Series 6 : Variable Insurance Products and Regulation (Lesson 3) Practice Questions

A purchaser of a variable annuity is primarily protected from default of the issuer by which of the following? A) A state's guaranty fund B) The National Insurance Federation C) SIPC D) FDIC

A) A state's guaranty fund State guaranty funds help protect investors from the default of insurance companies. They are funded by collections from insurance companies that operate in their state. Complete restitution is not guaranteed.

Your customer wishes to invest his retirement nest egg, but is concerned about the possibility of outliving his savings. To provide protection from this risk, you could suggest which of the following? A) A variable annuity B) A government bond fund C) A balanced mutual fund D) A growth and income mutual fund

A) A variable annuity Of these choices, only the variable annuity can guarantee income for life. The performance of the subaccount will determine the amount of income that the variable annuity will pay.

FINRA registration is required for the sale of all of the following products EXCEPT A) Equity indexed annuities B) Variable annuities C) Unit investment trusts D) ETFs in their primary offering

A) Equity indexed annuities Equity indexed annuities are structured as fixed annuity products. Fixed annuity products are not registered investment products, and may be sold by persons that hold insurance licenses but not FINRA registration.

All of the following are features of variable life insurance policies EXCEPT A) Flexible premiums B) The option to borrow against the cash value C) A minimum guaranteed death benefit D) Cash value that fluctuates based on the performance of the separate account compared to the AIR

A) Flexible premiums Variable life insurance contracts have fixed premiums.

A fixed equity indexed annuity includes all of the following features EXCEPT: A) Interest credits that equal the performance of the index to which the annuity is linked B) A minimum interest guarantee C) Protection from principal risk D) A death benefit during the accumulation period

A) Interest credits that equal the performance of the index to which the annuity is linked Fixed indexed annuities pay interest credits that do not fully equal all market upside achieved by the index because of contract expenses that must be deducted.

All of the following statements regarding variable life insurance are true EXCEPT A) It covers an insured for a specified period of time that expires B) It has a guaranteed minimum death benefit C) Its cash value is invested in the separate account of the issuing insurance company D) Its cash value grows on a tax deferred basis

A) It covers an insured for a specified period of time that expires Variable life insurance is permanent insurance protection. It is designed to cover the insured for life, not a specified time period. Term insurance is designed to provide coverage for a specified period of time.

Which of the following annuity settlement options would result in the smallest monthly income amount? A) Joint and last survivor B) Life with 20- year period certain C) Life with 10- year period certain D) Life with 5- year period certain

A) Joint and last survivor The greater the guarantee, the higher the cost to provide it. Because joint and last survivor guarantees monthly income until the second person dies, it pays the smallest benefit.

When selling a fixed index annuity to a customer, registered representatives must: A) Notify their broker dealers because sale of these products is considered an outside business activity B) Ensure that the customer receives a prospectus at or prior to the sale C) Provide the customer with a hypothetical illustration that shows projected performance based on the guaranteed rate D) Use sales literature that has been approved by FINRA

A) Notify their broker dealers because sale of these products is considered an outside business activity FINRA considers the sale of non-securities products as outside business activities, so reps that sell them are required to notify their firms. Fixed index annuities are not securities, so are not sold with prospectus. Corresponding sales literature is not subject to FINRA approval. While product illustrations assist in explaining product functionality, they are not required.

An insurance company's separate account is not directly managed by its investment managers. This separate account is A) Registered as a unit investment trust under the Investment Company Act of 1940 B) Registered as an open end investment company under the Investment Company Act of 1940 C) Registered as a closed end investment company under the Investment Company Act of 1940 D) Is not registered under the Investment Company Act of 1940

A) Registered as a unit investment trust under the Investment Company Act of 1940 When the investment management of the insurer passes the responsibility of management to subaccount fund managers, the separate account must be registered as a unit investment trust. When the assets of the separate account of an insurance company are managed by the insurance company's investment company, the account is registered as an open end investment company

A variable life insurance policy has an assumed interest rate of 3%. If the return of the separate account is 4%, which of the following will occur? A) The cash value will increase B) The minimum guaranteed death benefit will fall C) The premium will increase D) The premium will decrease

A) The cash value will increase When the separate account return is greater than the AIR, the cash value and death benefit will increase in value. The premium is fixed and will not go up or down.

A variable annuity contract owner wishes to begin receipt of monthly income payments. After these payments have started A) The contract owner cannot change the income option that was selected B) Cash in excess of the monthly payment cannot be withdrawn C) The contract cannot be surrendered D) The beneficiary of the contract's death benefit cannot be changed

A) The contract owner cannot change the income option that was selected The income option that has been selected cannot be changed after annuity payments are started. Any change to the payout option must be made before annuitization.

A variable annuity owner has elected a variable income option. The assumed interest rate of the variable annuity contract is 4%. The annuitant's last monthly check was $500 and this month's check is for $550. Which of the following statements is true? A) The separate account earned more than 4% this month B) The general account earned more than 4% this month C) The separate account earned 10% this month D) More information is needed to determine why the payment increased

A) The separate account earned more than 4% this month If the separate account performance is greater than the contract's AIR, the income will be more than the previous month's income.

All of the following statements about variable annuity surrender charges are true EXCEPT A) They typically increase each year of the surrender charge period B) They are charged to protect the insurance company from early withdrawals of invested funds C) They often apply for the first 6 to 10 years of the contract D) They are charged in addition to other mortality, expense and administrative charges that apply to variable annuity contracts

A) They typically increase each year of the surrender charge period Surrender charges typically decrease over a surrender charge period. They are assessed as a percentage of the amount of the payment withdrawn.

An insurance policy includes a benefit in which payment of insurance premiums is not required if the owner becomes disabled. This benefit is called A) Waiver of premium B) Guaranteed insurability C) A step-up benefit D) A period certain option

A) Waiver of premium If the waiver of premium option is included in an insurance policy, the owner is not required to pay premiums in the event of serious illness or disability.

When a customer applies for a $1 million life insurance policy, his agent tells him that he must provide information about his health and medical history, as well as his personal habits like smoking, and also submit to a physical exam. What is this process called? A) medical underwriting B) comprehensive health check C) physician qualification D) HIPAA

A) medical underwriting Life insurance company profitability depends on accurately assessing how long applicants can be expected to live, which is mainly a function of their health, medical histories and lifestyle habits (especially smoking). The process through which companies acquire and evaluate this information is called medical underwriting. It determines the rating class they can offer, which in turn sets the policy cost (premium). In some cases, the company may reject the applicant due to poor health.

Seven years ago, when he was 36 years old, Luke bought a 10-year level term life insurance policy with face value of $250,000 and an annual premium of $600. He is in excellent health. He wants to know if it would be a good idea to shop the market for a new 10-year level term policy now, before his current policy expires. What is the best advice you can give him A) no, wait until your current policy expires and then shop B) yes, because you can probably find a lower premium on a new 10- year level term policy C) yes, because it would be a good idea to lock up a new 10- year level term policy while you are still in excellent health D) yes, because it is never a good idea to let a 10-year level term policy expire

A) no, wait until your current policy expires and then shop Level-term life insurance is popular among young people because it allows them to buy an adequate amount of death benefit coverage at an attractive premium that will stay level for 10-20 years. Since mortality risk increases with age, the level premium in the early years is relatively expensive for the policyholder. But the level premium becomes a better bargain with each passing year. It's almost never a good idea to cancel or swap out level-term policies in the last few years. It's better to wait until the policy expires and then shop for a new one.

Greg is a 30-year-old engineer who is buying his first life insurance policy to protect his wife and new son. He can only afford to pay $200 per month for premiums and wants as much death benefit coverage as possible. What type of life insurance best meets his needs? A) term B) whole life C) universal life D) variable life

A) term Term life insurance usually provides the most death benefit bang for the buck, especially for younger people. There is no cash value in term life insurance, and this helps to make it affordable. Also, term premium costs are based on mortality. The probability of death at age 30 is very low. Life insurance companies compete aggressively on price to sell term insurance to young people, hoping they will become customers for life and perhaps convert to permanent insurance later.

