Series 65 Unit 24
Current IRS regulations permit an unlimited contribution to which of the following tax-deferred plans? A) Roth IRA B) Annuity C) SEP IRA D) 401(k)
B) Annuity
Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? A) Variable annuity B) Bonus annuity C) Whole life insurance D) Class B shares
B) Bonus annuity
Concerning index annuities and their method of crediting interest, which of the following is true? A) Annual reset offers the best return regardless of market fluctuations. B) High-water mark with look back offers the best return during periods of high volatility. C) On average, annual reset has a higher participation rate than point to point. D) Point to point offers the best return when the market has had a single drastic decline during the period.
B) High-water mark with look back offers the best return during periods of high volatility.
Which of the following is not considered to be an annuity purchase option? A) Periodic payment deferred annuity B) Periodic payment immediate annuity C) Single-premium deferred annuity D) Single-premium immediate annuity
B) Periodic payment immediate annuity
A 57-year-old client has $100,000 in a nonqualified variable annuity and $100,000 in a mutual fund with a dividend reinvestment plan. Coincidently, each was purchased 10 years ago with a deposit of $50,000. If the client needs $50,000 to use as a down payment for a vacation home, which would have the most severe tax consequences? A) Not enough information to tell B) The variable annuity C) The mutual fund D) The same tax consequences for both
B) The variable annuity
A 54-year-old individual invests $25,000 into a nonqualified single premium deferred variable annuity. Five years later, with an account value of $35,000, the investor engages in a Section 1035 exchange into a variable annuity issued by a different insurance company. Four years later, with an account value of $50,000, the investor withdraws $20,000. The tax consequence of the withdrawal is
$20,000 of ordinary income.
A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal?
$6,000.00
A registered representative presenting a variable life insurance policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability. C) The insured may request that the insurance company exchange the VLI policy for a traditional whole life policy issued by the same company within 2 years. The insurance company retains the right to have medical examinations for underwriting purposes. D) Within the first 18 months, the insured may exchange the VLI policy for either a whole life or universal variable policy issued by the same company with no additional evidence of insurability
A) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability.
An owner of an annuitized annuity can do all of the following except A) receive monthly payments for a defined period and then 2 years later change the contract to payment for life B) receive the benefits on a monthly basis until the time of death. C) have a joint life with last survivor clause, with payments paid, until the death of the last survivor. D) receive the benefits for life with a certain minimum period of time guaranteed.
A) receive monthly payments for a defined period and then 2 years later change the contract to payment for life
All of the following statements are features of a straight life, fixed, single-premium immediate annuity except A) the income level may drop if the underlying investments go down in value. B) payments stop when the annuitant dies. C) the annuitant may die before a return of the principal is realized. D) payments do not increase with inflation.
A) the income level may drop if the underlying investments go down in value.
A client purchases a fixed annuity that will immediately begin paying $2,000 a month for life. What is the annuitant's greatest risk? A) Capital risk B) Interest rate risk C) Inflation risk D) Market risk
C) Inflation risk
Which of the following is guaranteed by a variable life policy? A) Cash value B) Policy loans after the policy has been in effect for at least 24 months C) Minimum death benefit D) Minimum separate account performance
C) Minimum death benefit
One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is not used as a method to compute the amount of interest to be credited to the account? A) Point to point B) Annual reset C) Participation rate D) High-water mark
C) Participation rate
Which of the following is not an annuity purchase option? A) Single premium deferred annuity B) Single premium immediate annuity C) Periodic payment immediate annuity D) Periodic payment deferred annuity
C) Periodic payment immediate annuity
Which of the following is a possible advantage of scheduled premium variable life insurance over whole life insurance? A) Less risk in the underlying investment instruments B) Greater guaranteed cash value C) Possible inflation protection for the death benefit D) Flexibility of premium payments
C) Possible inflation protection for the death benefit
Which of the following types of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup? A) Variable life B) Ordinary whole life C) Term D) Universal life
C) Term
A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A) Common stock B) REIT C) Variable annuity D) Fixed annuity
C) Variable annuity
When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that A) you will receive a statement of your death benefit no less frequently than semiannually. B) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing. C) by surrendering the policy, its cash value may be obtained. D) premiums will vary based on performance of the separate account.
