Life 5 (11, 13 & 28) Fixed & Variable Contracts - including retirement

DuMarse, the great grouper fisherman, invested $10,000 into his annuity. His payments are projected to be $20,000. How much of his annuity will be subjected to taxes?

1/2 Explanation:The amount invested divided by the expected return. 10,000/20000. = 10/20 = 1/2.

All of the following statements concerning IRA withdrawals are correct except:

100% of any withdrawal will be taxed Explanation:Not all contributions are deductible.Some of the money coming out of an IRA may represent non-deductible contributions and will not be taxed. Only the interest earned. It will be taxed like an annuity is taxed. Mike was not taxed when he annuitized his IRA. Had he made a withdrawal, then the 10% penalty would have applied.

Which of the following would be eligible for a Keogh Plan?

An independent financial planner

Which of the following contracts require a series of benefit payments be made at specified intervals?

Annuity

If someone purchased a variable annuity, what type of units would the annuity be paid out in?

Annuity Explanation:Variable annuities are expressed in terms of units rather than dollars, as in a fixed annuity. There are only two types of units...Accumulation units which refer to the accumulation period and annuity units which refer to the annuity or payout period. One is either in the accumulation phase or the annuity (payout) phase.

Profit Sharing and Money Purchase Plans are:

Defined Contribution Plans

Which of the following statements regarding annuity taxation is true?

During the annuity period taxes will be imposed at ordinary income rates Explanation:There are no taxes imposed during the accumulation period of the annuity. During the annuity period, taxes will be imposed at ordinary income rates.

Qualified corporate retirement programs must meet all requirements below EXCEPT:

Employee contributions must be vested by 3 years.

The Self-Employed Individual Retirement Act of 1962 created which plan?

Keogh Plan

Which of the following regarding a Roth IRA is true?

One of the qualified withdrawal requirements is that the funds must have been held in the account for five yeyear

An annuitant, age 65, chooses a life income with a 20 year period certain. Which of the following statements concerning this option is true?

Payments will continue for the life of the annuitant, no matter how long that life lasts

Insurance companies must utilize which of the following to guarantee interest under a variable annuity contract?

The average of the company's investment earnings in money market funds A percentage of the company's investments in low risk stocks a percentage of the company's investments in government bonds and mortgages none of the above

After conversion to a payout mode, a decrease in the rate of interest has what affect on the payout of a fixed annuity?

The monthly payout will not be affected Explanation:A fixed annuity guarantees the interest rate, the principle etc... Nothing changes.

Which of the following statements concerning equity indexed annuities is/are correct:

The returns are credited to a specific equity or stock index 2. There are guaranteed interest rates 3. The principle is guaranteed 4. Annuitization can be fixed or variable

A producer must register with FINRA in order to sell which of the following products:

Variable Annuities

The special class of retirement plan available to employees of certain nonprofit charitable or educators is nown as

a tax-sheltered annuity Explanation:403b plans (tax-sheltered annuities) are for 501c3 organizations. There are, for our purposes, 3 types of 501c3 organizations. Teachers, preachers, & non-profits. Remember the "3" in 501c3 stands for 3...A 403b plan is an annuity that can have before tax dollars invested. The "b" in 403b stands for "before tax"....Not really, but it helps to remember this and all we are trying to do is pass a test.

Who will receive the lowest monthly annuity payment, all else being equal?

a young woman Explanation:A young woman lives longer than all the others listed. Her benefit factor would be lower per $1000.

The exclusion ratio for a Variable Annuity is determined by:

dividing the amount invested by the life expectancy Explanation:This means that 100% of your investment (the amount representing after-tax dollars) will be received tax free. The portion representing interest will be taxable. The formula is different for variable annuities vs. fixed annuities. With FIXED annuities the benefit amount is fixed so you use a fixed % to determine what is taxable and what is not. With a variable annuity the benefit changes every month so a different formula is used. In the case of variable annuities the formula is the amount invested divided by the life expectancy. Ex., If you had invested $15,000 and your life expectancy was 15 years, you divide the $15000, by 15. This equals $1000. Any amount receive above the would be taxable.

A Life with 20 yr. period certain annuity would pay:

20 yrs. or life of the annuitant whichever is longer Explanation:This is a "life" annuity with a survivorship option. If the annuitant died within the first 20 years the company would pay for the remainder of the 20 years.

Which annuity option is not taxed according to the Last In First Out (LIFO) method?

