Retirement Plans: Variable Annuities (UITs)
Investment risk in a variable annuity contract is carried by the: A purchaser B issuer C custodian D manager
The best answer is A. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.
Upon annuitization, a customer's insurer calculated the assumed interest rate (AIR) of his annuity as 5 percent. The account earned 6 percent after the first year. The customer's next payout amount will: A increase B decrease C remain unchanged D increase by the changes in the CPI
The best answer is A. Payout amounts will change depending upon the actual earnings of the separate account assets. AIR - Assumed Interest Rate - is the assumed investment return needed to maintain a level monthly payment. If the actual investment return exceeds AIR (as in this example), then the monthly payment will increase. If actual investment return is less than the AIR, then the monthly payment will decrease.
Variable annuities are: A exempt securities that are sold without a prospectus B non-exempt securities that must be sold with a prospectus C insurance products that are sold without a prospectus D futures products that are sold without a prospectus Review
The best answer is B. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.
In a variable annuity contract: A the number of accumulation units is fixed B accumulation units are liquidated to make payments to the annuitant C the number of annuity units is fixed D annuity units are converted into accumulation units
The best answer is C. During the accumulation phase of a variable annuity contract, new money that is invested buys additional accumulation units of the separate account (analogous to buying shares of a mutual fund). (Remember money coming into a contract is accumulating so accumulation units are purchased.) Once the account is annuitized, payments into the separate account must stop. The accumulation units owned at that moment are converted into a fixed number of annuity units (the number of annuity units received is based on that person's expected mortality). The monthly annuity payment is the fixed number of annuity units times the unit value (which will vary with the performance of the underlying mutual fund held in the separate account).
What will change the cash value of a variable life policy? A Changes in expenses B Changes in market value C Changes in death benefit D Changes in beneficiary
he best answer is B. Any "variable" product, either a variable annuity or variable life insurance, takes the premium and invests it in a designated separate account, also called a subaccount, that invests in a specified mutual fund. The performance of the mutual fund builds cash value in a variable life policy. This cash value build can be borrowed from the policy. If the cash value grows to more than the death benefit and has not been borrowed, then the policy will pay the higher cash value on death.
An "accumulation unit" of a variable annuity contract is a(n): A share of common stock representing an interest in the underlying portfolio B accounting measure of the owner's interest in the separate account C accounting measure of the annuity amount to be received by the owner D share of beneficial interest in a fixed portfolio
The best answer is B. An accumulation unit is an accounting measure used for valuing a variable annuity holder's interest in the separate account.
Any changes in value of a variable annuity unit are directly related to changes in the: A Standard and Poor's 500 Average B Value of the securities funding the separate account C Consumer Price Index D Dow Jones Averages
The best answer is B. Since the separate account of investments funds a variable annuity, annuity unit values are directly influenced by changes in the values of the securities in the separate account.
Which annuity payout option usually results in the largest periodic payment? A Unit Refund Annuity B Joint and Last Survivor Annuity C Life Annuity D Life Annuity-Period Certain
The best answer is C. The shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.
To sell variable annuities, a salesperson must be registered with all of the following EXCEPT (the): A FINRA B State Insurance Commission C State Banking Commission D SEC
The best answer is C. To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state's "blue sky" laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
Which of the following annuity payment options will pay the estate of the annuitant if the full value of the account was not received? A Life Annuity B Life Annuity with Period Certain C Joint and Last Survivor Annuity D Unit Refund Annuity
The best answer is D. If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his or her estate gets a "refund" of the remaining value.
The "death benefit" associated with a variable annuity contract means that if the contract holder dies: A prior to annuitization, the amount invested in the contract is returned to a beneficiary B after annuitization, the amount invested in the contract is returned to a beneficiary C prior to annuitization, the insurance company will make a lump sum payment to complete the terms of the contract D after annuitization, the insurance company will pay for the insured's burial expenses
The best answer is A. The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."
The separate account that the insurance company maintains for a variable annuity is: A directly invested in common stocks B invested in Legal List securities only C invested in designated mutual funds D invested in U.S. Government guaranteed securities
The best answer is C. The separate investment account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity to be received.
In order to recommend a variable annuity to a customer, all of the following statements are true EXCEPT: A The customer must be informed, in general terms, of the material features of the product B The representative must believe that the customer would benefit from the product's features C The representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable D The customer, representative and branch manager must all sign a statement that all required representations and determinations were completed
The best answer is D. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that the: customer has been informed, in general terms, of the material features of the product; customer would benefit from one or more of the product's features; and particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable. The representative must sign a statement that all required representations and determinations were completed. Note that there is no customer signature here!
All of the following are features of variable annuities EXCEPT: A professional management B right to vote for change in objectives C insured against losses D death benefits
The best answer is C. Because the separate account is invested in a mutual fund, the portfolio that funds the annuity is professionally managed. The unit holder has the right to vote to change the objectives of the separate account, just like a fund shareholder. Variable annuity purchasers take on investment risk - the separate account can lose money, causing the annuity payments to fall. There is no insurance against losses in the separate account (unless a separate rider is purchased for this). Variable annuities offer a "death benefit" during the accumulation phase. If the owner dies before annuitization, the insurance company will return the greater of all payments made, or NAV, to a beneficiary.
Which recommendation would be most suitable for a 40-year old client whose main objective is retirement income and preservation of capital? A Fixed deferred annuity B Fixed immediate annuity C Variable deferred annuity D Variable immediate annuity
The best answer is A. Because this customer is looking for income in retirement and he or she is only 40 years old, a deferred annuity is the right choice. Because the customer wants preservation of capital, a fixed annuity ensures a fixed guaranteed growth rate, while the growth rate of a variable annuity can go higher, or lower, or negative. So for preservation of capital, a fixed annuity is best. Note that at retirement age, the holder of an annuity can opt for a lump sum payment instead of taking annuity payments, and a fixed annuity guarantees a fixed amount of capital at retirement age, whereas a variable annuity does not.