An annuity that has no accumulation phase is A) A deferred annuity B) An immediate annuity C) A fixed annuity D) A variable annuity

B) An immediate annuity An immediate annuity has no accumulation phase. Instead, a lump sum is invested, and income payments begin within a 30-day period. Either a fixed or variable annuity can be an immediate annuity.

All of the following product features are shared by fixed and variable annuities EXCEPT: A) Surrender charges B) Choices of subaccount investments C) Mortality expense charges D) Choices of settlement options

B) Choices of subaccount investments Only variable annuities offer a choice of subaccount investments. These subaccounts are like mutual funds and offer numerous investment objectives.

Variable annuities are most suitable for an investor with which of the following objectives? A) Long-term savings and protection from loss of principal B) Desire for growth to ensure income that lasts for life C) Tax-deferred growth to meet long-term savings objectives D) A low cost investment option that provides access to many different investment options with a low minimum investment

B) Desire for growth to ensure income that lasts for life Variable annuities are best suited to individuals who are planning for retirement. They typically have higher charges when compared to other investment options because of the guarantees they deliver. Tax-deferred growth can be achieved in other types of retirement plans. Fixed annuities protect against loss of principal, but may lose purchasing power.

Products associated with the separate account of an insurance company include all of the following EXCEPT A) Variable annuities B) Endowment contracts C) Variable universal life D) Variable life

B) Endowment contracts Endowment contracts are fixed savings vehicles that offer a defined payment in the future. They are general account products. Variable products are associated with the insurer's separate account.

A variable annuity owner has elected a variable income option. The assumed interest rate of a variable annuity contract is 3%. If the separate account returned exactly 3%, the next monthly payment will be A) Equal to the initial monthly income amount B) Equal to the prior month's payment C) Greater than the prior month's payment D) Less than the prior month's payment

B) Equal to the prior month's payment If the separate account performance is equal to the contract's AIR, the Income will be the same as the previous month's income.

Organizations that have regulatory oversight over variable products include all of the following EXCEPT A) SEC B) FDIC C) FINRA D) State Insurance Commissioners

B) FDIC The FDIC is a banking regulator and does not have regulatory authority over variable products. Securities regulators and insurance regulators are charged with regulatory oversight of variable products. These regulators include the SEC, FINRA, and state insurance commissioners.

When purchasing a variable annuity, an investor asks if there is a way to receive a guaranteed minimum investment benefit regardless of market conditions. You should reply A) That insurance companies cannot make these guarantees to investors B) For an additional payment, a GMIB option can be added to the annuity contract C) Long term high quality bonds would be a nice complement to their annuity D) That paying a full years' premium up front will assure them of regular payments regardless of market conditions

B) For an additional payment, a GMIB option can be added to the annuity contract The guaranteed minimum investment benefit (GMIB) can be purchased as an additional option in an annuity contract, whereby the contract holder is promised a minimum payment regardless of market conditions.

Which two of the following statements regarding variable annuities are TRUE? I. investors assume the investment risk II. The insurer assumes the investment risk III. The insurance company guarantees a rate of return IV. The insurance company attempts to reduce purchasing power risk A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Because investors in variable annuities may lose money, they have taken on investment risk. The growth opportunity offered in variable products is designed to keep pace with inflation, or reduce purchasing power risk.

Which two of the following statements about the separate account of an insurance company are TRUE? I. It must be registered with the Investment Company Act of 1940 II. Registration under the Investment Company Act of 1940 is not required III. It holds the general funds of the insurer IV. It separates the general funds of the insurer from those associated with variable products A) I and III B) I and IV C) II and III D) II and IV

B) I and IV The separate account of an insurance company is separated from the general assets of the insurance company. It resembles an investment company in structure and must be registered under the Investment Company Act of 1940.

A variable annuity owner wishes to ensure that payments are made for the life of both him and his spouse, regardless of who dies first. Which of the following annuitization options should be elected? A) Life with 10 year period certain B) Joint life annuity C) Straight life annuity D) Life with 20 year period certain

B) Joint life annuity A joint life annuity pays income for the life of two annuitants regardless of who dies first. Because this option has the strongest guarantee, it pays the smallest monthly income of the choices provided.

Which fee specifically covers the cost of the death benefit in a variable annuity? A) ME&A B) Mortality expense C) Administration fee D) Management fee

B) Mortality expense The mortality expense fee is charged to provide the death benefit for a variable annuity. It is part of the ME&A fees that are withdrawn from account value on a monthly basis.

The separate account of an insurance company is most similar to a A) Hedge fund B) Mutual fund C) Closed end investment company D) Direct participation program

B) Mutual fund The separate account of an insurance company functions similarly to a mutual fund. Investors own units in the fund which function like shares in a mutual fund, and increase or decrease in value relative to the performance of the underlying securities. Units are issued continuously; there is not a fixed number of shares as in a closed end company.

Charges that are deducted from the premium of a variable life insurance policy include all of the following EXCEPT A) Premium taxes, if applicable B) Subaccount management fees C) Mortality expense D) Administrative charges

B) Subaccount management fees Fund or subaccount management fees are deducted from the cash values of the contract. Deductions from the premium include the cost of insurance (mortality expense), administrative charges and premiums taxes if applicable. After these charges are deducted, the remaining amount of the premium is the cash value of the contract.

In considering the sale of a fixed index annuity to a customer, a registered representative must be aware that: A) The contract has the potential to lose money so will subject the investor to principal risk B) The contract may cause reduced liquidity due to its surrender charge schedule C) Interest will always be credited at the end of each year that the contract is in force D) The customer must be given a prospectus or access to a prospectus at or prior to a sale

B) The contract may cause reduced liquidity due to its surrender charge schedule A consideration in the sale of annuity contracts is the surrender charge period. Because the surrender charge period of up to 10 years in some contracts reduces liquidity, these contracts may be unsuitable for some investors. Fixed indexed annuities are not securities, so are not sold with prospectus. They do not subject investors to principal risk because they include a minimum guaranteed interest credit. The interest crediting strategy and timing varies widely between contracts.

After owning a variable annuity contract for 5 years, the contract holder wants to cash in the contract for the account value. Which of the following statements is TRUE? A) This is a contractual right, and the insurer must provide the full value of the contract within 7 days of the request B) The insurer must provide the surrender value of the contract, which means that it can withhold surrender charges in accordance with the surrender charge schedule published in the prospectus C) The insurer is required to honor this request only if the contract is beyond its surrender period D) Although surrender charges are likely to apply, they are tax deductible in the year they are paid

B) The insurer must provide the surrender value of the contract, which means that it can withhold surrender charges in accordance with the surrender charge schedule published in the prospectus Variable annuities are designed as longterm investments. The insurer can charge surrender charges if the owner wants to cash in the contract after owning it for a short time. These charges typically apply for the first 6 - 10 years of the contract, and are detailed within the prospectus.

An owner of a variable life insurance contract surrenders his policy while a policy loan is outstanding. Which of the following statements best describes the consequences that apply? A) The surrender value will be reduced by the loan amount and interest, but there is no potential tax liability B) The surrender value will be reduced by the loan amount and interest, and there may be tax liability if the loan amount exceeded the premiums that were paid C) The customer will receive a commuted death benefit that will be reduced by the outstanding loan amount and any interest due D) The loan amount must be repaid before the surrender value can be distributed

B) The surrender value will be reduced by the loan amount and interest, and there may be tax liability if the loan amount exceeded the premiums that were paid An outstanding policy loan and any interest owed will reduce the policy surrender value. Taxes will also be due if the amount of the loan or policy cash values exceeds the premium payments that were made.

All of the following statements about accumulation units are true EXCEPT A) They represent an interest in the separate account of an insurer B) They fluctuate in value relative to the performance of the investments in the general account C) The number of accumulation units an investor owns can change D) They are converted to annuity units when an investor begins to take income from an annuity

B) They fluctuate in value relative to the performance of the investments in the general account Accumulation units represent an ownership interest in the separate account, and fluctuate in value based on the performance of the underlying subaccounts. They are converted to annuity units when the annuity owner begins to take income, or annuitize, the contract.