Annuitized settlements Explanation:Annuitized settlements (payments for life) are taxed according to the idea that part of the amount received represents principle, the rest interest. This is taxed according to the amount invested divided by the expected return. Lump sums, withdrawals, and period certain payments are taxed according to LIFO, Last In First Out. Any money taken out first will be taxed up to the amount of the gain.

Which of the following statements concerning the differences between IRA's and Simplified Employee Pension plans is/are correct?

Contribution limits are 25% for SEPs, $5500 for IRAs Both are individual retirement accounts No new SARSEPs may be established SARSEPs established prior to 1997 may still accept new employee participants. However, no new SARSEPs may be established. These were replaced by the new SIMPLE plans.

Which of the following statements about a life annuity with 10 years certain is/are true?

If the annuitant lives for 20 years after the start of the income period, he will receive income payments for 20 years.

Which of the following is not a determining factor in the payout of an annuity?

Inflation Rate Explanation:Would be nice to know, but it is not required.

Which of the following statements concerning SIMPLE plans is/are correct?

Mandatory employer contributions up to 3% of the employee's contribution annual compensation

Which of the following statements concerning annuities are true?

Most annuities guarantee a death benefit in the event the annuitant dies prior to the beginning of the payout, but it is usually limited to the amount invested. During the annuity period, which is the time the annuitant is receiving payments, no further payments are allowed. One can not "pay in" while the annuity is paying out. Immediate annuities are what they are, immediate, and no further payments are allowed. Immediate annuities begin paying usually within one month after the deposit. Annuity payments are usually monthly but may be paid to the annuitant quarterly, semi-annually, or annually.

An annuity which pays out a minimum guaranteed amount for a specified period or number of years is a:

Period Certain Explanation:Although most annuities pay for "life" there are temporary annuities that pay a "fixed period" of time. There are minimum payouts they must follow. The Florida lottery is an example.

Pamella is the sole proprietor of a craft shop. She decides it is time to start her retirement planning. In order to obtain the maximum legal amount in a qualified plan which should she choose?

Simplified Employee Pension Explanation:With a SEP, the maximum contribution is $49,000. The IRA limit is $5500. With a spousal, there would be an additional $5500.The 401k limit is $18,500.

The Pension Protection Act of 2006 helps employees who save for retirement through defined contribution plans by

The Pension Proctection Act provides for all of these things, as well as mandating certain requirements for "under-funded" Defined Benefit Plans.

The purpose of the Variable Annuity exclusion is to show that:

The Principle is tax-free, the interest is taxable

Variable Annuity insurance companies are regulated by which of the following?

The SEC and the state's Office of Insurance Regulation Explanation:Any time you see the word "variable" you need to remember that the product is then dually regulated by the state (Office of Insurance Regulation) AND the SEC (Securities and Exchange Commission), which is federal.

An Annuity is designed to provide which of the following financial features?

The liquidation of principal and interest A favorable tax treatment for income received

Which of the following statements regarding Keogh plans is incorrect?

They do not have to qualify for employer contributions to be a deductible expense Explanation:For contributions to be deductible, the must be "qualified". Keoghs are qualified plans.

Which of the following can not be exchanged tax free under the 1035 exchange rule?

annuity to life insurance Explanation:Under the 1035 exchange rules, one can NOT go from annuity to life.

Which of the following is true concerning Section 457 deferred compensation plans?

may be funded with life insurance Explanation:These types of deferred compensation plans are reserved for employees of state and local governments and non-profit organizations which allow the employee to defer compensation without current taxation. Life insurance and annuities are allowed in these investments.

When dealing with annuity investments for seniors, an agent should obtain at a minimum all of the following except:

occupation Explanation:If the consumer refuses to provide this information, the agent must have a signed verification form from the consumer.

Which of the following would be entitled to a tax free rollover from an IRA?

the person who establishes the IRA and any named beneficiary Explanation:Only the person who established the IRA is entitled to a rollover, with one exception, a surviving spouse. Note....The tax law now reads that non-spousal beneficiaries may take the proceeds over their lifetime.

To qualify for tax purposes, a defined benefit plan must meet all the following except:

the plan must provide equal benefits to all employees in the same actuarial class Explanation:Benefits will be different for everyone depending on the amount of time worked at the company, position, etc. Actuarial class pertains to death benefits.

What does the exclusion ratio in an annuity determine?

the principle is tax free and the interest is taxable Explanation:The exclusion ratio is used to determine what is taxable and what is not. It tells us what is EXCLUDED. The money put into an annuity is with after tax dollars. This money is invested and earns interest. The interest is NOT taxed until it is taken out. The taxes are deferred. When taken out, the principle is received tax free as it has already been taxed. The interest Will be taxed. That is what the exclusion ratio is for.