A customer, age 60, is looking for an investment that will provide life-long income at retirement. The BEST recommendation would be for the customer to: A purchase a variable annuity and annuitize the separate account at retirement B purchase a variable annuity and take installments of a designated amount at retirement C invest in an income mutual fund and elect not to automatically reinvest distributions D invest in a GNMA fund since GNMAs make monthly payments
The best answer is A. The benefit of an annuity contract to an older person is the assurance of receiving income for life - however this only happens if the customer annuitizes the contract. If the customer chooses installments, there is no guarantee of payments for life - when the money in the account is depleted, payments stop.
Which statement is TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? A All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more annuity units B All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred C All interest, dividends, and capital gains from the securities in the account are taxable D All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units
The best answer is B. During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units (NOT annuity units) for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.
The "death benefit" associated with a variable annuity contract: A applies prior to annuitization and means that, upon death, the insurance company will make a lump sum payment to complete the terms of the contract B applies prior to annuitization and means that, upon death, the insurance company will pay a beneficiary at least the amount invested in the contract C applies after annuitization and means that, upon death, the insurance company will make a lump sum payment to complete the terms of the contract D applies after annuitization and means that, upon death, the insurance company will pay a beneficiary at least the amount invested in the contract
The best answer is B. The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."
All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: A the return to investors is dependent on the performance of the securities in the underlying portfolio B the Investment Company Act of 1940 is the regulating legislation C distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made D the underlying portfolios are managed
The best answer is C. Dividends and capital gains in variable annuity separate accounts must be reinvested during the accumulation phase and build tax deferred. In contrast, mutual fund distributions are taxable. Both mutual funds and variable annuities are managed, are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain or loss potential.
All of the following statements are true for both mutual funds and variable annuities that are in the accumulation phase EXCEPT: A both are regulated a under the Investment Company Act of 1940 B the underlying portfolios are managed C both investments grow tax-deferred D the return to investors is dependent on the performance of the securities in the underlying portfolio
The best answer is C. During the accumulation phase of a variable annuity contract, dividend and capital gains distributions must be reinvested and build tax-deferred. In contrast, mutual fund distributions do not have to be reinvested, and they are taxable. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies, and both are regulated under the Investment Company Act of 1940 Investment returns for both are dependent on the performance of the manager of the mutual fund, whether directly purchased or purchased in separate account.
A 50-year old man has purchased a variable annuity contract. He wants payments for his life, but wants to make sure that payments are made for at least 20 years, should he die prematurely. He should choose a: A joint and last survivor annuity option B systematic withdrawal plan that provides for 20 years of payments C life annuity with a 20 year period certain D unit refund annuity
The best answer is C. A life annuity with a 20 year period certain will pay for the life of the annuitant, but if the annuitant dies early, it will pay for a minimum of 20 years regardless. These payments will be made to a designated beneficiary
All of the following are purchase and payout options for variable annuity contracts may be employed EXCEPT: A Lump sum payment; Immediate annuity B Lump sum payment; Deferred annuity C Periodic payments; Immediate annuity D Periodic payments; Deferred annuity
The best answer is C. An investor can buy a variable annuity contract with a lump sum payment. Once the monies are used to purchase accumulation units, annuitization can occur immediately or can occur years in the future. An investor can also make periodic payments into a variable annuity contract, but cannot annuitize until payments stop. Thus, there is no option of periodic payments with an immediate annuity. The annuity must be deferred until the payments are completed.
The "AIR" stated in a variable annuity prospectus is a: A guaranteed fixed interest rate for the annuity B guaranteed minimum interest rate for the annuity C conservative illustration of an interest rate for the annuity D guaranteed maximum interest rate for the annuity
The best answer is C. The Assumed Interest Rate shown in a variable annuity prospectus illustrates the annuity that will be available if the separate account performs at that rate. It is conservatively estimated, but is no guarantee of a specific return.
During the accumulation phase of a variable annuity: A funds can be distributed to unit holders B funds can only be distributed to unit holders above the age of 59 1/2 C as interest, dividends, and capital gains are received, the investor has the option of reinvesting in more shares D as interest, dividends, and capital gains are received, these must be reinvested in more accumulation units
The best answer is D. As interest, dividends, and capital gains are realized from the securities held in the separate account during the accumulation phase, these must be automatically reinvested to buy more accumulation units for the contract holder. These cannot be distributed to the unit holders until the contract is annuitized. Thus, the accumulation phase allows payments to be made into the plan; requires that all dividends and capital gains be reinvested in the plan; and does not allow distributions to be taken out of the plan.
Which statement is TRUE regarding variable annuity contracts? A The principal amount is guaranteed prior to annuitization by the insurance company that issues the contract B The principal amount is guaranteed after annuitization by the insurance company that issues the contract C The contract holder loses control of the principal amount prior to annuitization D The contract holder loses control of the principal amount after annuitization
The best answer is D. In a variable annuity contract, the principal amount is never guaranteed. The principal value may increase or decrease, depending on the performance of the separate account. The "investment risk" is borne by the contract holder, not the insurance company. Regarding the statement about the contract holder "losing control of the principal," this relates to the contract holder's ability to change the terms of the payout from the contract. Prior to annuitization, the contract holder is allowed to change his or her payout option, thus he or she has control over how the principal will be disbursed. However, once the contract is "annuitized," the contract holder cannot change the payout option - he or she loses control over the principal. (Please note that the term "losing control over the principal" does not refer to how the investment manager decides to invest the funds in the separate account.)