Which of the following insurance contracts offers both a flexible premium and a flexible death benefit? A) Fixed term life insurance B) Variable universal life insurance C) Variable life insurance D) Both variable and variable universal life insurance

B) Variable universal life insurance Variable universal life insurance has a flexible death benefit and flexible premiums. Variable life insurance has a fixed premium and a minimum guaranteed death benefit

A customer purchases a feature that obligates the insurance company to pay premiums in the event of serious illness or disability. This feature is a A) Morbidity waiver B) Waiver of premium C) Living benefit rider D) Step-up benefit

B) Waiver of premium The waiver of premium feature can be purchased to transfer the obligation of paying premiums to the insurance company in the event of serious illness or disability of the contract owner.

A customer buys a whole life insurance policy that is guaranteed, at purchase, to pay $1 million to his beneficiary on his death. What term accurately describes the $1 million? A) par value B) face amount C) guaranteed minimum benefit D) endowment value

B) face amount At purchase, the amount of protection guaranteed is called either the face value or death benefit. The face value of a policy does not change over its lifetime. However, the death benefit can change over time based on policy performance, riders, and choices made by the policyholder.

A customer annuitizes her contract and chooses to begin monthly income payments from a nonqualified annuity. The payments received will be A) fully taxable. B) partially taxable. C) tax deferred. D) tax free.

B) partially taxable. The purchase payments made into a non-qualified annuity are made with after tax dollars. The portion of each payment that represents these purchase payments is returned tax free, but the amount that represents earnings will be taxed as ordinary income

A client contributed $1,000 to a variable annuity subaccount when that subaccount's accumulation units were worth $20 each. If the accumulation unit's value rises to $25 dollars, the investor's new value in the subaccount is: A) $850 B) $1,000 C) $1,250 D) $1,500

C) $1,250 The client purchased 50 units ($1,000 ÷ $20). If unit value rises to $25, the investor's value rises to $1,250 (50 x $25).

Which of the following may be suitable for an investor who wants guaranteed income for life that begins 10 years from now and continues for life? A) An immediate life only annuity B) An immediate annuity with 10 year period certain C) A deferred life only annuity D) A deferred annuity with 10 year period certain

C) A deferred life only annuity In a deferred annuity, payments begin in the future. They will last for the life of the annuitant only if a life only option is selected.

All of the following result in ordinary income taxes to a variable annuity owner EXCEPT A) A lump sum withdrawal of earnings after retirement B) A monthly payment from a qualified annuity under a life only payout option C) A distribution made to accumulation units D) A lump sum withdrawal of principal and earnings from a qualified annuity

C) A distribution made to accumulation units A variable annuity has accumulation units while in the accumulation phase. At this time distributions are taxed deferred. Earnings from funds held in variable annuities are always taxed as ordinary income when withdrawn, and monthly income includes both earnings and principal. All distributions from qualified annuities are fully taxed because these annuities are purchased with pre-tax dollars.

An investor is saving for retirement and is concerned about inflation, but also wants an investment with no risk to the invested principal. Of the following choices, which is most appropriate to meet the investor's objectives? A) High grade corporate bond fund B) Large cap mutual fund C) A fixed Equity Indexed Annuity D) A variable annuity with a guaranteed lifetime income benefit

C) A fixed Equity Indexed Annuity Of these choices, the most appropriate for this investor is a fixed equity indexed annuity, which offers a minimum guarantee and the ability to earn interest credits based on market performance. These products offer growth, and also fully protect investors from loss (principal risk).

The contractual benchmark to which actual investment performance is compared to determine if a variable annuity's monthly income will increase is the A) Separate account performance rate (SAR) B) Internal rate of return (IRR) C) Assumed interest rate (AIR) D) The prime rate

C) Assumed interest rate (AIR) The assumed interest rate is stated within an annuity contract. It is typically between 2 - 4%. Actual investment performance is compared to the AIR to determine if the amount of monthly income changes

Registration with FINRA is not required to sell which of the following products? A) Closed end investment company shares that are traded over-the-counter B) Variable annuities with a guaranteed lifetime income benefit C) Equity indexed annuities with an annual reset provision D) Index fund shares that are purchased directly from the issuer

C) Equity indexed annuities with an annual reset provision Equity indexed annuities are most often structured as fixed annuity products. Fixed annuity products are not registered investment products, and may be sold by persons that hold insurance licenses but not FINRA registration.

The value of variable annuity accumulation units A) Is fixed when they are purchased B) Is linked to the performance of the insurance company's general account C) Fluctuates based on the performance of separate account assets D) Is determined by a formula specified in the annuity contract

C) Fluctuates based on the performance of separate account assets The accumulation units of a variable annuity are based on the performance of the investments in the insurance company's separate account. The value is not fixed.

A customer is likely to prefer a variable annuity over a fixed annuity for which of the following reasons? A) Lower surrender charges B) Less potential for investment loss C) Greater ability to keep pace with inflation D) More seniority in the event of issuer default

C) Greater ability to keep pace with inflation Variable annuities are generally preferred by investors for their ability to keep pace with inflation. This is accomplished by investing in growth subaccounts. Fixed annuities pay a stated rate of interest only, and like other investments of this type, subject investors to purchasing power risk.

A variable annuity owner has elected a variable income option. The assumed interest rate of the variable annuity contract is 3%. If the separate account returned 4%, the next monthly payment will be A) Equal to the initial monthly income amount B) Equal to the prior month's payment C) Greater than the prior month's payment D) Less than the prior month's payment

C) Greater than the prior month's payment If the separate account performance is greater than the contract's AIR, the Income will be more than the previous month's income

Which two of the following are likely to be included in variable annuity subaccounts, but not in the general account of an insurance company? I. Corporate bonds II. mutual funds III. ETFs IV. U.S. Treasury securities A) I and III B) I and IV C) II and III D) II and IV

C) II and III The separate account of the insurer that provides variable products offers growth opportunities for purchasers. Equity products like mutual fund and ETF subaccounts are found in separate accounts but not in the insurer's general account

Which two of the following statements about purchase payments for variable products are TRUE? I. they are invested in an insurer's general account II. they are invested in an insurer's separate account III. they purchase units IV. they purchase shares A) I and III B) I and IV C) II and III D) II and IV

C) II and III Variable product purchase payments are invested in the separate account of an insurance company. They purchase units which fluctuate in value based on the performance of the underlying investments.

Which two of the following statements about purchase payments for variable products are TRUE? I. they are invested in an insurer's general account II. they are invested in an insurer's separate account III. they purchase units IV. they purchase shares A) I and III B) I and IV C) II and III D) II and IV

C) II and III Variable product purchase payments are invested in the separate account of an insurance company. They purchase units which fluctuate in value based on the performance of the underlying investments.

Which of the following annuitization options will generate the largest monthly income payment to the annuitant? A) Life with 10 year period certain B) Joint life annuity C) Straight life annuity D) Life with 20 year period certain

C) Straight life annuity A straight life, or life only annuity, pays income for the life of the annuitant only. If the annuitant dies after only a few payments, the insurance company has no further payment obligations. Because this payment has the least guarantee it generates the largest monthly income or greatest cash flow per payment.

A variable life insurance policy has an assumed interest rate of 3%. If the return of the separate account is 2%, which of the following will occur? A) The cash value will increase B) The minimum guaranteed death benefit will fall C) The cash value will decrease D) The death benefit will increase

C) The cash value will decrease When the separate account return is less than the AIR, the cash value and death benefit will fall in value. However, the death benefit will not fall below the minimum guarantee.

A representative explains that the premium for a life insurance policy is fixed, but the death benefit may vary based on performance of the underlying subaccounts. The representative is explaining which of the following products? A) Term insurance B) Variable Universal life insurance C) Variable life insurance D) Universal or variable life insurance

C) Variable life insurance Variable life insurance has fixed premium payments, but cash value and death benefit that fluctuates with the performance of the separate account. Both fixed and variable universal life insurance policies offer flexible premium payments if supported by policy values. Term insurance has fixed premiums and death benefit

Jane has invested $100,000 in the ABC non-qualified variable annuity. The assumed interest rate on this annuity is 1.75%. The contract is structured to annuitize in 20XX. During the accumulation period Jane A) must pay ordinary income tax on the interest credited to her account. B) must treat any interest earned as a long-term capital gain and pay the appropriate income taxes. C) is not required to pay taxes on the interest credited to her account. D) may offset the interest earned on her annuity with any capital losses in her portfolio.

