Unit 24
Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and Social Security benefits. As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance—and he would opt for principal protection instead. Based on the client's profile, which of the following would be the best recommendation? A) Variable annuity B) Fixed annuity C) Mutual fund portfolio consisting of blue-chip stocks D) Exchange-traded fund (ETF) or exchange-traded note (ETN)
B) Fixed annuity Though its stated return might not be as high as the other choice's potential returns, only a fixed annuity fits the objective and risk-averse traits of this client. VAs, blue-chip mutual fund portfolios, ETFs, and ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client.
A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following? A) Increase the premium amortized over the life of the policy B) Reduce the death benefit when the client dies C) Reduce the cash value at the next anniversary D) Cancel the policy
B) Reduce the death benefit when the client dies Unpaid cash value loans reduce the death benefit.
The death benefit of a variable life policy must be calculated at least A) semiannually B) annually C) weekly D) monthly
B) annually The death benefit must be calculated annually and the cash value, monthly.
In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement except A) both are issued by life insurance companies B) both offer an opportunity for unlimited gain C) only the EIA has a minimum guaranteed return D) only the variable annuity is considered a security
B) both offer an opportunity for unlimited gain EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.
The return that will be earned over the life of a fixed annuity A) is tied to a portfolio of common stocks selected by the annuity owner B) will always be at least equal to the guaranteed minimum specified in the contract C) is tied to an investment index such as the Standard & Poor's 500 D) may decrease over time due to the increase in surrender charges
B) will always be at least equal to the guaranteed minimum specified in the contract Fixed annuities are what the term implies—the return is fixed for the life of the contract. In some cases, a fixed annuity may actually pay more (but never less) than the guaranteed amount. This would be true if the insurance company earned what is called "excess interest."
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is A) a 30-year term policy. B) whole life insurance. C) an annuity. D) an index fund.
C) an annuity. One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.
An investor purchases a single premium deferred index annuity with a 6% bonus feature. The premium was $100,000. The annuity has an 80% participation rate with a 10% cap. If the underlying index increased by 15%, the account's value at the end of the year would be closest to A) $116,600. B) $118,720. C) $110,000. D) $116,000.
A) $116,600. The 6% bonus means that the client's initial payment is increased by 6%. That means the account shows a starting balance of $106,000. Although the index increased by 15% and the participation rate of 80% would be a 12% growth rate, the cap of 10% comes into play. That makes the calculation: $106,000 x 110% or $116,600.
According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of A) 24 months B) 12 months C) 45 days D) 18 months
A) 24 months Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege.
Juliette, a math teacher in the local high school, owns a qualified, tax-deferred annuity. When she retires, what will be the tax consequences of her annuity payments? A) Her annuity payments are tax free. B) Her annuity payments are partly taxable as capital gain and partly taxable as ordinary income. C) Her annuity payments are partly taxable and partly tax-free return of capital. D) Her annuity payments are all taxable as ordinary income.
D) Her annuity payments are all taxable as ordinary income. Explanation The key word here is qualified! The investment Juliette made was with pre-tax dollars, the money grows tax-deferred, and everything is taxed at distribution at ordinary income rates. No annuity payment is ever treated as a distribution of capital gains. Note: On the exam, all contributions to retirement plans are fully -deductible unless something in the question specifies otherwise.
Which of the following statements are true of a variable annuity? I. The number of annuity units is fixed when payout begins. II. The value of accumulation units is fixed at purchase. III. The monthly annuity payment is a variable amount. IV. The annuity payments are not subject to income taxes. A) III and IV B) II and III C) I and II D) I and III
D) I and III Explanation The number of annuity units is fixed when an annuitant starts the payout process, and the monthly payment will vary with the market value of the securities in the separate account portfolio. The value of accumulation units varies with the value of the portfolio, and the growth portion of the monthly payments is subject to income tax.
Which of the following is not a type of life insurance policy? A) Universal life policy B) Endowment policy C) Term to 65 policy D) Variable annuity policy
D) Variable annuity policy Explanation Although a variable annuity may have a death benefit provision, it is not considered a life insurance policy. One key to that is, among other things, there is no health questionnaire when purchasing an annuity. Perhaps you have never heard of an endowment policy (it is not mentioned in the LEM). This type of situation may come up on the actual exam where one of the choices is something unfamiliar to you. Don't let that cause you to lose your focus. Annuities are issued by life insurance companies, but they are not life insurance policies, so select the correct answer and move on.
In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years B) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months C) a minimum death benefit D) a minimum cash value
D) a minimum cash value Explanation In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage.
