Variable Annuities.
What does the "b" in 403b stand for?
"before tax" because the money is not taxed AT ALL until it is withdrawn. Therefore, the account is built "before tax" is levied.
What are the investment options for variable annuities?
4 "buckets" of investments. Money markets, growth funds, aggressive growth funds, and bonds.
What is the purpose and function of the prospectus?
A prospectus contains information about the nature and purpose of the insurance or annuity plan, the separate account and the risk involved. It is a primary source of information for the prospect. All other materials, such as direct mail letters, brochures and advertising also must have prior approval by the SEC.
What are the two types of units?
Accumulation Units, and Annuity Units
Describe "Life income with installment refund"
Annuitant gets lifetime income, but upon death, the balance of the account is passed on in INSTALLMENTS to a beneficiary
Describe "Life income with cash refund"
Annuitant gets lifetime income, but upon death, the balance of the account is passed on in a LUMP SUM to a beneficiary
Why are common stocks used to back variable contracts?
Because common stocks are good against inflation, and the whole purpose of variable contracts is to guard against inflation.
When must a prospectus be given to a potential annuity customer?
Before or during any sales presentation.
D: Joint and FULL Survivor payout
Both survivors get same amt even if 1 of them dies
What unit are FIXED annuities referred to?
Dollars
TF: a senior is 64 years or older.
FALSE. The law says seniors are 65+
Explain how the policy-owner is informed of the accumulated value of the contract during the premium payment period?
Florida law: at least ONCE EACH YEAR the insurer must provide the policy-owner with a report on an approved form that states the # OF UNITS credited to the contract and the DOLLAR VALUE of a unit as of a date not more than two months prior to the date the report is mailed.
What is an immediate annuity?
Funded by a single payment
How does the state punish inappropriate annuity sales?
Generally reasonable corrective actions: refund of premiums, rescinding the policy, having the agent or MGA make corrective actions, etc.
What kind of risk do FIXED annuities have?
INFLATION RISK
What is dollar cost averaging?
It refers to applying equal amounts of money at regular intervals regardless of market levels. In a variable annuity operation, because the dollar amount of monthly or annual premiums is fixed, this means more units would be credited to the contract for each premium payment when stock market levels are low and less when they are high, thus tending to average out the cost of the units during the pay-in period.
D: Joint and 1/2 Survivor payout
Last survivor gets 1/2 of what he/she was getting while both were living.
What KIND of risk is carried with variable annuities?
MARKET RISK
D: correlation between Joint Survivor payout options and amt after the first survivor dies.
More money received while both annuitants are living means less money for the survivor when the first of the annuitant dies.
How is the payout period determined?
Mortality tables used by the insurance company
Equity Indexed Annuities invest in what?
S&P 500 Index.. an average of the entire 500 companies
TF: A 10 year period certain pays for 10 years or for life, whichever is longer.
TRUE. Even if the annuitant dies after the 1st year of payments, the payments will continue for 9 more years.
What has been the role of the Securities and Exchange Commission in the development of both variable annuity contracts and separate account contracts?
The SEC has been a major influence in the historical development of these contracts. In 1956 the SEC asserted jurisdiction over variable annuity contracts and its jurisdiction was upheld in several court decisions. Accordingly, the SEC has jurisdiction over all variable annuity contracts issued by life insurance companies.
What is the present position of the SEC in relation to the issue of "group" variable annuity contracts by insurance companies?
The SEC has permitted life insurance companies to sell certain types of group annuity contracts based on separate accounts, including variable annuity-contracts, without registration as investment companies.
Who carries the risk in a fixed contract?
The insurance company
Which insurance company account directly affects the value of variable annuity units?
The insurance company maintains a SEPARATE VARIABLE UNIT account.
Who carries the risk in a variable contract?
The policy owner
When you see "universal", it means..
The premiums are FLEXIBLE
What is the unit of measuring VARIABLE annuities?
