
Age and sex of the annuitant
Which one of the following statements is correct?
Annuity Income becomes more favorable when purchased at the older ages The older the person is at the time of purchase, the higher the monthly income will be the life expectancy of the older person is less, so the monthly income will be higher
The difference between a fixed annuity and a variable annuity is that the variable annuity...
Attempts to offer protection to the annuitant from inflation A variable annuity does not offer a guaranteed return and the return could be more or less than a fixed annuity
Bary is paying into his variable annuity plan. Last month he received a statement from his insurance company stating that his account had been credited with $127 in net investment income and realized capital gains. How should Bary handle these earnings?
Defer them from current taxation The earnings are tax-deferred. Upon withdrawal, earnings are taxed as ordianry income
A variable annuity contarct guarantees a
Fixed mortality expense & Fixed administrative expense The Company assumes the mortality risk and also guarantees the expenses. The client assumes the investment risk
At age 65, Fred purchased an immediate variable annuity contract. Fred made a lump-sum $100,000 initial payment and selected a life income with ten-year period certain payment option. Fred lived untill age 88. The insurance company made payments to Fred
For 23 years The annuitant receives payment for life. The value of the accumulation units, the number of annuity units remain the same
Which of the following statements about a LIFE ANNUITY with 10 YEARS CERTAIN is true?
If the annuitant lives for 20 years after the start of the income payment period, he will receive income payments for 20 years "A" is correct because the statement indicates the annuitant lived only 20 years and of course, is entitled to payments for life (In his case, 20 years) "B" is incorrect because in a 10 YEARS CERTAIN. if the annuitant died after 5 years the beneficiary would receive payments for the remaining 5 years
Harvey's annuity has a portfolio that contains mostly common stocks. What does this mean for Harvey?
In a rising market, the value of Harvey's account may rise The value of the unit and the value of the total account dpened on the performance of the securities in the seperate account
Susan has paid $14,000 into her variable annuity. Currently, her account is valued at $20,000. If she were to terminate her contract and take the proceeds in a lump sum she would would need to know her cost basis
$14,000 The amount paid into the contract is considered to be her cost base. Taxes are due on the amount that exceeds the cost base
Susan has paid $14,000 into her variable annuity. Currently, her account is valued at $20,000. If Susan surrendered her contract, how much would she report as taxable income received?
$6,000 Her cost base is $14,000 (amt invested) She will pay the tax on the difference
Angus has been investing in a non-qualified deffered annuity through a payroll deduction plan offered at the school system where he works. Angus has invested a total of $10,000. The annuity contrat is currently $16,000, and he plans to retire. On what amount will Angus be taxed if he chooses a lump-sum withdrawal
$6,000 His cost basis is $10,000 (amt invested) He will pay tax on the difference ($16,000-$10,000=$6,000)
Your client tells you he wants a source oof retirement income that is stable, but that also could offer some protection against purchasing power risk in times of inflation. You should recommend:
A combination annuity A combination annuity consits of part fixed (stability), part variable (inflation hedge)
Doris is planning for retirement. She wants to be assured of a minimum income per month, and she wants some protection from inflation. Doris should consider a plan with...
A combination fixed and variable pay-out The fixed annuity will provide a guaranteed income and the variable annuity will provide an income that will vary each month
Harvey has purchased a deferred variable annuity with monthly payments of $150. What do his monthly payments purchase?
Accumulation Units Acculumation units=pay in period; Annuity units= pay-out period
Gary has just purchased a participating immerdiate variable annuity. All of the following are characteristics of Gary's investmetn EXCEPT
All variable annuitites provide dividends An Immediate Variable annuity is purchased with a single payment. Also, if this is a participating contract, dividends will be provided and included in the payout
A contract on which Annual Deposits are paid to specified age after which a lifetime income is payable could be all of the following EXCEPT
An Immediate Annuity A deferred annuity purchased with periodic payments is described here. This could also be called a retirement annuity. Choice "C" is wrong because an immediate annuity can only be purchased by a Lump Sum Payment
Your client is 68 years old, retired, and in good health. She is concerned about budgeting funds. She needs funds for day-to-day living expenses. Starting now as her representative, you could suggest that she purchas...
An immediate annuity A deffered annuity would not give this client the immediate income she needs for her everyday living expenses
Mildred assumes the risk involved with her variable annuity. All of the following are true EXCEPT
An investor, she can be held liable for the debts incurred by the insurance company She is not responsible for the debts of the insurance company
All of the following statements about deferred variable annuities are ture EXCEPT
Contract holders are guaranteed a rate of return The two ways to purchase a deferred annuities are: Single Payment and Periodic Payments (Flexible Premium deferred Annuity) Earnings accumulate on a tax deferred basis. There os no guarantee rate of return
If a client, age 52, chooses to cash in her annuity contract before pay-out begins, she will
Have to pay 10% penalty on the amount withdrawn that exceeds cost base. A 10% penalty is imposed because of early withdrawal (before age 59 1/2) and taxes are due on earnings above the cost basis as ordinary income
Which of the following statements about a straught-life variable annuity is true?
If the client dies during the annuity period, the remaining funds will be distributed to the beneficiary Once the accumulation units are covered to annuity units, the number of annuity units remain the same
An annuity may be purchased under all of the following methods EXCEPT
Periodic Payment, immediate annuity An immediate annuity can be purchased only with a single payment
Annuity payments made to the contract owners are
Taxed only on the portion that represents investment earnings The part of the payment is considered to be Principle is not taxed. The portion considered to be Earnings is taxed
What will suddenly happen if a client,age 35, invests $100 a month in a variable annuity for seven years and suddenly dies?
The client's beneficiaries would receive the greater of the contributions or current value of the account if the contract were insured
The value of a variable annuity separate account fluctuates in relation to the
Value of the separate account portfolio The value of the account varies depending on the performance of the "separate account"
Bob, a registered representative, is discussing variable annuities with a client. He explains that under the contract annuitant recieves payments for life. Bob is describing a...
Payment guarantee A company guarantees payments for life of the annuitant
The insurance company's seperate account is
Payments are invested in a seperate account, similar to a mutual fund, as opposed to an insurer's general account