C) is not required to pay taxes on the interest credited to her account. During the accumulation period of a variable annuity, whether qualified or non-qualified, the investor will not incur a tax liability. Applicable taxes will be due at the time any distributions are taken during the annuitization phase of the contract. Distributions will be taxed as ordinary income

Separate account performance compared to the assumed interest rate (AIR) is used to determine A) the value of both accumulation and annuity units in a variable annuity. B) the amount of change in the value of accumulation units only. C) whether the monthly income fluctuates from month to month in the annuitization phase of a variable annuity with a variable income option. D) the amount of monthly income payable to an annuitant who owns a variable annuity with a fixed annuitization option.

C) whether the monthly income fluctuates from month to month in the annuitization phase of a variable annuity with a variable income option. The Assumed Interest Rate (AIR) is applicable in the annuitization phase of a variable annuity contract. The separate account performance is compared to the AIR to determine if the monthly income will increase, decrease, or stay the same as the prior month's income.

Fixed index annuities typically feature all the following EXCEPT A) A minimum guaranteed return B) Interest credits based on the performance of one or more market indexes C) Administration expenses that are defined within the contract D) A death benefit during the annuitization period

D) A death benefit during the annuitization period Annuities include a death benefit during the accumulation period. The settlement option chosen at annuitization determines whether there is a benefit payable to another party at the death of the annuitant

Which of the following statements is true regarding the death benefit of a variable life policy? A) The death benefit cannot grow beyond an established maximum amount B) The growth of the death benefit is based on comparison of the separate account performance to the S&P 500 index C) The amount of the death benefit can be increased or decreased based on the amount of premium payments that are paid into the contract D) Beneficiaries do not pay income tax when they receive a death benefit from a variable life policy

D) Beneficiaries do not pay income tax when they receive a death benefit from a variable life policy The death benefit of a variable life contract grows based on comparison of separate account performance compared to the assumed interest rate (AIR). There is a guaranteed minimum but no maximum limit. Only variable universal life contracts have flexible premiums. Beneficiaries are not taxed on receipt of life insurance death benefits.

Which two of the following statements are TRUE regarding variable annuity accumulation units? I. Their number does not change II. Their number increases with new purchase payments III. Their value is fixed at the time of purchase IV. Their value fluctuates throughout the accumulation period A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Variable annuity purchase payments increase the number of accumulation units held by a contract owner. They fluctuate in value based on the performance of the investments in the separate account. They are converted to annuity units which are fixed in number at the time the contract is annuitized. Additional accumulation units can typically not be purchased when income is being paid in the annuity phase of the contract

Which two of the following statements are true regarding variable annuity surrender charges? I. They can apply for a period of no more than 5 years II. They are usually a level charge for the period of years during which they apply III. They are similar to mutual fund contingent deferred sales charges IV. When an existing variable annuity contract is exchanged for a new annuity, a new surrender charge period is likely A) I and II B) II and III C) II and IV D) III and IV

D) III and IV Variable annuity surrender charges commonly apply for periods of 6 - 10 years. They are similar to CDSCs (contingent deferred sales charges) charged by mutual funds, and decline over the period of years during which they apply. It is important that individuals understand that a new surrender charge period is likely to apply when annuity contracts are exchanged.

Which of the following statements is TRUE regarding the value of variable contract annuity units? A) It is determined by a formula specified in the annuity contract B) It is linked to the performance of the insurance company's general account C) It is fixed at the time of the contract's annuitization D) It fluctuates based on the performance of separate account assets

D) It fluctuates based on the performance of separate account assets Annuity units in variable annuity contracts fluctuate in value based on the performance of separate account assets. The number of units is fixed but their value continues to fluctuate.

The phase of an annuity contract that is associated with annuity units is the A) Accumulation phase B) Performance phase C) Deferral phase D) Payout phase

D) Payout phase Annuity units are associated with the payout, or annuitization phase of a variable annuity contract.

The penalty paid by a variable annuity contract owner for early withdrawal of funds in excess of any free withdrawal amount permitted by the contract is the A) Mortality expense charge B) Morbidity Charge C) Roll-up charge D) Surrender charge

D) Surrender charge Surrender charges apply when the contract owner withdraws cash above the free withdrawal amount, or surrenders the contract before the end of the surrender period.

Individuals that take withdrawals from annuity contracts prior to annuitization may be required to pay A) Waiver of premium charges B) Mortality expense charges C) Annuitization surcharges D) Surrender charges

D) Surrender charges Surrender charges apply when money is withdrawn from an annuity within a certain period of the purchase payments

An annuitant has received monthly income under a Life with 10 years certain annuity option for 2 years, and then dies. Which of the following statements is TRUE? A) The beneficiary will receive a lump sum benefit equal to 10 years' worth of income payments B) The beneficiary will receive income payments for life C) The beneficiary will continue to receive monthly income for 10 years D) The beneficiary will continue to receive monthly income for 8 years

D) The beneficiary will continue to receive monthly income for 8 years A life with period certain option guarantees that payments will be made for a minimum number of years. Because the annuitant died after 2 years, the beneficiary will receive payments for 8 additional years since that annuitization option was 10 years period certain.

What is the major risk in buying a term life insurance policy issued by a highly-rated company? A) cash value is not guaranteed B) the death benefit can fluctuate with investment performance C) the ability to take loans is not guaranteed D) premiums will become more unaffordable at older ages

D) premiums will become more unaffordable at older ages The most significant risk in buying term life insurance issued by a financially strong company is that premiums will become unaffordable at older ages. Since term is fixed life insurance, the insurance company bears all investment risk. There is no cash value and no loan feature in term life insurance.

The separate account of a variable annuity is usually legally organized as a A) open-end investment company. B) closed-end investment company. C) hedge fund. D) unit investment trust

D) unit investment trust. The separate account is usually organized as a unit investment trust, which is a type of investment company

All of the following annuity benefits apply to an annuity's annuitization phase EXCEPT A) An enhanced death benefit rider B) A 5 year period certain C) A life only option D) A living benefit rider

A) An enhanced death benefit rider A variable annuity death benefit rider provides accumulation benefits rather than annuitization benefits. Living benefit riders, period certain options and life only options, all provide lifetime guarantees of income for the annuitant. The enhanced death benefit rider ensures that the contract value paid to a beneficiary is no less than the purchase payments made to fund the contract. This guarantee ends when the contract reaches the annuitization phase.

In which of the following situations is a variable annuity with a living benefit rider most suitable? A) An investor would like to ensure that a minimum amount of guaranteed income is available for life B) An investor would like to ensure that at death, a named beneficiary will receive no less than the amount of the purchase payments that were made C) An investor would like a to accumulate savings for retirement on a tax deferred basis D) An investor wants to ensure that purchase payments grow at a minimum rate regardless of market performance

A) An investor would like to ensure that a minimum amount of guaranteed income is available for life A living benefit rider should be added to a variable annuity to guarantee income that can last for life. A death benefit rider protects the amount that a beneficiary will receive. If an investor wants only tax deferred accumulation, a living benefit rider is an unnecessary expense.

An individual who has made an initial payment for an immediate annuity contract owns A) Annuity units B) Separate account shares C) Accumulation units D) General account units

A) Annuity units Individuals that purchase immediate variable annuity contracts own separate account units known as annuity units because their contracts are immediately in the payout phase. They skip the accumulation phase of the contract, so do not own accumulation units.

Which of the following are least likely to be found within an insurance company's general account? A) Common stock B) Treasury bonds C) Corporate bonds D) Cash

A) Common stock The general account of an insurance company backs its guarantees. It is usually invested in conservative instruments like Treasury securities and high grade corporate bonds. Common stock is typically not held within the general account of an insurer.