Which of the following would not be a characteristic of an annuity?

typical mandatory distributions by age 70 1/2 Explanation:Typically, insurance companies impose limitations on how long an annuity can be deferred. Generally age 75. They do usually allow one to withdraw up to 10% of the value without a surrender charge.

An Annuitant receives monthly payments from a variable annuity under a joint and 2/3rds survivor option. If the primary annuitant dies what will the surviving annuitant receive?

The dollar value of two thirds of the annuity units that were being distributed monthly to the primary annuitant for life.

Under a life income annuity option which of the following is true?

The older the annuitant the larger the monthly payment.

All of the following might be found in a prospectus except:

past annual returns of the general account Explanation:The prospectus must accompany or precede the offering of the security, the variable annuity. Variable products are invested in the company's seperate account, not the general account.

A money-purchase plan is:

A fixed contribution with a variable benefit Explanation:A money purchase plan is a type of Defined Contribution plan. We can define either a stipulated amount or a percentage of income deposited each year, but because the interest rate varies from year to year it is impossible to predict how much money will be available to the retiring worker in future years. So, the amount or percentage going in is known , the amount coming out is unknown, a variable.

ANNUITIES can be designed to provide all the following EXCEPT:

A predictable death benefit to a beneficiary. Explanation:There are no death benefits with an annuity. Only before the annuity has been annuitized (the accumulation period) will the annuity pay a death benefit. This is limit4d to whatever was invested and any interest earned.

All the following statements regarding SIMPLE plans are true except?

may be integrated with a defined contribution plan Explanation:For businesses with fewer than 100 employees. No other qualified plans may be offered to the employees.Employer match,dollar for dollar, contribution up to 3% of the employee's annual compensation. 100% vested, even in the employer's matching contribution.

A Florida life insurance company may issue "Group Variable Annuity Contracts" without registering as an investment firm if the contracts are used for qualified retirement plans and cover at least _____ people?

25

The Pension Protection Act defines a Defined Benefit Plan "At RIsk" when the plan is less than what per centage funded?

80% Explanation:A Defined Benefit Plan must have a certain amount of money available to fund the benefits that was promised to the employees when they retire. Some plans did not have enough money to cover these benefits. They were "at risk" or under funded.

All of the following should be able to establish a Keogh plan EXCEPT:

A minority stockholder/employee of a family corporation. Explanation:Unincorporated is the key.

What is dollar cost averaging?

Investing equal amounts of money at regular intervals Explanation:Dollar cost averaging is an investment stategy which applies equal amounts of money into the stock market at regular intervals. The idea is not to time the market but to buy more shares when the price is low and fewer shares when the price is high.

To determine the amount of income that is considered taxable from a fixed life annuity, an exclusion ratio is used. Which of the following would be correct?

The amount invested divided by the expected return

A joint & 2/3 fixed or variable annuity may have all the following characteristics except:

The company cannot use the SEX of the individuals as a payout factor.

Under the 1035 exchange rules, which would not be an acceptable course of action for tax purposes?

changing from an annuity to life insurance Explanation:Under the 1035 exchange rules any gains may be sheltered by rolling a like product to another like product. The cash value from a life policy to an annuity is allowed but the money from annuity to a life insurance policy is not allowed.

All of the following are general qualification requirements for employer-sponsored retirement plans except:

the plan may be established by the employer, employee, or both Explanation:Life insurance benefits must be incidental.This means that the majority of money invested in the plan(at least 51%) be invested in some type of investment not including life insurance.) (If a dollar is invested, .51 may go to mutual funds, .49 may purchase insurance benefits). There also must be available for the spouse a joint type of annuity option. The employee can't choose a straight life option without the spouse's consent.The employer can be teated as an employee and the plan must be established by the employer.

Should Joan die after receiving one month's payment the balance would be paid to a named beneficiary

Should Joan die after receiving one month's payment the balance would be paid to a named beneficiary Explanation:The straight life income option has the highest benefit factor (the dollar amount per $1000 that Joan will receive) of all income options. So, it has the most risk to Joan. Should she die, no more payments are made to her estate of beneficiary. Should she live forever, payments will continue forever. This option is usually for a single person, or a person who has plenty of insurance that would "kick-in" after the annuitant died.

Owners of Variable Annuities will realize better investment growth when?

The stock market outperforms fixed-dollar investments Explanation:The idea with Variable annuite is to provide a hedge against inflation. Over the long haul, the stock market has outperformed fixed dollar investments.