Surrender charges may cause a reduction to all of the following except A) the liquidation value of a variable annuity B) the redemption value of Class B mutual fund shares C) the cash value of a variable life insurance policy D) the death benefit of a variable life insurance policy Explanation Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.
D) the death benefit of a variable life insurance policy Explanation Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.
Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and Social Security benefits. As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance—and he would opt for principal protection instead. Based on the client's profile, which of the following would be the best recommendation? A) Fixed annuity B) Exchange-traded fund (ETF) or exchange-traded note (ETN) C) Variable annuity D) Mutual fund portfolio consisting of blue-chip stocks
A) Fixed annuity Though its stated return might not be as high as the other choice's potential returns, only a fixed annuity fits the objective and risk-averse traits of this client. VAs, blue-chip mutual fund portfolios, ETFs, and ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client.
All of the following are requirements to be a salesman of variable products except A) affiliation with a registered investment adviser B) possession of a valid life insurance license C) affiliation with a registered broker-dealer D) possession of a valid FINRA registration
A) affiliation with a registered investment adviser Because variable contracts are securities as well as insurance products, it is necessary to have a life insurance license as well as a FINRA registration. There is no requirement to be affiliated with an investment adviser, but obviously one can't have a FINRA registration without being affiliated with a broker-dealer.
Which of the following statements regarding nonqualified annuities is correct? A) Because only insurance companies issue variable annuities, they are not considered securities. B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. C) The exclusion ratio applies to accumulation units only. D) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received.
B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.
A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is A) ordinary income tax on $20,000 plus a 10% penalty. B) ordinary income tax on $20,000. C) ordinary income tax on $15,000. D) no tax until the withdrawal exceeds $25,000.
B) ordinary income tax on $20,000. Withdrawals from nonqualified annuities (all annuities on the exam are nonqualified unless otherwise specified) are taxed on a LIFO basis. That is, the last money in (the earnings) is considered the first money withdrawn. The investor's cost is $25,000. The 1035 exchange doesn't affect the cost basis because it is nontaxable. Therefore, with the account currently valued at $50,000, the first $25,000 withdrawn is from the earnings. That makes all of the $20,000 in this question taxable as ordinary income. What about the 10% tax penalty for early withdrawal? If you add the years together (47 + 6 + 7), the investor is 60 and, once reaching 59½, there no longer is the tax penalty.
If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is A) term life. B) index annuity. C) variable life. D) universal life.
D) universal life. Explanation Universal life (not universal variable life) does not invest in the market through a separate account. That is only true of life insurance policies using the word "variable." These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner). Term life cannot be overfunded and annuities of any type are not life insurance policies.
Which of the following statements correctly describes the relationship between annuity units and their value during the payout period of a variable annuity? A) the number of units varies, the unit value varies. B) the number of units remains constant, the unit value varies. C) the number of units remains constant, the unit value remains constant. D) the number of units varies, the unit value remains constant.
B) the number of units remains constant, the unit value varies. Once a variable annuity enters the payout phase, the number of annuity units to be received each month is fixed for life. Since the value of each annuity unit is based on the separate account, the unit value will fluctuate - hence the reason for a variable payout.
All of the following statements regarding universal life insurance are correct except A) it may include a minimum guaranteed interest rate. B) it offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit. C) its premiums are fixed for the life of the policy. D) it offers two death benefit options.
C) its premiums are fixed for the life of the policy. The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.
Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A) Amount of insurance that can be issued B) Cost of the insurance C) Tax treatment of the death proceeds D) The way in which the cash values are invested
D) The way in which the cash values are invested Explanation Variable life insurance allows the policyowner to decide how the cash value is invested through a number of subaccounts. Death benefits from life insurance policies are always free of income tax regardless of the type of policy.
A life insurance policy that allows the policyholder to "overfund" the premium payments is called A) a universal life insurance policy. B) a decreasing term life insurance policy. C) a fixed premium variable life insurance policy. D) a scheduled premium variable life insurance policy.
A) a universal life insurance policy. Universal life, also known as flexible premium or unscheduled premium life, allows the policyholder to make payments in excess of the stated premium in an effort to generate greater cash value growth.
One way in which universal life and variable life are similar is that both A) have flexible premiums B) permit loans against the cash value C) are considered securities D) have a fixed minimum cash value
B) permit loans against the cash value As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.