Which of the following investments is least likely to be found within an insurance company's general account? A) Common stock B) Treasury bonds C) Corporate bonds D) Cash

A) Common stock The general account of an insurance company backs the guarantees made by the insurer. It is usually invested in conservative instruments like Treasury securities, and high grade corporate bonds. Common stock is typically not held within the general account of an insurer.

A variable annuity is best described as a(n) A) Contract with an insurance company that is designed to help investors prepare for retirement B) Investment program for persons who are not comfortable with market volatility C) Insurance contract which guarantees that beneficiaries will receive no less than the amount of the purchase payments, but more if the market performs well D) Insurance product that guarantees growth with full liquidity for investors that are planning for retirement

A) Contract with an insurance company that is designed to help investors prepare for retirement A variable annuity is a contract with an insurance company, and is designed to provide retirement benefits. A death benefit that guarantees a return of purchase payments is not always included, but can be purchased. Growth is not guaranteed, although riders can be purchased to ensure minimum benefits are available for the lifetime of the annuitant(s). Variable annuity contracts are subject to market volatility; fixed annuities are not.

Which benefit is offered in the accumulation but not the annuitization phase of a variable annuity? A) Death benefit B) GMIB C) GMAB D) GLWB

A) Death benefit A death benefit is offered during the accumulation phase of a variable annuity. GMIB, GMAB, and GLWB riders are living benefit riders that ensure minimum account value, and/or minimum lifetime income, at annuitization.

A variable annuity owner has elected a variable income option. The assumed interest rate of the variable annuity contract is 3%. The current monthly payment is $500. In order to keep the monthly payment the same, the separate account return must be A) Exactly 3% B) 3% or more C) More than 3% D) Less than 3%

A) Exactly 3% The monthly income will stay the same as the prior month if the separate account return is equal to the contract's AIR

Variable annuity contracts must be registered with which of the following regulatory organizations? I. SEC II. State insurance departments III. FDIC A) I and II only B) I and III only C) II and III only D) I, II and III

A) I and II only Variable annuity contracts must be registered with the SEC and with the insurance department of each state in which they are to be offered. They are not registered with banking regulators like the FDIC.

Holders of variable annuities receive the largest monthly payments under which of the following payout options? A) Life annuity B) Life annuity with period certain C) Joint and last survivor annuity D) All of the above

A) Life annuity The life annuity provides distributions for the shortest period of time and therefore offers the greatest monthly cash flow.

The charge that is paid by a variable annuity owner to compensate the insurer for the guarantees it provides is the A) Mortality and expense charge B) Administrative Charge C) Fund expense charge D) Trail commission

A) Mortality and expense charge The mortality and expense charges provide for the guarantees that are supplied by the insurer and are usually the largest of the ongoing charges that are deducted from the contract value.

Of the ongoing fees that are typically paid from the account value of a variable annuity, which is typically the largest? A) Mortality and expense charge B) Administrative Charge C) Fund expense charge D) Commission to the sales representative

A) Mortality and expense charge The mortality and expense charges provide for the guarantees that are supplied by the insurer and are usually the largest of the ongoing charges that are deducted from the contract value. The commission to the sales representative is typically paid up front, and recovered by the insurance company through its investment performance and pricing allowances.

Nancy has $100,000 to invest and is seeking your advice on how best to utilize these funds to achieve her short-term goals. You would tell Nancy not to use these funds to purchase a A) Variable annuity B) REIT C) ETF D) Money market fund

A) Variable annuity Variable annuities are not appropriate for meeting short- term trading goals. The other products provide greater liquidity and would be more suitable for meeting short- term goals.

A customer who is purchasing a variable annuity wants to make certain that beneficiaries receive the greater of the contract value or purchase payments made in the event of death. This customer should purchase which of the following? A) A standard death benefit rider B) An enhanced death benefit rider C) A living benefit rider for the beneficiaries D) No purchase is necessary to provide this death benefit. It is the standard death benefit of all annuity contracts, and is required by law.

B) An enhanced death benefit rider To ensure that the greater of the contract value or the purchase payments is paid to a beneficiary at the death of the contract owner, an enhanced death benefit rider should be purchased. The standard death benefit rider ensures that the purchase payments are paid to the beneficiary. The death benefit of a variable annuity (without the purchase of a death benefit rider) is the contract value, which could be less than the purchase payments under adverse market conditions.

Which two of the following statements are true regarding variable universal life insurance contracts? I. Premiums are flexible II. The cash value is guaranteed III. The death benefit is fixed IV. It must be sold with prospectus A) I and II B) I and IV C) II and III D) III and IV

B) I and IV All variable insurance products are registered with the SEC under the Securities Act of 1933 and must be sold with prospectus. Universal variable life contracts have both flexible premiums and flexible death benefits. Cash value is not guaranteed.

Which two of the following statements regarding variable life insurance are TRUE? I. The premiums are fixed II. The premiums are flexible III. The period of coverage is for a specified term IV. The coverage is permanent A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Variable life insurance is permanent coverage for the life of the insured. The premiums for coverage are fixed at the time the policy is issued.

With which of the following must variable annuities be registered? I. State banking commission II. State insurance commission III. SEC IV. FINRA A) I and III only B) II and III only C) II and IV only D) I, II, III and IV

B) II and III only Variable annuities must be registered with both the state insurance commission and the SEC as they are sold by insurance companies, but are nonetheless a security

All of the following statements about an insurer's separate account are true EXCEPT A) If actively managed, it must be registered as a mutual fund under the Investment Company Act of 1940 B) It is mostly invested in conservative investments like U.S. Treasury securities and highly rated corporate bonds C) Units in the account fluctuate in value based on the performance of the underlying assets D) Its assets are paid for with purchase payments from variable product purchases

B) It is mostly invested in conservative investments like U.S. Treasury securities and highly rated corporate bonds The separate account of an insurance company supports variable products, which are designed to offer growth to their owners. The investments in the account include equities like common stock, mutual funds and equity ETFs to

Which of the following statements about the separate account of an insurance company is TRUE? A) Purchasers of variable annuities own shares in the separate account B) It must be registered with the Investment Company Act of 1940 C) It is conservatively invested and holds very little equity D) It cannot be directly managed by the insurance company's investment managers

B) It must be registered with the Investment Company Act of 1940 The separate account of an insurance company must be registered as either an open-end investment company or unit investment trust under the Investment Company Act of 1940. This depends on whether it is directly or indirectly managed. Separate account products are designed to provide growth, so include equity investments. Purchasers of variable products own units in the separate account, not shares.

Which of the following annuitization options will generate the smallest monthly income payment to the annuitant? A) Life with 10 year period certain B) Joint life annuity C) Straight life annuity D) Life with 20 year period certain

B) Joint life annuity A joint life annuity pays income for the life of two annuitants regardless of who dies first. Because this option has the strongest guarantee, it pays the smallest monthly income of the choices provided.

At annuitization an annuity owner wishes to select the settlement option that pays the highest monthly income benefit for life. The investor should select: A) Joint and last survivor B) Life only C) Life with cash refund D) Life with 10- year period certain

B) Life only The largest amount is payable on the option with the least guarantee. Life only guarantees payments for as long as the annuitant is alive. There is no beneficiary. This option pays the largest monthly amount.

An annuity contract owner who wishes to maximize the amount of monthly income to be received at annuitization, but also insure a minimum number of payments are made, would choose which of the following settlement options? A) Life only B) Life with 5- year period certain C) Life with 20-year period certain D) Joint and last survivor

B) Life with 5- year period certain The option that has the least guarantee pays the largest monthly benefit. While life only pays the largest monthly benefit, it does not guarantee a minimum number of payments. A period certain guarantees payment for the life of the annuitant, but further guarantees that a minimum number of payments are made. A 5-year period certain guarantees that 5-years of payment are made in the event of premature death. A 20-year period certain guarantees a minimum of 20 years of annuity payments - a greater guarantee than the 5-year —so results in smaller monthly payments. Joint and last survivor guarantees payments for two lives so results in the smallest monthly payments.

