Chapter 10
According to industry rules, how long should investors wait between 1035 exchanges of variable contracts?
36 months
According to suitability rules, 1035 exchanges should occur not more frequently than once every:
36 months
Within how many days of receipt must a principal approve or disapprove an application to purchase a variable annuity?
7 business days
the payout on a variable annuity?
A fixed number of annuity units multiplied by a variable dollar amount
In order to sell variable annuities to clients, a person must hold:
A life insurance license and securities registration
Dividends and capital gain distributions in a variable annuity are:
Allowed to accumulate on a tax-deferred basis
An accumulation unit in a variable annuity contract is:
An accounting measure that's used to determine the contract owner's interest in the separate account
According to FINRA, the maximum sales charge on a variable annuity contract is:
An amount that is fair and reasonable
The payout from a variable annuity contract is:
Dependent on the investment returns that are earned by the annuitant
During annuitization, a variable annuity owner will receive payments that are based on a:
Fixed number of annuity units
A customer owns a variable annuity that has a life annuity payout option with a 20-year period certain. If the customer dies after 14 years of payments:
Future payments will continue for six years to a named beneficiary
An investor might take advantage of a Section 1035 exchange if:
Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract
A 57-year old father was in the accumulation phase of his variable annuity when he passed away. What are the tax implications if the annuity is inherited by his son?
If liquidated, any amount above the cost basis is taxed as ordinary income to the son.
Variable annuity nonqualified separate accounts are registered under the:
Investment Company Act of 1940
When comparing variable annuities to fixed annuities, investment risk is assumed by the:
Investor in a variable annuity Annuity company in a fixed annuity
annuity settlement option would provide the longest stream of income over the lives of two individuals?
Joint and last survivor annuity
A person who purchases an annuity with an expectation that she may consider exchanging into another better performing annuity after three years, should consider purchasing:
L shares
The prospectus for a variable annuity contract:
Must be filed with the SEC May be delivered electronically Must provide full and fair disclosure Must detail all sales charges and ongoing expenses of the contract
Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's _____________ and be approved by a principal within _______________ days of receipt before being sent to the insurance company.
OSJ 7 business
A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis?
Only the amount she paid when accumulating units, since reinvestments of distributions were in pretax dollars
An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be:
Ordinary income on the amount in excess of the original investment
An investor is approaching the age she would decide to annuitize a contract. She is considering different settlement options and wants you to explain the benefit of selecting a straight-life payout option. You would explain that this option is attractive because it:
Provides the maximum cash flow of all life payout options
A client has annuitized a variable annuity which has an AIR of 4% but was sold to her by an RR who used an illustration containing a 7% growth rate. This past period, the separate account grew at a rate of 4%. The client's next payment will:
Remain the same
A 65-year old individual invested $240,000 into a variable annuity, which has since grown to $400,000. If she wants to withdraw $150,000, what's the tax implication of taking the withdrawal?
She will be taxed on $150,000 as ordinary income.
When a beneficiary receives the death benefit from a variable annuity, the amount received is:
Taxable above the cost basis to the beneficiary
When engaging in a 1035 exchange an individual should be aware that:
The exchange is not a taxable event but the new annuity may come with additional restrictions
An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is:
Unit refund life annuity
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a:
Variable life insurance contract
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:
Varying number of accumulation units
Once an individual has annuitized her contract, no changes can be made to the settlement option. The accumulated value of the contract is converted into:
a stream of income and no additional withdrawals are permitted from the annuity outside of the chosen the settlement option.
A tax-qualified variable annuity is one used as part of a qualified retirement plan. The monies contributed are:
a tax deduction (pretax monies), grow tax-deferred, and all monies withdrawn are taxed as ordinary income. There is no exclusion allowance since the distribution has never been taxed.
The annuity payout option that provides the beneficiary with a lump-sum payment at the time of the annuitant's death (which reflects the value of the remaining annuity units) is referred to as:
a unit refund life annuity.
Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the:
accumulation or pay-in phase.
When investors purchase a variable annuity contract, they are purchasing:
accumulation units.
The death benefits, which vary with the performance of the separate account, are calculated __________________. Should an investor choose to take a loan against the accumulated value, ______________ would be charged.
annually interest
A person purchased a variable life contract one year ago. Although the contract performed well, the policyholder has never really understood the policy and has informed his RR that he wants out of the contract. The policyholder may be able to:
convert his policy into a whole life contract that is offered by the same firm.
When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the ____________________.
cost basis. Reinvestment of distributions is automatic and done in pretax dollars.
The decision to annuitize and the selection of a settlement option are:
final and cannot be changed.
After annuitizing, investors are still permitted to:
make changes to the allocations of the investment portfolio.
An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that Once annuitized, she may:
no longer make a change
An exchange of annuities that qualifies for IRS Section 1035 treatment is:
not a taxable event.
There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at:
ordinary income tax rates
When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as:
ordinary income.
The number of a client's annuity units never changes in a:
periodic payment variable annuity
An investor who annuitizes a fixed annuity on a straight life basis will receive the same fixed payment for life. Since, in this case the insurance company is highly rated, there is little credit risk (risk of default). However, the ___________________ of any fixed payment is subject to erosion over time due to inflation.
purchasing power
Whether the payment from a variable annuity changes depends on the relationship between the performance of the
separate account and the assumed interest rate (AIR) in the contract.
Variable annuity L shares are referred to ____________________ and have deferred sales charges that decline to zero in three to four years.
short surrender securities
When receiving the death benefit from an annuity, the beneficiary is not subject to a tax penalty. However, the amount that exceeds the cost basis is subject to:
taxation at ordinary rates.
A life annuity with a short period certain settlement option will offer a greater monthly payout than a unit refund life annuity settlement option. The reason is that:
the former only guarantees payments for a short period, while the latter guarantees the payout of the accumulated value less expenses.
Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to:
the highest deferred sales charge, thus making the switch unsuitable.
An annuitant will receive the greatest payout from:
the life annuity settlement option.
If the actual rate of growth in the separate account of a variable annuity exceeds the assumed interest rate (AIR), that month's payment will exceed:
the previous month's payment.
A total withdrawal from a nonqualified annuity results in:
two separate tax treatments.