An individual purchasing a flexible premium variable life contract should know which of the following? I. Timing and amount of premiums generally are discretionary. II. The death benefit will generally be higher than that of a comparable whole life policy. III. The face amount is fixed at the beginning of the contract. IV. The performance of the separate account directly affects the policy's cash value. A) I and IV B) I and III C) II and IV D) II and III
A) I and IV A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.
Among the special characteristics of a universal life insurance policy is A) early termination could lead to surrender charges B) the policy may be overfunded C) that policyowners may borrow against the cash value D) death benefits may increase above the initial face amount
B) the policy may be overfunded This question is looking for a feature found in universal life that is not generally found in other forms of life insurance, i.e, something special. In the case of universal life, the policyowner is permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Therefore, being able to borrow against the cash value is nothing special. Many forms of life insurance have surrender charges for early termination.
You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A) Variable life B) Universal life C) Whole life D) Annual renewable term
D) Annual renewable term Explanation At any given age, term insurance always carries the lowest premium and, of the term policies available, annual renewable term always has the lowest initial premium. Of course, because the premium tends to increase each year the policy is renewed, at older ages it can become unaffordable. But, remember, this question is only asking about initial cost.
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis B) Capital gains taxation on the earnings withdrawn in excess of the owner's basis C) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn D) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis
A) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.
Alix purchased a single premium deferred fixed annuity over 10 years ago. She would be subject to taxation on the deferred earnings in which of these cases? A) When the earnings are withdrawn B) When she dies C) When the earnings are credited to her account D) If she enters into a Section 1035 exchange
A) When the earnings are withdrawn Earnings from any deferred annuity are taxed when withdrawn using the LIFO (last-in, first-out) method. A major advantage of a deferred annuity is that all earnings during the deferral period are tax deferred. A special feature available to certain insurance company products, including annuities, is the ability to exchange one annuity for another on a tax-free basis under the provisions of Section 1035 of the Internal Revenue Code. When the annuitant dies, neither she nor her estate are subject to income tax; any tax due is levied against the beneficiary.
Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose A) a whole life policy. B) a 5-year renewable term policy. C) a decreasing term policy. D) a universal life policy.
A) a whole life policy. Whole life insurance is permanent insurance with a level premium and a level death benefit. The renewable term policy may have a level death benefit, but every 5 years, the premium will increase. Universal life has flexible premiums and, depending on the option chosen, the death benefit can increase. Decreasing term insurance, which is often called mortgage life insurance, reduces the death benefit over the life of the policy, as the name implies.
A customer purchased a variable annuity from an agent 5 years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year 7, which coincides with the customer's anticipated need for the funds. In the 5th year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is A) unsuitable because of surrender fees B) suitable because 1035 exchanges have no adverse tax consequences C) unsuitable unless the customer agrees with the recommendation D) suitable because of the increased death benefit
A) unsuitable because of surrender fees Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is inappropriate for a customer, in general, and particularly for this customer, considering her need to access her funds only two years later.
A terminally ill client wishing to access a portion of the cash value in his whole life insurance policy while still providing a death benefit for his beneficiaries could do so by A) selling the policy in a viatical settlement B) taking out a policy loan C) surrendering the policy for its cash value D) converting it into a term policy
B) taking out a policy loan One of the benefits of whole life insurance is the ability to borrow against the guaranteed cash value in the policy. At death, the amount of the loan is paid off from the death benefit, but the remainder is then paid to the beneficiaries of the policy. Surrendering the policy cancels the death benefit, and the purchaser of the viatical is now the one who determines the beneficiaries. You can't convert permanent insurance to term (and the exam will not consider the situation of leaving the cash value to purchase extended term insurance, which wouldn't work here anyway).
An investor purchased a single payment, deferred non-qualified variable annuity. Each of the following statements is true except A) upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income B) taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract C) random withdrawals are handled under LIFO tax rules D) money invested in this annuity represents the investor's cost basis
B) taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract Taxes on earned dividends, interest, and capital gains are not paid annually. They are deferred and paid later, when the owner withdraws money from the contract. Money randomly withdrawn (not annuitized) is handled under LIFO tax rules; money invested in a non-qualified annuity represents the investor's cost basis; and on withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.
All of the following statements are features of a straight life, fixed, single-premium immediate annuity except A) payments do not increase with inflation. B) the income level may drop if the underlying investments go down in value. C) payments stop when the annuitant dies. D) the annuitant may die before a return of the principal is realized.
B) the income level may drop if the underlying investments go down in value. Payments from a straight life, fixed, single-premium immediate annuity are fixed and are not dependent on underlying investments. However, as fixed payments, they do not offer inflation protection. As a straight life annuity, payments cease at the death of the annuitant. Because there is no minimum payout period, early death could result in total payments being less than the amount of the invested principal.
