RETIREMENT PLANS: VARIABLE ANNUITIES (UITS)

Death Benefit

-contract holder dies prior to annuitization = insurance company pays the greater of current NAV or the amount invested to a beneficiary -contract holder dies after annuitization = no more "death benefit."

Annuity units

-fixed number of units upon which the pay-out from a fixed or variable annuity is calculated - fixed when the accumulation units are annuitized

accumulation phase

-monies can be paid into the plan -withdrawals cannot be taken without a penalty (prior to age 59 1/2 = 10% penalty tax being imposed, in addition to regular tax liability ) -earnings must be reinvested

Traditional insurance products

-term insurance -whole life insurance -fixed annuity contracts -take payments from the policy holder -invest them in the insurance company's general account -excluded from the definition of a security

Variable annuity contracts

-unit trust form of an investment company -insurance company sells an annuity in which the amount of the periodic payments to the investor (called the annuitant) will vary with the value of the mutual funds held in the underlying portfolio -take the payments from the policy holder -invest them in a separate investment account

When comparing fixed annuities to variable annuities, which statements are TRUE? I. a fixed annuity account grows at a guaranteed rate II. A variable annuity account grows at a guaranteed rate III. Fixed annuities are subject to investment risk IV. variable annuities are subject to investment risk A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

Which of the following annuity payment options will continue payments for a specified time period if the annuitant dies prematurely? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity

B. Life Annuity with Period Certain

A customer buys a variable annuity and elects a payout option of Life Income with a 20 year period certain. This means that payments will continue for: A. the annuitant's life, not to exceed 20 years B. the annuitant's life, but if he dies before 20 years elapse, payments continue to his heir(s) C. the life of the annuitant and then cease D. 20 years to the annuitant or beneficiay

B. the annuitant's life, but if he dies before 20 years elapse, payments continue to his heir(s)

Which of the following are purchase and payout options for variable annuity contracts? I. Lump sum payment; Immediate annuity II. Periodic payments; Immediate annuity III. Lump sum payment; Deferred annuity IV. Periodic payments; Deferred annuity A. I and II only B. III and IV only C. I, III and IV D. I, II, III, IV

C. I, III and IV

Variable annuity contracts: I. have the issuer bear the investment risk II. have the purchaser bear the investment risk III. are non-exempt securities IV. are exempt securities A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I. Distributions are taxable to the holder in the year the distribution is made II. The underlying portfolios are managed III. The Investment Company Act of 1940 is the regulating legislation IV. The return to investors is dependent on the performance of the securities in the underlying portfolio A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

C. II, III, IV

Which of the following annuity payment options will continue payments to another person for their life after the annuitant dies? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity

C. Joint and Last Survivor Annuity

An "annuity 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

C. accounting measure of the annuity amount to be received by the owner

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

C. conservative illustration of an interest rate for the annuity

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

C. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made

All of the following terms apply to a variable life policy EXCEPT: A. permanent insurance B. cash value C. general account D. Level premium

C. general account

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

C. invested in designated mutual funds

Accumulation units

- "shares" that a customer acquires in the separate account when purchasing a variable annuity, since this is a "unit" trust form of investment company. The dividends and capital gains received during the investment period are reinvested in the separate account, purchasing additional accumulation units

AIR" - Assumed Interest Rate - illustration

- prospectus for a variable annuity contract - conservative interest rate assumption - shows that annuity that would be received if the separate account grew at this rate - no way a guarantee of the interest rate that will be earned on the contract -dependent on the performance of the mutual fund held in the separate account

Joint and Last Survivor Annuity

-Pays a married couple until the second party dies

Life Annuity - Period Certain

-Pays for that person's life -if that person dies before a stated time period (say 10 years) = annuity will be paid to a beneficiary for the balance of the 10 year certain period

Life Annuity

-Pays only for that person's life -largest monthly payments

Separate account

-account in which a variable annuity investor's monies are used to buy designated mutual fund shares -performance of the mutual fund held will determine the amount of the annuity to be received -assets are kept separate from the insurance company's other investments, which are held in the general account of the insurance company

Unit Refund Annuity

-contract holder dies earlier than expected = balance left in the separate account is refunded to a beneficiary

During the accumulation phase of a variable annuity contract, reinvested: I. dividends and interest are tax deferred II. capital gains are tax deferred III. dividends and interest are taxable IV. capital gains are taxable A. I and II only B. III and IV only C. I and IV only D. II and III only

