series 6 - securities chapter unit 6 b- annuities

What is a combination annuity?

1. fixed and variable combined. 2. premiums paid into this type of annuity are allocated between the insurance company's general funds and a separate growth oriented account. 3. As a result, they provide guaranteed payments as well as protection against inflation.

Who is the insured?

The person whose life is protected by the insurance policy.

What risk are associated with fixed annuities?

The risk of loss of purchasing price over time due to inflation.

What are immediate annuities?

This type of annuity begins making payments to the annuitant one payment period after a single lump sum payment is made. 2. Can only be funded with a single lump sum premium since payments begin immediately. This can be the first month or the first year after the deposit was made, depending on the payment schedule selected.

T/F since the separate account is considered a form of security, it must be registered.

True, under the investment company act of 1940.

What are Real Estate investment trust?

a company that administers a portfolio of real estate investments in order to earn profits for shareholders. 2. publicly traded on excanges and over the counter

What is straight life income option?

Provides payment until the beneficiary dies, regardless of the amount paid out

What is administrative fee?

a one time charge to cover the cost of processing the insurance application

What is mortality risk fee?

aka cost of insurnace covers risk that the policyholder could live longer than period of time assumed

What are 1035 exchanges?

allows a tax sheltered exchange from one annuity contract to another under certai circumstances.

What is life annuity?

annuitant receives regularly scheduled payments for life. When the annuitant dies, payments end. No payments are made to any beneficiaries.

What is permanent insurnace?

coverage continues for an undetermined time period, usually the lifetime of the insured.

What is investment management fee?

covers the insurnace cost to handle the investment accounts.

What is expense risk fee?

covers the risk that the expense of managing and issuing the policy may be greater than assumed

What kind of license to you need to have in order to sell variable annuities?

life insurance agent and Series 6

What are the two forms of annuities?

1. Fixed annuities 2. variable annuities

What is fixed period option of death benefit?

The beneficiary receives equal installments of principal and interest, at regular intervals, for a specified time

What is a hedge fund?

1. Does not register with the SEC, not an investment company 2. Comprised of an investment pool with fewer than 100 shareholders whose investments cannot be sold freely. 3. Riskier than mutual funds. 4. often illiquid, so sales may only occur on specific dates , sometimes not at all during 1st 2 years.

What are 3 different types of REITs?

1. Equity REITs- commercial property 2. mortgage reit- mortgages on commercial property 3. hybrid REIT- both commercial property and mortgages on commercial property

What are the two types of variable annuities?

1. Immediate annuities 2. Deferred annuities

What are the ways money accumulated in annuity can be withdrawn?

1. Surrender- current value of the separate account less any surrender charge 2. Death benefit- if the annuitant dies the beneficiary receive either the total amount of the annuity or the total amount invested, whichever is greater 3. Annuitization- funds in the annuity are paid out through payments.

What are the differences between Mutual funds and variable annuities?

1. Variable annuities offer a guaranteed lifetime income; mutual funds provide no guarantees of future income 2. Money invested in variable annuities grows tax-deferred; dividends and capital gains paid by mutual funds are taxable in the year they are distributed.

Features of the universal variable life ?

1. Variable death benefit 2. no guaranteed cash value 3. provide a flexible premium 4. risk is on the policyholder to maintain enough cash value in account to keep the policy in force. 5. premiums are flexible]6 6. more popular when interest rates are high 7. UVL is considered a security. 8. premiums only invested in separate accounts can only be variable death benefit

What are the advantages of Variable Life insurance?

1. ability of the insured to select his investments for the separate account 2. cash value that grows when separate account performs 3. after 3 years, 75 % of VLI is available for a loan 4. Exchange privileges to swap all or portion of assets held in the separate account among alternative investments available in the account, free of charge and without tax liabilities 5. Conversion privileges for the exchange of one form of permanent insurance policy for another .

What are contractual plans?