Concerning index annuities and their method of crediting interest, which of the following is true? A) Annual reset offers the best return regardless of market fluctuations. B) Point to point offers the best return when the market has had a single drastic decline during the period. C) High-water mark with look back offers the best return during periods of high volatility. D) On average, annual reset has a higher participation rate than point to point.
C) High-water mark with look back offers the best return during periods of high volatility. Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point.
Which of these features are common to both variable annuities and scheduled premium variable life insurance? I. Income earned in the separate account is tax deferred. II. Separate account performance below the AIR causes a reduction in cash value. III. Fixed contributions are required. IV. Contract owners have voting rights. A) I and II B) II and III C) I and IV D) III and IV
C) I and IV All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit of a variable life policy, not to cash value. Variable annuities earning more or less than the AIR affects the value of the accumulation unit. Scheduled premium variable life has premiums that are fixed, but no such requirement exists with variable annuities.
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? A) 10% penalty plus payment of ordinary income tax on all funds withdrawn B) Capital gains tax on earnings exceeding basis C) Ordinary income tax on earnings exceeding basis D) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis
C) Ordinary income tax on earnings exceeding basis The IRS taxes distributions from a nonqualified annuity using LIFO. That is, the last money in (the earnings) is the first money withdrawn. The income was deferred from tax, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59½.
Among the reasons to consider investing in a variable annuity would be all of the following except A) a guaranteed death benefit for death before annuitization B) basically, no limit on the amount that can be contributed C) capital gains treatment on any realized gains upon withdrawal D) avoiding probate upon the death of the investor
C) capital gains treatment on any realized gains upon withdrawal In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity. Some insurance companies will place a limit on the amount that may be invested, especially for older clients, but unlike IRS rules on retirement plans, this is strictly a company-by-company decision, not a law. Variable annuities are generally sold with a death benefit provision guaranteeing that the beneficiary will receive the higher of the amount invested or the current value of the account. Because there is a specifically named beneficiary, annuities do not go through the probate process.
A customer purchased a variable annuity from an agent 5 years ago with an initial investment of $200,000. The annuity's surrender fee will expire in year 7, which coincides with the customer's anticipated need for the funds. In the 5th year of the contract, the value of the annuity increased from $300,000 to $375,000. The agent notices that the general market is on the decline and recommends she enter a 1035 exchange of the variable contract for another, thus increasing her death benefit and locking it in at a higher minimum. This recommendation is A) suitable because 1035 exchanges have no adverse tax consequences B) suitable because of the increased death benefit C) unsuitable because of surrender fees D) unsuitable unless the customer agrees with the recommendation
C) unsuitable because of surrender fees Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is inappropriate for a customer, in general, and particularly for this customer, considering her need to access her funds only two years later.
A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal? A) He will not owe taxes because the annuity was nonqualified. B) $16,000.00 C) $10,000.00 D) $6,000.00
D) $6,000.00 Explanation Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.
Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is not true? A) A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. B) A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. C) An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days). D) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity.
D) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity. Explanation Accumulation does not refer to a purchase option. The pay-in period for an annuity is known as the accumulation stage. A single premium deferred annuity is an annuity with a lump-sum investment, with payment of benefits deferred until the annuitant elects to receive them. Periodic payment deferred annuities allow a person to make periodic payments over time. Immediate annuities allow an investor to deposit a lump sum, with the insurance company payout of the annuitant's benefits starting immediately (usually within 60 days).
Which of these features are common to both variable annuities and scheduled premium variable life insurance? I. Income earned in the separate account is tax deferred. II. Separate account performance below the AIR causes a reduction in cash value. III. Fixed contributions are required. IV. Contract owners have voting rights. A) II and III B) III and IV C) I and II D) I and IV
D) I and IV Explanation All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit of a variable life policy, not to cash value. Variable annuities earning more or less than the AIR affects the value of the accumulation unit. Scheduled premium variable life has premiums that are fixed, but no such requirement exists with variable annuities.
The owner of a fixed annuity is protected against A) inflation risk. B) loss of money due to early death. C) purchasing power risk. D) longevity risk.
D) longevity risk. Explanation Because a fixed annuity promises a fixed monthly payment for life, longevity risk is not a concern. However, the fixed payments are subject to purchasing power risk, also known as inflation risk. One other risk is that of dying after only receiving payments for several months after having chosen the life only option.
