Chapter 12 - Basics of Life Insurance and Variable Annuities

What is the tax treatment for one time withdrawals from variable annuities?

"Last in, first out"

What is the premature withdrawal penalty?

10%

What licenses must a branch office manager have to sell annuities, so as long as they do not participate directly in the sale?

A securities license

What allows the contract holder of a variable annuity to exchange their existing contract for a new variable annuity contract without paying any tax on the income and investment gains on their current variables?

A tax free 1035 exchange

When recommending the replacement of an existing annuity, what must be completed and forwarded to the principal of the firm?

A written statement form the RR about what factors were considered in making the suitability determination

What is the rate the insurance company has to receive to cover their costs and profits?

AIR, which is a hurdle rate

What is used to determine the contract owner's interest in the separate account?

Accumulation Unit or pay-in period

What are the 2 basic types of units in a variable annuity contract?

Accumulation or annuity units

What type of variable annuity unit is created when you pay into a plan?

Accumulation unit

What is an accounting measure used to determine a contact owner's interest in the separate account during the accumulation period?

Accumulation unit or pay-in period

What is compensation that is paid to the issued of the annuity contracts for services such as recordkeeping, accounting, computation of daily unit values, etc?

Administrative expenses

What does a BD firm need to sell annuities?

An agreement with the issuer

When is tax paid on life insurance products?

Before the premium is paid, and it is not tax deductible

What provides an extra 3-5% premium credit as an incentive to buy the annuity, but comes with higher contract costs and longer surrender periods?

Bonus annuities

What is a fee charged by BD's handling the separate account portfolio transactions, and who's fees are deducted from the separate account?

Brokerage fee

What is the amount avalible in cash upon the voluntary termination of a policy?

Cash surrender value

Who is the investor that buys the variable annuity?

Contract holder or annuity holder

Who are not taxed on their dividends annually, because they are tax deferred?

Contract holders of variable annuities

What is an optional benefit with separate charges that contract holder can purchase to ensure that premium payments will be made in the event of disability?

Disability Waiver of Premium Benefits

When can a contract owner begin to withdraw payments from the CSV, although surrender charges may occur?

During the accumulation period

What provides annuity payments linked to a specific stock index, the S&P 500, which could provide additional returns that are generally capped at a certain percentage?

Equity indexed annuities

What is a charge that an issuer can make for guaranteeing the maximum level of expenses it will incur in administering the contract?

Expense risk charge

What type of annuity pays the same predetermined dollar amount each periods, and the risk is beared by the insurance company?

Fixed annuity

What is a limited investment account established by the insurance company for investments to be paid from the insurance premiums paid?

General account

What should variable annuities not be purchased in, due to the fact that variable annuities accrue tax deferred?

IRA's or 401k's

What is the exception to the 10% tax penalty for early withdrawals?

If the customer annuitized their assets

Where are the professionally managed securities for variable annuities held?

In the separate account

What is the primary purpose of life insurance?

Income replacement for the beneficiary

What is the payout method which gives the investor a fixed amount set in the contract, until the account is extinguished?

Installments for a fixed amount

What payout method gives the investor payments for a designated period and payments are then halted whether or not the investor is still living?

Installments for a period certain

What types of payouts are not annuity payouts?

Installments for a period certain and installments for a fixed amount

What is the fee paid to oversee or manage the portfolio of securities in the separate account, which is based on the average daily net assets in the separate account?

Investment management fee

What type of risk does the contract holder of an annuity account have?

Investment risk

What payout method allows investors to receive regular payments until death, regardless of the investor's sex or life expectancy, and gives out the largest payment of all methods of payout?

Life annuity

What payout method allows investor to receive regular payments until death, and then to a beneficiary for a predetermined period of time?

Life annuity period certain

Who issues annuity contracts?

Life insurance companies

What is another name for a living benefit in permanent life insurance?

Living benefit

What is the greatest risk associated with variable life and variable universal insurance policies?

Market risk

When are annuity units valued?

Monthly, just before payout

How do you determine the number of annuity units created in annuitization?

Multiply the number of accumulation units by the net asset value per unit in the separate account

What is sent to contract owners so they may exercise their right to vote?

Proxies

What is the amount a customer will receive when voluntarily terminating a policy?

The cash value of the policy minus the outstanding loan balance or a surrender charge

What should be considered when buying a variable annuity?

The financial soundness of the issues, the return, and the sales charges, cost of adding riders, and other fees

What will occur if a variable annuity is purchased within a traditional IRA?

The investor will bear additional costs, and will be required to start withdrawing no later than April 1st of the following year that the investor turns 72

What determines the amount of annuity units created?

The payout method chosen by the customer

What determines the number of annuity units issued?

The value of the accumulation units

What is the caveat to receiving distributions from their variable annuities before they are 59.5?

They are subject to the 10% penalty tax until they reach 59.5?

What payout method guarantees the investor or beneficiary will receive a fixed number of payments (not a fixed dollar amount)?

Unit refund annuity

How long does a principal of an OSJ branch office have to approve 1035 applications?

7 days

What licenses must an RR have to sell variable annuities?

A life insurance license and a securities license

What occurs when the annuity owner selects a payout option, and accumulation units are exchanged for annuity units?