An annuitant that would like to ensure that a variable annuity will pay out a defined monthly amount will benefit from a A) Death benefit rider B) Living benefit rider C) Â Roll-up provision D) Â Step-up provision

B) Living benefit rider A living benefit rider guarantees that an annuitant will receive a defined minimum payment for life. A roll-up is a guaranteed minimum rate that applied to the rider's value. A step up locks in the highest market value achieved during a particular period.

A separate account that is actively managed by the insurance company is A) Registered as a unit investment trust under the Investment Company Act of 1940 B) Registered as an open end investment company under the Investment Company Act of 1940 C) Registered as a closed end investment company under the Investment Company Act of 1940 D) Not registered under the Investment Company Act of 1940

B) Registered as an open end investment company under the Investment Company Act of 1940 When the assets of the separate account of an insurance company are managed by the insurance company's investment company, the account is registered as an open end investment company. When the investment management of the insurer passes the responsibility of management to subaccount fund managers the separate account must be registered as a unit investment trust

All of the following features are shared by fixed and variable annuities EXCEPT: A) Flexible purchase payments B) SEC registration C) Decreasing surrender charges D) Named beneficiary for payment of death benefit

B) SEC registration Only variable annuities are securities and require SEC registration. Both fixed and variable annuities offer flexible purchase payment options, surrender charges that decrease the longer the annuity is held, and a death benefit that is payable to a named beneficiary prior to annuitization.

With which of the following investment objectives is a variable annuity usually associated? A) College education funds B) Saving for retirement C) Emergency savings D) Long term growth

B) Saving for retirement While annuities can help investors meet a number of investment objectives, they are well-suited for helping investors prepare for retirement because they are long-term products that can be used to provide monthly income that is guaranteed for life.

The account of the insurance company in which variable product purchase payments are invested is the A) General account B) Separate account C) Variable account D) Investment account

B) Separate account The separate account of the insurance is set apart from its general account for the investment of variable product purchase payments. Its subaccounts include a variety of investment alternatives to align with differing investor objectives.

A customer that has recently purchased a variable annuity contract wishes to take an emergency cash withdrawal of 50% of the purchase payments. Which of the following statements is TRUE? A) Variable annuity contracts allow customers to withdraw funds when needed without charge B) The customer may withdraw the funds, but will be subject to surrender charges C) The customer may withdraw the funds through the policy loan provision D) This type of withdrawal is not permitted

B) The customer may withdraw the funds, but will be subject to surrender charges Insurance companies charge surrender charges on early withdrawals from contracts to ensure their costs are covered. These charges typically decrease each year of the contract. Many contracts offer a "free" withdrawal of 10% of contract value each year to help provide liquidity for emergency cash needs. Life insurance contracts have loan provisions, but annuities offer withdrawal provisions

All of the following statements regarding variable life insurance death benefits and cash values are true EXCEPT A) The death benefit can increase based on the performance of the separate account B) The death benefit can fall to zero C) The cash value can increase based on the performance of the separate account D) The cash value can fall to zero

B) The death benefit can fall to zero A variable life insurance policy has a minimum guaranteed death benefit, but does not have a minimum guaranteed cash value.

A registered rep currently has a client who has held a particular variable annuity for the past four years. The client is unhappy with the performance of the separate account and asks the rep to recommend some alternatives. Which of the following would be the most appropriate course of action? A) The rep should immediately reinvest the client's funds into a different annuity closely aligned with the client's objectives. B) The rep should examine the suitability of alternative investment vehicles in conjunction with the consequences of switching annuities. C) The rep should advise the client that it is impossible to liquidate a variable annuity for at least ten years. D) The rep should immediately speak with a supervisor about the appropriate next step

B) The rep should examine the suitability of alternative investment vehicles in conjunction with the consequences of switching annuities. Annuities are meant as long-term investment vehicles. As a result, investors face significant charges when switching annuities, including surrender fees and potential tax consequences. When switching annuities a rep must strongly consider a client's goals along with a consideration of potential switching costs.

A purchaser of a variable annuity wants to ensure that a beneficiary will receive no less than the amount contributed to the contract. Which of the following statements is TRUE? A) This individual should purchase a living benefit rider that includes a roll-up provision B) This individual should purchase a standard death benefit rider C) This individual should purchase an enhanced death benefit rider D) This is the standard death benefit. The purchase of a rider is not required to deliver this benefit

B) This individual should purchase a standard death benefit rider A variable annuity with no death benefit rider returns the contract value only at the death of the annuitant. The purchase of a standard death benefit rider will pay the beneficiary no less than the purchase payments. An enhanced death benefit rider may offer potential increases to the death

The premium that is paid by the owner of a variable life insurance contract is A) A flexible amount that can be varied by the amount of death benefit that is needed B) A flexible amount that will rise or fall based on the comparison of the separate account return to the AIR C) A fixed amount that remains the same for the duration of the policy D) A fixed amount that is invested in the general account of the insurer

C) A fixed amount that remains the same for the duration of the policy A variable life insurance company has a fixed premium. It is invested in the separate account of the insurer after expenses are deducted.

All of the following are features of variable universal life insurance policies EXCEPT A) Flexible premiums B) The option to borrow against the cash value C) A minimum guaranteed cash value D) Cash value that fluctuates based on the performance of the separate account compared to the AIR

C) A minimum guaranteed cash value Variable universal life insurance contracts have flexible premiums. The cash value is not guaranteed.

An investor is interested in making annual payments to purchase an annuity that will provide income in 10 years. This investor should purchase a(n) A) Immediate annuity B) A single premium deferred annuity C) A periodic payment deferred annuity D) A periodic payment whole life annuity

C) A periodic payment deferred annuity In annuity terminology, multiple payments are called periodic payments. Deferred annuities pay income in the future.

A customer wants to ensure that his investment portfolio will deliver monthly income guaranteed for life. Which product should be recommended to accomplish this requirement? A) An asset allocation fund with a fixed time withdrawal plan B) A target date fund with a specific percentage withdrawal plan C) A variable annuity with a period certain payout option D) A mutual fund fixed dollar withdrawal plan

C) A variable annuity with a period certain payout option Only insurance products can provide lifetime guarantees. A variable annuity with a period certain option guarantees income for life to the annuitant with a guarantee of a minimum period of payments (e.g. 5 years or 10 years).

An individual who has made an initial payment for a deferred variable annuity contract owns A) Annuity units B) Separate account shares C) Accumulation units D) General account units

C) Accumulation units Individuals that purchase variable annuity contracts own separate account units known as accumulation units until their contracts are in the payout phase. The units are converted to annuity units at the annuitization of the contract.

When selling fixed index annuities, a representative must hold which of the following? A) A FINRA representative registration only B) A FINRA representative registration and insurance license C) An insurance license only D) Neither a FINRA registration or insurance license

C) An insurance license only Equity indexed annuities are fixed annuity products. Fixed annuity products are not registered investment products, and may be sold by persons that hold insurance licenses but not FINRA registration.

Variable life insurance policies and fixed life insurance policies share which of the following features? A) Guaranteed cash value B) Sold with prospectus C) Fixed premium D) Flexible death benefit

C) Fixed premium Both variable life and fixed life insurance contracts have a fixed premium. Variable policies traditionally have minimum death benefits, while fixed policies have a fixed death benefit. Fixed policies have a guaranteed cash value, variable policies do not. Only variable products must be sold with prospectus

Which of the following best summarizes the management objective of an insurance company separate account A) Offer principal protection to purchasers of variable products B) Deliver guaranteed lifetime income to purchasers of either fixed or variable annuities C) Help provide inflation protection for purchasers of both life insurance and annuity products D) Protect purchasers of variable insurance products from investment risk

C) Help provide inflation protection for purchasers of both life insurance and annuity products The separate account of an insurance company separates purchase payment for variable life and annuity products from purchase payments for fixed products (general account products). The separate account is designed to offer growth to keep pace with inflation for purchasers of variable products. In exchange for growth potential, purchasers take on investment risk.

