S6 Chapter 7
When is the death benefit calculated in a variable life policy?
on an annual basis
Who are SIMPLE plans for?
adopted for small business , 100 or fewer, who do not have another qualified plan. can be IRA or 401K plans, fully vested. pretax
What factors are used for the payout of annuity units?
age principal payout option AIR
Contributions for an IRA can go up to?
age 70 1/2
What 1035 exchange is not permitied?
annuity to a life policy
What is a defined contribution plan?
employees direct the employer to withhold a defined amount of compensation
Funding a defined benefit plan is on the?
employer and they bear the investment risk
What are SEP plans?
established by corporations for smaller employers. They set up IRAs for the employees and is funded by the employer, up to 25% of the employees salary Fully vested.
Most annuities charge this type of sales charge?
CDSC when the investor withdraws money during the accumulation period
When the contract is annuitized, payout options cannont....
CHANGE, they are fixed at that point
What is the maximum sales charge for a variable insurance policy?
9%
One vote is connected to this amount of contract value?
$100
What is the expense charge?
% of the account value used for operating expenses
The mortality expense charge is a ?
% of the contract value, in the range of 1 - 1.25%
VUL have this type of general account
THEY DONT HAVE ONE and no guarantees
Growth in a variable life insurance is dependent on ?
the performance in the separate account
The cash value of variable insurance is based on?
the performance of the underlying investments in the separate account and happens at least monthly
In variable universal life policies (VUL) premiums are paid into?
the separate account with no guarantees as to death benefits or cash value flexible premiums
What happens if policies fail to meet the 7-pay test?
they are classified as MECs, which prior to age 59 1/2 are subject to ordinary tax income plus 10% penalty. death benefit is tax free
What is the conversion or contract exchange?
insurance companies are required to provide a 24 month, conversion window that allows variable policy owners to convert their contracts into a WHOLE LIFE from the date of issuance without evidence of insurability
Nonqualified plans are :
457 plans for religious or non profit deferred compensation plans
Withdrawals on variable life insurance products are treated as?
FIFO, they are not taxable until the cost basis of premiums is exhausted.
Sales in a separate account must be accompanied by a?
Prospectus
What plan would you establish in addition to a 401K plan?
Roth plans
Variable annuities and variable life insurance are both regulated by?
SEC and investment act of 1940
Policy surrenders are treated as?
a cancellation and is taxed on the earnings
What are ESOPs?
a defined contribution plan, where the employer contributions are used to purchase stock. held in a trust
A variable life insurance is a permanent policy designed to offer more competitive returns to act as ?
a hedge against inflation
A full surrender has a payout feature of?
a lump sum distribution
What are non-qualified annuities?
contracts purchased with AFTER-tax dollars
What are the requirements for SEP plans?
21 or older 600 annual income in the last 3 out of 5 years.
Insurance companies must allow policy holders to borrow against their policys cash value in this amount?
75% and the policy must be in force for a specified minimum time period
What is charged if the client cancels the account
A surrender charge and this applies to a specific time period of the contract
What is a 1035 exchange?
A tax-free exchange of one annuity for another, allowed under Section 1035 of the Tax Code.
What type of retirement plan does ERISA require employers to establish for employees? A - defined contribution B - profit-sharing C - defined benefit D - ERISA does not require an employer to establish any type of retirement plan for their employees
D - ERISA does not require an employer to establish any type of retirement plan for their employees
What do you need to have to sell these products?
FINRA RR series 6/7, a state securities (63) and a state life insurance license
Nonqualified plans uses this for surrenders or withdrawals?
LIFO, comes from the earnings first then the original cost basis
Tax free 1035 exchanges is permitted for?
Life to life insurance annuity to annuity life insurance to annuity
What are the pay out options for an annuity?
Lump sum or annuitization which pays out over the life or a specific period of time
The death benefits taxation is?
NOT subject to income tax when paid to the beneficiary
Variable annuities must be registered with?
The SEC under the investment company act of 1940
What is a deferred compensation arrangement?
a nonqualified retirement plan in which employees defer a portion of their income to a specified later date. the goal is to be in a lower tax bracket
What are "subaccounts" according to the policy?
a policy owner can allocate premium and account value dollars to a variety of investment accounts within the separate account
The premiums for a variable life insurance go into?
a portion into the general account to cover the face amount and the remaining will go into the separate account to be invested by the policy owner.