1. aka periodic payment plans 2. allow investors to build up money to invest in a mutual fund on a periodic basis, normally monthly, through a contractual plan company. 3. it is a type of non-fixed unit investment trust.\ 4. Individual agrees to invest a set number of dollars over a certain time frame (10 years usually) 5. exempt from FINRA's 8.5 % max sales charge 6. Front end load or spread load sales charge.

What are deferred annuities?

1. can be purchased with a single, lump sum payment (single premium deferred annuity) or with a series of periodic payments ( flexible premium deferred annuity. 2. they provide a guaranteed surrender value, if surrendered prior to annuitization.

What are the expenses of the VLI?

1. expenses deducted from the gross premium 2. expenses that deducted from the separate account (net premium)

Characteristics of variable life insurance?

1. guaranteed death benefit 2. premiums placed in a separate account and invested in common stock bonds etc. 3. Death benefits and cash values fluctuate with the performance of the investments. 4. Loans are permitted 5. no guaranteed cash value 6. increase or decrease of death benefit 7. Policyholders assume the risk on investment returns in the separate account. 8. Fixed premiums

Characteristics of wholelife?

1. guaranteed, rate of return on cash value 2. tax free loans against cash value 3. guaranteed death benefit level 4. regulated as an nsurnace not a security.

How is variable life insurnace taxed?

1. premium payments dont qualify for a deduction, paid with after tax dollars. 2. grow tax deferred. 3. if a policyholder takes out a loan , there is no tax consequences.

What are the taxation on annuities?

1. purchase of annuities are made with after tax dollars. 2. money invested represents the cost basis. 3. Funds grow tax deferred until withdrawn. 4. any amount receives in excess of the investment cost basis is taxed as ordinary income. 5. if withdrawal before 59.5 10% penalty.

What are the three categories of the permanent life insurance?

1. whole life insurance 2. variable life insurance 3. universal variable life insurnace.

How are variable annuity separate accounts may be regulated?

1.Open end management investment company- if the account is directly managed. . In this case the investment manager for the insurance company determines the securities held in the separate account. 2. Unit investment trust- if the account is indirectly managed. This occurs when responsibilities for managing the portfolio of the separate account is turned over to a party other than the investment manager for the insurance company.

What is assumed interest rate?

Changes in the value of investments in VLI are based on the performance rate assumed by the insurnace company when it issues a policy usually set at 4%to 5T.

What is the Equity Index Annuity?

EIA aka fixed index annuity. 2. This type of annuity provides an opportunity to benefit from increases in the stock market, while protecting against losses. 3. even if there is a decline there is a min guaranteed return.

T/F the insured is always the policy owner

False, policyholder is the owner of the insurance, he is responsible for paying the premiums.

T/F REITs are considered an investment company and also direct participation programs (DPPs)

False, yet they do provide dividends. 2. not considered PPs because they only pass on earnings to investors and not losses.

Who is the annuitant?

He is the owner of the annuity.

Can an annuity be terminated?

It can be terminated anytime during the accumulation phase. However, once the policy is annuitized, it cannot be terminated.

How does a variable annuity work?

Premiums paid on a variable annuity are invested in a separate account from the insurance company's general account. 2. Investments in the separate account include stocks, bonds and mutual funds, with the goal of obtaining a return that matches or exceeds the rate of inflation. 3. It is regulated as both a security and an insurance product.

What is the life income with period certain option ?

Provides income for life to the beneficiary for a minimum specified time. if the beneficiary dies before the end of the period, payments continue to be made to a secondary beneficiary.

What are the sales charges and expenses for annuities?

Similar to mutual funds. 2. May provide breakpoints and rights of accumulation that reduce sales charge payments. 3. Fees for investment managemetn 4. Mortality risk fee 5. expense risk fee 6. premium taxes 7. admin expenses.

Who bears the investment risk in variable annuity?

The annuitant rather the insurance company. The insurance company does not guarantee the amount of the monthly income. Monthyl income can vary depending on the performance of the securities.

What is the life income option of the death benefit?

The beneficiary receives income for life

What is fixed amount option of the death benefit?

The beneficiary receives periodic installments of principal and interest in equal dollar amounts until all the funds are gone

What is the interest option of death benefit?