Which of the following apply to the sale of variable insurance products? I. FINRA Suitability requirements II. The Know Your Customer Rule III. Anti-Fraud Provisions of the Securities Act of 1934 A) I and II only B) I and III only C) I, II, and III

C) I, II, and III Variable products are securities because customers may lose money. They are subject to FINRA rules of suitability and the Know Your Customer rule which requires the collection of sufficient information to understand investment objectives. The anti-fraud provisions of the Securities Exchange Act of 1934 apply to the sale of all securities.

An investor would like to purchase an annuity that includes both a fixed and variable component. Which two of the following statements are TRUE? I. This is a compound annuity II. This is a combination annuity III. The investor's purchase payments are invested in both the separate account and the general account of the insurer IV. The investor's purchase payments are held in the general account of the insurer A) I and III B) I and IV C) II and III D) II and IV

C) II and III Annuities that include both fixed and variable accounts are called combination annuities. The purchase payments for the variable portion of the annuity are invested in the separate account; the purchase payments for the fixed portion of the annuity are invested in the insurer's general account

Which two of the following statements regarding variable life insurance are TRUE? I. It has a minimum guaranteed cash value II. Its cash value is not guaranteed III. It has a minimum guaranteed death benefit IV. The death benefit is not guaranteed A) I and III B) I and IV C) II and III D) II and IV

C) II and III Variable life insurance contracts deliver a minimum guaranteed death benefit, but the death benefit may increase above the minimum based on the performance of the underlying investments. The cash value within a variable life contract is not guaranteed. Its growth is tied to the performance of the underlying subaccounts.

Which two of the following statements explain the annuitization of a variable annuity contract? I. The number of accumulation units continue to grow II. The number of annuity units is fixed III. Annuity units are liquidated to pay monthly income to annuitants IV. The investments are transferred to the insurer's general account A) I and III B) I and IV C) II and III D) II and IV

C) II and III When a variable annuity is annuitized, the number of annuity units is fixed and no more accumulation units can be purchased. Annuity units are liquidated to pay the monthly income benefit the annuity was purchased to provide.

An owner of a variable life insurance policy takes a policy loan against the cash value of the policy. Which of the following statements is TRUE? A) Ordinary income taxes are due on the amount of the loan at the time it is taken B) The interest on the loan is tax deductible if policyholder itemizes deductions for federal income tax purposes C) If the policy is surrendered the loan amount that hasn't been repaid is taxable as ordinary income D) The policyholder must repay the loan within a time period and in accordance with a schedule set forth in the contract

C) If the policy is surrendered the loan amount that hasn't been repaid is taxable as ordinary income Life insurance contracts offer policyholders the benefit of borrowing against the cash value through a policy loan. A loan is not taxable unless it is outstanding at the time the policy is discontinued. The policyholder is not required to make payments or even pay interest on the loan, but the death benefit will be reduced by any outstanding loan. Policy loan interest is not tax deductible.

An annuity owner wants to ensure that income payments will be paid for his lifetime or for a minimum number of years to a beneficiary if he dies soon after the payments have started. Which annuitization option should be selected? A) Cash refund option B) Joint and last survivor annuity C) Period certain annuity D) Life only annuity

C) Period certain annuity The period certain option ensures that payments are made for the life of the annuitant, or for a minimum number of years as specified to a beneficiary if the annuitant dies soon after payment have started. For example, if the option selected is life with 15 years period certain, a minimum of 15 years of payments will be made.

A customer that purchases an immediate annuity A) Purchases accumulation units only B) Purchases both accumulation units and annuity units C) Purchases annuity units only D) Purchase neither accumulation or annuity units

C) Purchases annuity units only An immediate annuity is purchased to begin paying income rather than to accumulate value. Customers are in the payout phase immediately, and own annuity units right away. There is no accumulation period so there are not accumulation units.

Which of the following statements about variable annuities is false? A) The rate of return is determined by the value of the underlying portfolio B) These annuities are designed to combat inflation risk C) The AIR guarantees a minimum rate of return D) The number of annuity units becomes fixed when the contract is annuitized

C) The AIR guarantees a minimum rate of return The rate of return on a variable annuity is determined by the value of the underlying securities, generally mutual funds. The assumed interest rate is the expected interest rate for a specific annuity, but does not guarantee a minimum return as the portfolio may perform below the AIR, thus lowering the monthly distribution

All of the following statements about annuity units are true EXCEPT A) They represent an interest in the separate account of an insurer B) They fluctuate in value relative to the performance of the investments in the separate account C) The number of annuity units an investor owns can increase D) The value of the annuity units can impact the amount of income received by a annuitant

C) The number of annuity units an investor owns can increase Annuity units are associated with the payout phase of a variable annuity contract. At that time the number of annuity units are fixed, and are then liquidated to provide monthly income that is guaranteed for life. The value of annuity units fluctuates based on the performance of the separate account.

Your customer has purchased a living benefit rider to guarantee a minimum monthly income for life starting at age 65. Which of the following statements is TRUE? A) The income rider guarantees are paid only if the principle value of the contract is positive B) The principal value of the contract and income value are equal C) The principle value of the contract and the income rider value are completely separate D) Cash withdrawals cannot be made from the contract if a living benefit is added

C) The principle value of the contract and the income rider value are completely separate The income rider guarantees that income of a specified amount will be paid regardless of investment performance. The value of the income may be enhanced by guaranteed rollups, and is completely separate from the actual value of the annuity's principal. Contract owners may withdraw cash from their annuities. The amount of the income paid will be recalculated as described in the prospectus when a withdrawal is made.

All of the following statements about variable annuity surrender charges are true EXCEPT A) They apply when individuals withdraw funds from an annuity within a certain period of the purchase payment B) They usually decrease over the period of time for which they apply C) They are similar to the front end load sales charge that applies to mutual fund A-share purchases D) They help the insurance company recover upfront costs

C) They are similar to the front end load sales charge that applies to mutual fund A-share purchases Surrender charges are similar to contingent deferred sales charges, or back-end loads, of B-share mutual funds.

Which of the following insurance contracts offers a fixed premium and a death benefit that may fluctuate but cannot fall below a guaranteed minimum? A) Fixed term life insurance B) Variable universal life insurance C) Variable life insurance D) Both variable and variable universal life insurance

C) Variable life insurance Variable life insurance has a fixed premium and a minimum guaranteed death benefit. Variable universal life insurance has a flexible death benefit and flexible premiums.

For which of the following investors is a variable annuity most appropriate? A) A 35-year old that is looking for an investment option that provides tax-deferred growth B) A 45-year old that is looking for an investment opportunity for retirement savings that offers growth potential, tax deferral and complete liquidity C) A 55-year old that is planning to retire in 5 years, and can tolerate no loss of investment principal D) A 60-year old that would like an investment that can provide a guaranteed amount of income for life with the potential to keep pace with inflation

D) A 60-year old that would like an investment that can provide a guaranteed amount of income for life with the potential to keep pace with inflation Variable annuities are designed for retirement savings. Of these choices, the 60-year old seeking retirement income that keeps pace with inflation seems to be well-suited for this product. Investors that require full liquidity or are uncomfortable with potential loss of principal are not good candidates for variable annuities. Because of their lack of liquidity, annuities are not generally recommended for younger investors.

Packaged security investment products include all of the following EXCEPT A) Exchange-traded funds B) Open end investment company shares C) Real estate investment trusts D) Fixed Annuity products

D) Fixed Annuity products A packaged investment product is a diverse pool of securities that is managed professionally and combined into a single investment opportunity. Included in this category are mutual funds, exchange-traded funds, REITs, DPPs, UITs and hedge funds. Variable annuities are also packaged products because they offer shares in mutual fund subaccounts. Investors in fixed annuities do not own a share in a pool of securities. Instead they receive a stated amount of income based on the performance of the general account of the insurance company.