What is a 401K plan
a type of defined contribution where the employee elects to take a salary deduction
What is the cash value that provides living benefits to the owner?
accumulated portions of premiums and their earnings
Investments made into a variable contracts are used to purchase what?
accumulation units
What charges are deducted from the premiums?
admin fees state premium taxes sales charge
What is the contribution limits for qualified plans?
annual 6% excess contribution penalty until the excess is withdrawn
What is life income ( pure or straight life)?
annuity income is payable for as long as the annuitant lives and payments stop upon death. highest monthly income
What is joint and last survivor?
annuity income is payable to 2 named annuitants. upon death of one the benefits continue and could be reduced based on the contract
If the performance of the separate account is less than the AIR, the amount of next payment will
decrease
qualified plans are:
defined benefit hr-10 profit sharing 403(b) 401(k)
What charges are deducted from the separate account?
expense risk fee mortality risk free investment management fee
The premium on a variable life insurance is?
fixed and level premium
For whole life insurance, the policy is?
fixed and the premiums remain level throughout. will remain in force as long as premiums are paid
Periodic premiums for an annuity can be?
fixed or flexible
People whom are not active participants in other plans can deduct what in their IRA?
fully deduct contributions regardless of income
ERISA plans that are not regulated are:
government municipality nonprofit individual plans
The death benefits for a variable life insurance policy is ?
has a face amount that is guaranteed a minimum and can fluctuate based on the performance
What is life income period certain?
income is payable for life or a specific period of time. if they live beyond the period benefits continue. if the owner dies prior to the end of the period, the balance of the payments will be paid to a beneficiary
If the performance of the separate account is greater than the AIR, the amount of next payment will
increase
The separate account is considered a?
investment company
What is an annuity?
is a contract issued by life insurance companies in which the purchaser makes premiums that are invested in a tax-deferred account. designed to pay a future income stream.
Put in order highest annuity payment to lowest; joint and last survivor life income period certain life income with refund life income
life income life income period certain life income with refund joint and last survivor
What is a modified endowment contract?
limits premiums paid into a policy during the first 7 years to the total schedule premiums that would have been paid on a comparable traditional whole life policy.
What are the requirements for a SIMPLE plan?
must have earned 5K during any 2 years before the current year
When does an insurance company take ownership of the funds in an annuity?
once the contract is annuitized
What is life income with refund?
payable for lifetime upon death if the annuitant has not gotten an amount equal to the total of all payments (not growth) the balance is refunded to the beneficiary
What is another name for a defined benefit plan?
pension plan
ERISA regulates what type of plans?
private sector retirement plans
AIR is used to?
project the rate of growth of the separate account during the payout period.
What is the "long-term care rider"?
provides insurance in the event the annuitant qualifies for home health care or nursing home care.
If the performance of the separate account is the same as the AIR, the amount of next payment will
same as the prior month
HR-10 plans are for?
self employed persons, the employer is allowed to contribute the lesser of 25% of post contribution income which is equal to 20% of earnings.
The separate account valuation happens when?
similar to mutual funds EOD NAV
What is the stepped-up death benefit?
some products will have this, guarantees a death benefit based on the account value as of a specified date there is a charge for this
Under a nonqualified annuity contract earnings are?
subject to ordinary tax
Cash value of both variable and traditional products grow?
tax deferred
403(b) plans is a qualified?
tax-sheltered annuity, can also be referred to as a tax-deferred annuity
death benefits in a nonqualified plan are subject to?
taxes above the contracts cost basis
once a variable annuity contract application is complete what happens next?
the RR transmits it to their office of supervisory jurisdiction (OSJ) to be reviewed and approved by a principal of the firm within 7 business days of receipt
The exclusion ratio determines?
the amount of an annuity payment subject to income tax
What happens if the annuitant dies during the accumulation period?
the beneficiary will receive the greater of the current value of the contract or the owners cumulative premiums paid
What are some of the differences to universal life insurance?
the company will deduct mortality and expense loads directly from the cash value premiums are flexible as long as there is enough in the cash account to cover the expenses has adjustable death benefit builds cash at a minimum interest rate but could be higher
Who assumes the investment risk for a variable annuity?
the contract owner since there is no guarantees to performance based on the issuer
What is the surrender value?
the current cash value less any surrender chargers. This is the amount that gets paid to the policy owner
What is the face amount?
the death benefit of the policy that will be paid out to the beneficiary upon death of the insured.
People whom are active participants in other plans can deduct what in their IRA?
the deductibility is based on their AGI
In a defined benefit plan who makes the contributions?
the employer
Premiums and payments for a whole-life insurance are placed in?
the general account, where the insurance company will invest and has a minimum rate of return that guaranteed. the insurance company bears the investment risk
How does voting work for a variable product?
the insurance company is the only person with the right to vote, but votes by proxy for each owner
What happens if the current rate of return is greater than the minimum?
the insurance company will pay out and this will build up additional cash value
An IRA maximum annual contribution is?
the lesser of a specified annual limit or 100% of earned income
What is the free look provision?
the owner can return and receive a full refund of all premiums paid within 45 days of the application or 10 days from the receipt of the policy, whichever is later
AUV =
value of securities in the separate account / total number of accumulation units outstanding EOD close
People who want to hedge against inflation would purchase?
variable annuities
What is the waiver of surrender charges?
will waive or reduce the penalty if needed due to a disability or confinement in a nursing home
When are 1035 exchanges deemed inappropriate?
within 36 months
What happens if the account performance deteriorates while you have a loan against it?
you get a grace period of 31 days, to repay a portion of the outstanding loans