The insurnace company keeps the and invests the proceeds from the policy. The beneficiary receives a guaranteed interest rate from the company plus any additional interest earned.

What is variable death benefit?

earnings provided by investments in a separate account that fluctuate based on a comparision of actual account performance and the performance assumed by the insurnace company.

What is guaranteed minimum death benefit?

funds provided by a general account regardless of investment performance in a separate account

What is the cash refund life income option?

guarantees to pay out at least the amount of the original proceeds. if the beneficiary dies before all monies are received, the balance is paid to a secondary beneficiary

What is a deferred sales charge?

is assessed at withdrawal and is based on the length of time the annuity is held.

What is level sales charge?

is made at the time of each installment purchase in the annuity

What is life settlement?

is the sale of a life insurance policy or its death benefit to an entity other than the insurance company that issued the policy. 2. When the sale involves a variable life insurnace, it is considered a securities transaction and is subject to federal securities laws.

What is an annuity?

it is a contract issued by an insurance company that guarantees a stream of income for a set period of time. 2. Primarily used to provide retirement income for the annuity owner.

What is life insurnace?

it is a contract or agreement established between an individual and an insurance company to provide financial compensation to beneficiaries in the event of the insured's death.

What is the Exchange traded fund?

it is an equity fund that trades like a stock on an exchange. 2. EFTs are organized as a unit investment trust. 3. EFTs are traded among investors throughout the course of a day, intra day trading 4. Can be purchased on margin and sold short. 5. Pay commission rather than sales charge, lower expenses than mutual funds.

is variable life insurance a security or insuance?

it is an insurnace that has part of an investment risk so it is regulated by the insurance regulation and by the SEC as a security.

What is the insurance companies' general account?

it is used as the investment reserves held by the insurnace company and will be tapped to pay out any guaranteed benefits to investors. is restricted by law to investments in conservative vehicles such as debt instruments and preferred stock. low risk and stable rate of return

What is joint and last survivor income option?

lifetime income is provided to two beneficiaries. when the first beneficiary dies, payments continue for the remainder of the joint beneficiary's life.

What is the insurance companies' separate account?

maintained by the company in which gains and losses are kept apart from any other gains or losses the insurance company has. 2. include assets invested in any type of reasonable securities. (stocks, bonds etc) 3. function like a mutual fund where the insured holds the investment risk and subsequently the potential for profit or loss

Can a life insurnace agent sell REITs?

no, you need a series 7 license

Are death benefits subject to taxes?

not subject to taxable income but are subject to estate taxes

Who can invest in hedge funds?

only accredited investors such as institutions or parties with a high ne worth. however, they are indirectly available to the average investors through the sale of funds of hedge funds.

What is life annuity with certain period?

payments are guaranteed for life, but if the person dies before the selected period for payments ends, payments will continue to the beneficiary until the end of the selected period

What is joint life with last survivor annuity?

payments are made based on two lives. When the first annuitant dies, payments continue for the life of rhe second annuitant, often a spouse.

What is unit refund option?

periodic payments are made during the annuitant's lifetime. If the annuitant dies prior to receiving an amount equal to the annuity units, a lump sum or installment payments are made to the beneficiary.

What is insurable interest?

policyholder can purchase coverage for someone else. includes children, spouse , business parner, employees etc.

What is term insurance?

provides limited coverage based on a specified period of time usually 5,10,20 years

What is the accumulation phase?

purchases of annuities occur during this time.

What is a plan completion insurance?

similar to credit life insurance, plan completion insurance is offered by many plan companies. it is a form of decreasing term life insurnace that pays ooff the contructual plan should the investor die prematurily.

What is fixed amount option?

the annuitant selects a specfic payment amount, which continues until the principal in exhausted.

Who bears the risk in a fixed annuity ?

the insurance company, since it guarantees a rate of return to the annuitant.

What is sales load?

the maximum sales charge allowed on a VLI is 9% computerd over a 20 year period. During the first year, the max sales charge is 50% of the premium

What are state premium taxes?

the portion of funds required by state government in taxes