Units
define deferred annuity
an annuity that is funded via periodic payments
What is an "ordinary class" insurer as compared to an "ordinary-variable annuity class" insurer?
An ORDINARY CLASS insurer writes life insurance on the legal reserve plan, usually for amounts of $1,000 or more with premiums payable on an annual, semiannual, quarterly, monthly or weekly basis. An ORDINARY VARIABLE ANNUITY CLASS insurer is one writing an ordinary class of insurance that ALSO issues annuity contracts providing for payments or values that vary directly according to investment experience. This also applies to variable annuity insurance companies.
What is the due diligence for REPLACING or EXCHANGING an existing annuity?
An agent's recommendations must be recorded. An agent must specifically consider whether the consumer will incur a surrender charge, be subject to commencement of a new surrender period, lose existing benefits, be subject to increased fees, benefit from product enhancements, or has recently had another annuity exchange or replacement.
What SEC requirements have been established for group variable annuity contracts for associations of self-employed persons (Keogh Act)? How do they differ from the rules for individual variable annuity contracts?
Any group variable annuity contract forms used for qualified retirement plans established by associations of self-employed persons (under the Keogh Act) are required to be registered as securities. To issue such contracts, a company must file registration statements with the SEC and provide a prospectus. The company is not required to comply with all the requirements applicable to an investment company if it restricts its variable annuity activities to group contracts used for qualified pension and profit-sharing plans. The SEC has thus distinguished these group contracts from individual variable annuity contracts, for which full compliance with the Investment Company Act of 1940 is required.
How often do separate account values and variable account values fluctuate?
As often as the stock market does... so, daily? Yes.
How is the # of annuity units determined?
At the date of retirement, divide the dollar value of the person's accumulation units by the single premium for a life annuity in a monthly amount equal to the annuity unit's current dollar value. This calculation fixes the number of annuity units to which the annuitant is entitled for life even if the annuitant is paid more that he or she accumulated.
Explain the statute regarding an agent's identification on annuity contracts annuity contracts.
Existing law requires that an application for an insurance policy or an annuity contract display the name of the INSURING ENTITY prominently on the FIRST PAGE of the application. Also, such applications must disclose the NAME and LICENSE ID NUMBER as shown on the agent's license issued by the Office, which information may be typed, printed, stamped or handwritten if legible.
TF: A variable annuity agent must notify the Department of Financial Services within 30 days of changing his or her place of employment.
FALSE
TF: The agent needs to get his or her prospectus approved by the insurance company and GA before presenting it to clients.
FALSE. A prospectus must be approved by the SEC.
TF: All companies issuing group variable annuities for qualified retirement plans must comply with the same laws and endure the same registrations.
FALSE. Associations of self-employed people who restrict their VA activities to GROUP CONTRACTS used for QUALIFIED pension and profit-sharing plans DO NOT need to adhere to the same rules as regular investment firms (Keogh Act).
TF: a 20 year period certain pays for 20 years or for life, whichever is longer.
FALSE. It ONLY pays for 20 years.
TF: Florida law requires insurance companies to distribute annual reports to their annuitants that show the AMOUNT of annuity shares they have?
FALSE. The annual report must show the DOLLAR VALUE of each annuity unit.
TF: An annuity sold to a 67 year old may have a surrender charge OR deferred sales charge for a withdraw of money from an annuity LESS THAN 10% of the amount withdrawn (with certain exceptions.)
FALSE. The charges may not be MORE THAN 10% of the amount withdrawn (with certain exceptions) if sold to a senior.
TF: Only banks and insurance companies may issue annuities.
FALSE. The company that actually issues the variable annuity may be chartered as a life insurance company OR a VARIABLE ANNUITY COMPANY and authorized to do business in Florida.
TF: The # of annuity units changes no more than once per year.
FALSE. The number of annuity units credited to the purchaser is fixed once the annuity is annuitized.
TF: The amount of monthly variable annuity payments fluctuates because the number of annuity units fluctuates with the market.