Variable annuities are subject to which of the following securities regulations? I. The Investment Company Act of 1940 II. The Investment Advisors Act of 1940 III. The Securities Exchange Act of 1934 A) I and II only B) I and III only C) II and III only D) I, II and III

D) I, II and III Like mutual funds, variable annuities are subject to most securities regulations. The Securities Act of 1933, The Securities Exchange Act of 1934, The Investment Company Act of 1940 and the Investment Advisors Acct of the 1940 apply to variable annuities

Variable annuities are subject to which of the following securities regulations? I. The Investment Company Act of 1940 II. The Investment Advisors Act of 1940 III. The Securities Exchange Act of 1934 A) I and II only B) I and III only C) II and III only D) I, II and III

D) I, II and III Like mutual funds, variable annuities are subject to most securities regulations. The Securities Act of 1933, The Securities Exchange Act of 1934, The Investment Company Act of 1940 and the Investment Advisors Acct of the 1940 apply to variable annuities.

Which of the following apply to sale of variable insurance products? I. FINRA Suitability requirements II. The Know Your Customer Rule III. Anti-Fraud Provisions of the Securities Act of 1934 A) I and II only B) I and III only C) II and III only D) I, II, and III

D) I, II, and III Variable products are securities because customers may lose money. They are subject to FINRA rules of suitability and the Know Your Customer rule which requires the collection of sufficient information to understand investment objectives. The anti-fraud provisions of the Securities Exchange Act of 1934 apply to the sale of all securities.

Which two of the following choices best describe the features of a variable annuity? I. Growth taxed currently at lower capital gains rates II. Long-term investment alternative III. High degree of liquidity throughout the term of the contract IV. Multiple investment choices to meet a variety of investment objectives A) I and II B) I and III C) II and III D) II and IV

D) II and IV

An annuitant will receive guaranteed income of $500 per month for life from her annuity contract. Which two of the following statements are TRUE? I. The investor owns a fixed annuity II. The investor may own either a fixed or variable annuity III. Variable annuity contracts offer variable payout options only IV. Variable annuity contracts offer both fixed and variable payout options A) I and III B) I and IV C) II and III D) II and IV

D) II and IV A customer may purchase a variable annuity to benefit from the available investment options during the accumulation period and then choose a fixed or variable annuitization option. If a variable annuitization option is chosen, the monthly income will change from month to month based on the comparison of investment performance to the assumed interest rate (AIR) specified in the contract.

Which two of the following statements regarding variable life insurance contracts are TRUE? I. Waiver of premium is included for no extra charge II. The prospectus of the contract provides information about all contract features and charges III. The death benefit is fixed IV. Policyholders may change their allocations between subaccounts A) I and II B) I and IV C) II and III D) II and IV

D) II and IV A variable life insurance contract offers a minimum guaranteed death benefit that may grow if the separate account performance exceeds the policy's AIR. Policies have many subaccount choices, and the owner may change the allocation based on terms described in the contract. Waiver of premium is available at an additional charge. Charges and features of variable contracts are included in the prospectus.

After annuity payments have started, the contract owner is permitted to I. change the income option selected II. change the contract beneficiary III. make additional purchase payments into the contract IV. Withdraw cash in excess of the monthly income amount from the contract A) I and III B) I and IV C) II and III D) II and IV

D) II and IV After annuity payments after started, the contract holder cannot change the annuitization option or add additional cash to the contract. The owner may change the contract beneficiary or take cash withdrawals in excess of the monthly income amount. Such withdrawals will require a recalculation of the income paid in future months

A variable annuity owner has elected a variable income option. The assumed interest rate of the variable annuity contract is 3%. If the separate account returned 2%, the next monthly payment will be A) Equal to the initial monthly income amount B) Equal to the prior month's payment C) Greater than the prior month's payment D) Less than the prior month's payment

D) Less than the prior month's payment If the separate account performance is less than the contract's AIR, the Income will be less than the previous month's income.

Which of the following annuity settlement options would result in the largest monthly income amount? A) Joint and last survivor B) Life with 20- year period certain C) Life with 10- year period certain D) Life with 5- year period certain

D) Life with 5- year period certain The option that has the least guarantee pays the largest monthly benefit. While life with period certain guarantees payment for the life of the annuitant, it only guarantees that 5-years of payment are made in the event of premature death. A 20-year period certain guarantees a minimum of 20 years of annuity payments - a greater guarantee than the 5 year - so results in smaller monthly payments.

A fixed annuity is more appropriate than a variable annuity for a customer who has greater concern for which of the following? A) Ability to keep pace with inflation B) Surrender charges C) Choices of subaccount investments D) Potential loss of principal

D) Potential loss of principal Fixed annuities pay a stated interest rate to the contract owner. The rate is guaranteed by the insurance company, so investors are not subject to loss of principal. The disadvantage of these contracts is that the fixed rate may not keep pace with the rate of inflation.

When variable products are sold through a selling agreement with a broker-dealer, the contract owners are protected from potential issuer insolvency by: A) SIPC B) FDIC C) FINRA D) State Guaranty Association

D) State Guaranty Association State guaranty associations pay covered claims of policyholders when insurance companies become insolvent. FDIC or SIPC do not cover defaults of insurance company products.

When variable products are sold through a networking agreement, any default of the issuer is potentially protected by which of the following? A) SIPC B) FDIC C) FINRA D) State Guaranty Association

D) State Guaranty Association State guaranty associations pay covered claims of policyholders when insurance companies become insolvent. These associations are funded by assessment paid by insurers domiciled in the state. FDIC or SIPC do not cover defaults of insurance company products.

A variable annuity contract owner is notified of the bankruptcy of the insurance company that issued the contract. The owner's financial interest in the contract is most likely protected by which of the following? A) SIPC B) FDIC C) FINRA D) State Guaranty Association

D) State Guaranty Association State guaranty associations pay covered claims of policyholders when insurance companies become insolvent. These associations are funded by assessment paid by insurers domiciled in the state.

The annual growth of cash value within a variable life contract is A) Currently taxable as a capital gain B) Currently taxable as ordinary income C) Tax-deferred, but taxed as ordinary income if accessed through a policy loan D) Tax-deferred and accessible through a policy loan which is not taxable while the contract is in force

D) Tax-deferred and accessible through a policy loan which is not taxable while the contract is in force The cash value in a variable life insurance contract grows tax-deferred. The owner may take a policy loan against the cash value. Loans are not taxable, but if the policy is surrendered and the amount of an outstanding policy loan exceeds premiums paid, the difference is taxable.

Which of the following statements is TRUE regarding a financial representative that sells a variable life contract? A) A The representative must be registered with FINRA but is not required to have an insurance license B) The disclosure requirements of the Securities Act of 1933 do not apply to the sale of life insurance contracts C) FINRA suitability provisions do not apply to the sale of variable life insurance D) The fraud provisions of the Securities Act of 1934 apply to the sale of variable life insurance

D) The fraud provisions of the Securities Act of 1934 apply to the sale of variable life insurance A financial representative that sells variable life insurance must be insurance licensed and Series 6 or 7 registered. The Securities Acts of 1933 and 1934 apply to variable life insurance, as do FINRA suitability requirements

A customer explains that he would like his insurance coverage to be higher during the time his children are growing up and lower when they have completed their college education. An appropriate type of coverage for this customer is A) Whole life insurance B) Fixed premium term policy C) Variable life insurance D) Variable universal life insurance

D) Variable universal life insurance A feature of variable universal life insurance is the ability to adjust the death benefit based on the needs of the customer. This type of coverage may be suitable for customers who wish to have one policy that can adapt to their changing life stages.

At age 65, Fred wants to annuitize his deferred annuity into predictable fixed payments on a straight life payout. His life insurance company says it will pay him $900 per month for life, but that isn't enough money for him to live on in retirement. He thinks other companies are offering higher payouts. What can he do to get more income? A) nothing, his only choice is to take the straight life payout offered by his own company B) he can take a joint and survivor payout from his company instead of a straight life payout C) he can choose a lower AIR D) he can exchange his contract tax-free into one offered by a company with a higher payout

D) he can exchange his contract tax-free into one offered by a company with a higher payout Before annuitizing any deferred annuity, it is a good idea to shop the market by obtaining payout quotes from a variety of companies. Then, it is relatively easy to make a tax-free section 1035 exchange into the deferred annuity (or else a fixed immediate annuity) of the company offering the best payout. Of course, it's also important to evaluate the quality and ratings of the insurance company guaranteeing fixed payments for life.