A. I and II only

The "death benefit" associated with a variable annuity contract: I. applies during the accumulation phase II. Applies during the annuity phase III. Prior to annuitization, the insurance company will pay to a beneficiary, at least the amount invested in the contract IV. after annuitization, the insurance company will pay for the insured's burial expenses A. I and III B. I and IV C. II and III D. II and IV

A. I and III

Which of the following statements are TRUE about variable annuities? I. To sell variable annuities, salespersons must be registered with FINRA II. To sell variable annuities, salespersons do not have to be registered with FINRA III. To sell variable annuities, salespersons must be registered with the State Insurance Commission IV. To sell variable annuities, salespersons do not have to be registered with the State Insurance Commission A. I and III B. I and IV C. II and III D. II and IV

A. I and III

Which of the following statements are TRUE regarding a life annuity? I. The shorter the expected annuity period, the larger the monthly payment II. The longer the expected annuity period, the larger the monthly payment III. A life annuity usually pays the largest amount of all of the annuity payment options IV. A life annuity usually pays the smallest amount of all of the annuity payment options A. I and III B. I and IV C. II and III D. II and IV

A. I and III

Which statements are TRUE regarding the annuitization of a variable annuity contract? I. A Life Annuity payout option may be elected by the policy holder II. Life Annuity-Period Certain is the preferred payout option III. The number of annuity units is fixed; the annuity payment may vary IV. The annuity payment is fixed; the number of annuity units may vary A. I and III B. II and III C. I and IV D. II and IV

A. I and III

Typically, accumulation units of variable annuities represent an investment interest in underlying: A. mutual fund shares B. life insurance policies C. direct participation programs D. pension fund investments

A. mutual fund shares

Investment risk in a variable annuity contract is carried by the: A. purchaser B. issuer C. custodian D. manager

A. purchaser

If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment: A. will increase B. will decrease C. is unaffected D. is capped to a maximum amount

A. will increase

When a variable annuity contract is "annuitized," which statements are TRUE? I. The number of annuity units is fixed II. The number of annuity units is variable III. The annuity unit value is fixed IV. The annuity unit value is variable A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

In order to recommend a variable annuity to a customer, which statements are TRUE? I. The customer must be informed, in general terms, of the material features of the product II. The representative must believe that the customer would benefit from the product's features III. 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 IV. The representative must sign a statement that all required representations and determinations were completed A. I and II only B. III and IV only C. I, II, III only D. I, II, III, IV

D. I, II, III, IV

During the accumulation phase of a variable annuity: I. funds can be distributed to unit holders II. funds cannot be distributed to unit holders III. as interest, dividends, and capital gains are received, the investor has the option of reinvesting in more shares IV. as interest, dividends, and capital gains are received, these must be reinvested in more accumulation units A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

Which of the following statements are TRUE when comparing a Life Annuity to a Life Annuity with Period Certain? I. Both annuities will cease when the person dies II. Only the Life Annuity will cease if the person dies before a stated date III. The periodic payment for a Life Annuity will be lower than the periodic payment for a Period Certain annuity IV. The periodic payment for a Period Certain Annuity will be lower than the periodic payment for a Life Annuity A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

Which statements are TRUE regarding the annuitization of a variable annuity contract? I. A Life Annuity payout option must be elected by the policy holder II. Life Annuity-Period Certain may be elected by the policy holder III. The number of annuity units will vary IV. The annuity payment will vary A. I and III B. II and III C. I and IV D. II and IV

D. II and IV

All of the following statements are true about variable annuities EXCEPT variable annuities: A. must be registered with the Securities and Exchange Commission B. must be sold with a prospectus C. are a participating unit investment trust form of investment company D. are sold without a sales charge

D. are sold without a sales charge

All of the following are true statements about variable annuities EXCEPT: A. the portfolio funding the separate account is professionally managed B. the portfolio is invested in other management company shares C. dividends and capital gains must be reinvested until annuitization occurs D. investors get an interest rate guarantee

D. investors get an interest rate guarantee

Periodic Payments - Deferred Annuity

EXAMPLE: customer, age 40, decides to deposit $500 every month for the next 25 years to an annuity contract. At age 65, the customer annuitizes and starts taking the annuity payments.

Lump Sum Payment- Deferred Annuity

EXAMPLE: customer, age 40, deposits a lump sum amount and lets it build for 25 years. At age 65, the customer annuitizes and starts taking the annuity payments

Lump Sum Payment - Immediate Annuity

EXAMPLE: customer, age 65, has a large amount of cash and wants to retire. He or she deposits uses all the cash to buy a variable annuity contract and immediately annuitizes