FALSE. The number of annuity units does not fluctuate. It's the VALUE of those units that is tied to the market.
TF: Companies that issue variable annuities are regulated by the SEC because VA's are tied to the stock market.
FALSE. They are regulated by the STATE AND SEC.
TF: the AIR applies to CV for any policy.
FALSE. the AIR applies only to the DB of VARIABLE LIFE
TF. Annuity payments are tax deductable.
FALSE: You still pay taxes on money put into an annuity, and that money is not taxed when it is withdrawn.
The heirs of an annuitant receive the balance on an annuity after the annuitant passes. What kinds of annuities do this?
INSTALLMENT and CASH REFUND
What are variable annuities designed to beat?
Inflation
What is not factored into annuities?
Inflation. Otherwise, they account for interest, principal, and payout period.
Where do LI companies get authority to create separate accounts for common stocks to use as the basis for variable annuity contracts?
Insurance companies have authority from most STATE INSURANCE REGULATORS to establish separate accounts to be invested primarily in common stocks.
What is guaranteed by a traditional variable annuity?
Insurer only guarantees the DB if the owner dies before the maturity date.
How to determine the expected payout of an annuity?
It's based on the age of the annuitant and compared to when that person will likely die using the insurance company's MORTALITY TABLES.
D: Joint and 2/3 Survivor payout
Last survivor gets 2/3 of what he/she was getting while both were living.
Are the investment gains (losses) reflected in the accumulation unit values subject to current income taxation?
No. Accumulation units are only purchased in the accumulation period - which is untaxed. Only THE ANNUITY PERIOD IS TAXABLE @ ordinary income rates.
Can a person be licensed ONLY as a variable annuity agent?
No. No person may sell variable annuities in Florida unless first duly licensed and appointed as a life including variable annuity agent. A life including variable annuity agent is one representing an insurer as to life insurance and annuity contracts.
Does Florida law specify what an insurer must do if an applicant indicates that a variable annuity would be the sole source of retirement income for the applicant?
No. The requirement regarding the inquiry on the application is apparently designed only to bring this to the attention of the applicant.
Are there certain standards and procedures that must be followed in order to make recommendations for annuity products to consumers?
Oh hell yes there are... For sales to SENIORS (65+), an agent is required to have an objectively reasonable basis from information collected from the senior.
What additional information must an agent provide with regard to the replacement or exchange of an annuity contract?
On a form, information concerning differences between the existing annuity contract and the one being recommended, including: 1. Comparison of the benefits, terms, and limitations; 2. comparison of any fees and charges; 3. A written basis for the recommended exchange, including the overall advantages and disadvantages to the consumer; 4. Such other information considered relevant by the agent or insurer in making recommendations to the consumer. 5. Tax consequences 6. Proof of agent's advice for applicant to seek a tax adviser for specific tax insights.
What is the purpose of an annuity?
Pays steady income for a lifetime
TF: Insurers selling variable annuities are subject to regulation by the State.
TRUE
TF. Annuities are opposite of insurance
TRUE. Annuities pay when you're alive, insurance only pays when you're dead.
TF: Group variable annuity contracts used by self-employed people for qualified retirement accounts (and profit sharing plans) must be registered as securities.
TRUE. This is required by the KEOGH ACT. However, IF these associations of self-employed people restrict their VA activities to GROUP contracts, they DO NOT have to endure the same regulations as investment companies.
TF: An agent needs to be licensed in the state he or she is selling an annuity, if the customer lives out of state.
TRUE. You be licensed for the state of the CLIENT
TF in regards to indexed annuities: they can be sold without a FINRA license. Insurance companies guarantee the interest rates. They exists strictly for accumulation.
TRUE.TRUE.TRUE. They track the S&P 500 index,
How are annuities taxed?
Tax free while accumulating, but considered ordinary tax while annuitized.
What 3 groups qualify for 403b plans?
Teachers, employees of a church, and other non-profit employees.
When is AIR assigned?
