Variable Annuity QBank (went over)

Which of the following are defined as securities? 1) Fixed annuities. 2) Variable Annuities. 3) Options. 4) CDs insured by the FDIC.

2 and 3) A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return.

Variable annuities must be registered with what?

A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission.

All of the following statements regarding variable annuities are true EXCEPT: A) variable annuities offer the investor protection against capital loss. B) variable annuities may only be sold by registered representatives. C) variable annuities are classified as insurance products. D) insurance companies keep variable annuity funds in separate accounts from other insurance products.

A) A variable annuity is both an insurance and a securities product. An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses.

All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A) defined contribution plans. B) IRAs. C) Keogh plans. D) variable annuities.

D) Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) There is no tax as the withdrawal is considered return of capital. B) Two-thirds of the withdrawal is taxable as ordinary income. C) Any tax due is deferred. D) The entire $10,000 is taxable as ordinary income.

The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59-½, there will be a tax penalty of an additional 10%.

Variable life insurance contract

The policy provides a minimum guaranteed death benefit. The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.

What happens tax-wise for beneficiaries of VAs?

- The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. - Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.

If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding:

- accumulation units. - The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.

Universal variable life policies A) have investment risk that is assumed by the investor B) do not have a separate account C) can be sold by someone with only an insurance license D) are purchased primarily for their insurance features

A and D) Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both insurance and securities licenses.

Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. He makes the following four statements, all of which are true EXCEPT A) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed B) a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant C) with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually D) a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero

A) With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. Each of the remaining statements are true.

Your client owns a variable annuity contract with an AIR of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would his April payment compare to his March payment? A) It will stay the same. B) It will be higher. C) It cannot be determined until the April return is calculated. D) It will be lower.

B) If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.

With regard to a variable annuity, all of the following may vary EXCEPT: A) number of accumulation units. B) number of annuity units. C) value of annuity units. D) value of accumulation units.

B) number of annuity units. Once a variable annuity has been annuitized, each annuity unit's value varies with time, but the number of annuity units is fixed.

A separate account will invest in a number of different securities. The separate account is NOT likely to invest in: A) equity funds. B) money market funds. C) corporate stock. D) municipal bonds.

D) The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level.

Your customer in his early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A) Tax-free municipal bonds B) Corporate debt securities C) Growth mutual funds D) A variable annuity

D) Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. None of the other investments listed here offer tax-deferred growth.