Annuitization

What is a series of periodic payments paid to an annuitant for life, usually for a retirement income?

Annuity

What determines the amount of each payment to the annuitant?

Annuity payment (pay-out period)

What type of variable annuity unit is created when you receive payments from the plan?

Annuity unit

What is the interest rate used to determine payouts?

Assumed Investment Rate (AIR)

When must the contract holder receive a prosepectus?

At the time of the contract purchase

What happens to any rate of return over the hurdle rate?

It goes to the annuitants

What is the effect on the annuity value if the actual return exceeds the AIR?

It increased the value

What payout method makes regular payouts to a couple, and will continue to pay out until both members die?

Joint and last survivor annuity

What is a charge for the provision that either the original investment or current value of the contract, whichever is higher, will be paid upon death during the accumulation period?

Mortality risk charge

What do annuities contracts contain which provides that the contract holders will not lose their claim to previous investments if they cannot continue to make payments on their contract?

Non-forfeiture provision

What is an annuity where after-tax dollars are contributed by an individual investor buying a contract, and upon retirement only the excess over the amount contributed is taxable?

Non-tax qualified annuity

Why is choosing a payout method before retirement so important?

Once converted to annuity units, the client cannot withdraw from the program or change investments

When does the SEC permit the delivery of a updating summary prospectus?

Only when it is delivered to investors who already owned variable annuities

How is the excess amount in a non-tax qualified annuity taxed?

Partly a return of capital, partly ordinary income

Which purchasing method allows investors to make monthly, quarterly, semi-annual, or annual payments over a period of time at a fixed sale load?

Periodic payments deferred annuity

What are whole, universal, variable life insurances examples of?

Permanent life insurance

What is a lifetime long insurance policy which holds death benefits and a cash surrender value?

Permanent life insurance

What is the monthly amount a policyholder pays for the insurance policy?

Premium

What is an annuity where the investor contributes pre-tax dollars, usually in an employer-sponsered retirement plan, and upon retirement the distributions are taxed as ordinary income?

Qualified or tax qualified annuit

What is the course of action if an RR has a client who plans to liquidate another variable annuity that they already own in order to purchase a new annuity?

Reassess the situation with the client to determine if and what the amount of surrender charges would be

What is a charge for the liquidation or surrender of the contract during the accumulation period?

Redemption or surrender fee

What are a special optional features available at an additional cost, and must be disclosed to the customer before a decision to a purchase is made?

Riders

What are guaranteed minimum income benefit, bonus credits, and long term care protection examples of?

Riders

What are charges to investors when purchase payments are made on a mutual fund or variable annuity investment, which must be fair and reasonable?

Sales charges or sales load

What is the concept of an RR having to understand the product, know their customer, and have a reasonable basis to believe that the product is suitable for a particular customer?

Sales practices

What do variable life insurance products invest in?

Securities

What are the risks associated with variable annuities?

Securities will not keep pace with inflation, recessions or depressions will cause the value of the annuity units to decline, or the annuitant cannot afford a decrease in their income during the payout period

What is an annuity that is managed by a board of members, and is also called the sub-account or the investment account?

Separate account

Which purchasing method allows investors to make a lump sum purchase and defer the receipt of payments to a later date?

Single payment deferred annuity

What purchasing method allows investors to make a lump sum purchase and immediately begin to receive benefit payments?

Single premium immediate or lump sum purchase

What are taxes on the gross payments made on a life insurance policy or an annuity contract which is deducted before sales charges are computed?

State premium taxes

What are alternative names for variable annuities?

Sub-account, underlying account, or an investment account (NOT mutual funds)

What is a fee that a policyholder will incur when selling, cashing in or cancelling an insurance policy?

Surrender charge

What is the main benefit of a variable annuity?

Tax deferred

What is "temporary" insurance with is good for only a set period of time, providing death benefits only, and holds no cash value?

Term life insurance

What regulation applies to annuities?

The Securities Act of 1933

If the cash surrender value is paid to the customer, what happens to the policy and remaining death benefit?

The policy is terminated and the death benefit is lost

What rights does a contract holder have?

The right to vote for members on the board, and to change investment objectives

Who must variable annuities salespersons be registered with?

The state insurance department, the SEC, and FINRA (not the state banking department)

What are sales charge breakpoints for investments in variable annuities based on?

The total amount invested in the annuity

What affects the changes in value of the annuity unit?

The value of securities in the separate account

How long are earnings in an accumulation unit tax deferred?

Until annuity payments begin

What is a investment portfolio made of mutual funds or other professionally managed securities held in a tax deferred account?

Variable annuity

What type of annuity pays a fluctuating dollar amount each period based on the value of securities in a separate account of the insurance company, and the risk is beared by the annuitant?

Variable annuity

What type of long term investments provide a possible hedge against inflation and would be suitable for an investor with an investment objective of long-term capital appreciation?

Variable annuity

When does the SEC permit the delivery of an initial summary prospectus?

When the full prospectus is available online

When must the contract holder receive a statement of additional information?

Whenever requested

What should the RR consider when advising a client on the exchange of variable annuity for another?

Will the exchange benefit the client, the possibility of surrender charges, and if the client has had another exchange in the last 36 months

What must every firm have in place before the implementation and sale of variable annuities?

Written supervisory policies and procedures and training to RR's