The Assumed Interest Rate is determined by the insurance company at the time the policy is signed.
Where does the insurance company put the money for FIXED accounts?
The GENERAL account
What shortcoming of fixed annuities is remedied by VA's?
The LACK OF PURCHASING POWER in fixed annuities is remedied by a VA's (hopefully) increasing payments with the market
How does the insurance company decide HOW MANY accumulation units an annuitant gets after paying a premium?
The NUMBER of credited accumulation units purchased by each premium depends upon the current value at the time the premium is paid. .
When you see "variable" it means...
The POLICY OWNER chooses the investments
Is it necessary that a group variable annuity plan meet the requirements for a qualified plan set forth in the Internal Revenue Code?
The SEC restricts the sale of group variable annuity contracts in the case of a life insurance company that is not registered as an investment company to qualified retirement plans.
What if a senior annuity applicant refuses to disclose all of the required information?
The agent must obtain from the senior consumer a signed verification form that he or she refuses to provide the requested information AND may be limiting protections regarding the suitability of the sale.
What must be collected FROM SENIORS to perform due diligence before selling them annuities?
The applicant's... 1. Personal information: Age and sex of the parties to the annuity AND the ages and number of any dependents 2. Tax status 3. Investment objectives 4. Source of funds being used to purchase the annuity 5. Annual income 6. Intended use of the annuity 7. Existing assets, including investment holdings 8. Liquid net worth and liquidity needs 9. Financial situation and needs 10. Risk tolerance 11. Other relevant information is also encouraged
Explain the theory of the Exclusion Ratio
The basic theory underlying annuity taxation is that a taxpayer should be able to get back, free of income tax, the amount that he put into the annuity contract. A portion of each payment is considered to be a return of investment and the rest is taxable income. The exclusion ratio is expressed as T/(E)r, where T is the total amount of input and E(r) is the EXPECTED RETURN.
What are SEC restrictions for GROUP variable annuity contracts issued by insurance companies?
The contracts must be for qualified retirement plans that cover at least 25 employees. No employee contributions may be allocated to the separate account invested primarily in common stocks. The SEC has also authorized insurance companies to offer other forms of variable annuity contracts, both group and individual, provided the insurance company complies with the requirements of the Investment Company Act of 1940 and other securities acts.
At what rate are accumulation units purchased?
The investment earning rate of the insurance company.
How does an exclusion ratio in a variable annuity payout work?
The investment in the contract and the expected return are deemed to be equal and thus the exclusion ratio for variable annuities is 100 percent. The amount that can be received free of income tax in a taxable year is the portion of the investment in the contract that is allocated to that year. This is determined by dividing the investment by the number of years the annuitant is expected to live.
What is meant by the statement "the policy-owner is entitled to a paid-up deferred variable annuity"?
The policy-owner in this situation is credited with a paid-up policy that will provide an annuity based on the value of units credited to the contract up to the time when premium payments were discontinued. A paid-up deferred variable life annuity is a non-forfeiture option available (except in specified amount situations) to all variable annuity policy-owners who discontinue premium payments.
How does the value of an accumulation unit affect the number of units for which the purchaser gets credit?
The set periodic premium will buy more units when unit values are low and less units when unit values are high. Once a unit is purchased, however, the purchaser retains entitlement to that unit regardless of the movement of its value in the future. Thus, as periodic premiums continue to be paid, the purchaser acquires an increasing number of accumulation units. The total value of the accumulation units depends upon the investment performance of the portfolio.
What factors determine the amount of an annuitant's income?
The two factors that determine the participant's dollar income are the number of annuity units and the dollar value of each unit.
How does the insurance company figure the VALUE of each accumulation unit purchased with a premium?
The value of accumulation units is governed by the value of the equity investment portfolio supporting the variable annuity. The formula is specified in the contract.
How is the value of an accumulation unit determined?
The value of an accumulation unit is a function of the after-tax interest earned, dividends received and capital gains (or losses) incurred, less investment expenses associated with the insurer equity investment portfolio supporting the annuity. This is similar to the valuation of the unit values determined for shares in a mutual fund.
Summarize the mechanical aspects of how a deferred variable annuity works.
The variable annuitant is credited with accumulation units upon payment of each premium. The AMOUNT of accumulation units purchased by each premium depends upon the current value at the time the premium is paid. The VALUE of those accumulation units is governed by the value of the equity investment portfolio supporting the variable annuity.
How is the capital gains tax determined for an individual during (1) the accumulation period of a variable annuity, and (2) the payout period?
There is no capital gains tax to the individual during the accumulation period of a variable annuity. The amount of each annuity payment, including capital gains appreciation in excess of the tax-free return, is taxed as ordinary income during the period of payout.(Taxed like your income.)
How are annuity unit values calculated?
Total VA fund value/Total units outstanding
How many annuitants are in Joint & Survivor annuities?
Two
How does a company apply a given percentage of premiums toward accumulation of annuity units?
Upon payment of premiums, a percentage of premium, as provided in the policy, is accumulated for the purchase of accumulation units at the investment earning rate of the company. When annuity benefits are commenced, the total policy accumulation units are applied in accordance with the policy guaranteed annuity tables to secure the first annuity payment amount from which the number of monthly annuity units is calculated. The value of this same number of annuity units is paid each month during the life of the annuitant. The value varies according to investment results of the company's separate variable annuity account, thus producing variable monthly payments.
What is used to figure tax obligations of annuities?
Use the EXLUSION RATIO. What was put into the annuity/Expected returns. Example $150k put in the annuity, and it's expected to pay out $200k. 150/200=75%, so 75% of the annuity income is tax free.
Why are variable annuities regulated by both the SEC and state governments?
Variable annuities are an insurance product, but they are regulated as if they were securities.
What determines the market value of a common stock that is freely traded in the market?
What the buyer is willing to pay and what the seller is willing to accept. Prices are not pegged by the company, the Exchange or the seller. For purposes of determining unit values under a variable annuity contract, the market values of stock are based on the prices at which they have actually been traded.
Main difference between a withdrawal and annuitization
Withdrawal is one payment, you may continue to build the annuity after a withdrawal. Annuitization is when regular payments begin, and you MAY NOT build the annuity anymore after annuitization begins.
Can the variable annuity be written on employee groups as well as individuals?
Yes, it can, with each covered employee being included under the group variable annuity contract issued to the employer.
Can the variable annuity contain such features as waiver of premium or term insurance riders?
Yes, it can. Obviously, the provisions apply only to the accumulation period of a deferred variable annuity.
Must an agent report any changes in his or her residence to the Department of Financial Services?
Yes, you have 30 days to report changes of: name, mailing address, and personal phone numbers, principal place of business, and e-mail address. Failure to comply with this 30-day rule can result in penalties of up to $250 for the first offense and at least $500 for subsequent violations, which can also result in the suspension or revocation of the license.
Does the variable annuity have a loan value?
Yes. Some companies include a loan provision; however, depending on tax qualifications, some group contracts do not permit a loan provision.
If both spouses die with a balance in the annuity account, and the insurance company keeps this balance instead of giving it to the heirs, what kind of annuity did the couple have?
a JOINT annuity
What is the only annuity option that doesn't pay for life?
a PERIOD CERTAIN option. Pays for a period of time, not for life expectancy
What form is used to collect due diligence on an annuity sale?
a form adopted by the Department of Financial Services and signed by the applicant and agent.
Explain the difference between scheduled premium and flexible premium variable life insurance DB.
a guaranteed minimum death benefit versus only a variable death benefit
Describe straight life payout
pays the annuitant for life. NO survivorship options (can't inherit the money), pays the highest
What must be on the FIRST PAGE of an annuity contract application?
the insurer's name, the agent's name, and the agent's license number
Where would you find information about the separate account in which VA's are invested?
the prospectus