C) by surrendering the policy, its cash value may be obtained.
All of the following are advantages of universal life insurance except A) the ability to adjust the amount of premium payments. B) the ability to change the death benefit amount. C) the policy is guaranteed never to lapse. D) when the cash value is sufficient, no premium payment is required.
C) the policy is guaranteed never to lapse.
An investor purchases a single premium deferred index annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement from the insurance company showing an initial balance of $210,000. The most likely reason for the $10,000 increase is A) the underlying index has had outstanding performance. B) the insurance agent's commission was added to the account. C) this is a bonus annuity. D) the insurance company paid a dividend
C) this is a bonus annuity.
A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A) Common stock B) REIT C) Fixed annuity D) Variable annuity
D) Variable annuity
All of the following terms are found in a typical equity index contract except A) cap rate. B) participation rate. C) settlement options. D) inflation rate.
D) inflation rate.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% tax free. B) 100% tax-deferred. C) 100% taxable. D) partially a tax-free return of capital and partially taxable.
D) partially a tax-free return of capital and partially taxable.
Among the reasons why deferred variable annuities might not be a suitable investment for seniors are all of the following except A) surrender charges. B) improper subaccount selection. C) potential capital fluctuation. D) potential inflation protection.
D) potential inflation protection.
If a customer assumes the risk involved with her variable annuity, what does this mean? I. She is not assured of the return of her invested principal. II. The underlying portfolio of the selected subaccount is primarily common stocks, which have no guaranteed return. III. As an investor, she can be held liable for the debts incurred by the insurance company.
I and II
Which of the following is true with an annuity? I. Taxes on earned dividends, interest, and capital gains are paid annually until the owner withdraws money from the contract. II. Random withdrawals are taxed on a LIFO basis. III. Money invested in a nonqualified annuity represents the investor's cost basis. IV. Upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.
II, III, and IV
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?
Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis
One of your customers would like to buy a life insurance policy that has no participation in the stock market, has no cash value, and provides coverage for 20 years. You should recommend
a 20-year term life policy.
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is
an annuity.
When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that
by surrendering the policy, its cash value may be obtained
A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80,
monthly payments will continue until death.
A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be
ordinary income tax on $125,000.
A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is
ordinary income tax on $20,000.
A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending
scheduled premium variable life insurance.
When a variable annuity is annuitized
the number of annuity units redeemed each payment period remains constant
A client of an investment adviser representative (IAR) mentions that he has received a prospectus for a variable annuity but does not really understand the product. It would be reasonable for the IAR to explain that a variable annuity offers an investor
the opportunity to invest in equity securities on a tax-deferred basis.
Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease
to the original face value
A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of +20% in the first year, -5% the second year, and +10% the third year. The investor's current value is approximately
$125,350. In the first year, the index gained 20%. With a 90% participation rate, the investor might have earned 18% but was limited by the 15% cap. So after one year, the value was $115,000. In the second year, the index lost money. However, with an index annuity, there are never any reductions in a down market. So the account remained at $115,000. In the third year, the investor received 90% of the 10% growth, and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year.
In the past 20 years, 55-year-old James has put $27,000 into accumulation units in his nonqualified variable annuity. The current value of his units is $36,000. He wishes to withdraw $16,000 to assist with his grandchild's college education. If he is in the 28% tax bracket, what is his tax consequence on the withdrawal?
$3,420 Because this is nonqualified, the investments are in after-tax dollars. Therefore, any value of the account over the investment is growth. Withdrawals from tax-deferred plans treat the growth as ordinary income for tax purposes. The portion attributable to growth is considered to be withdrawn first under the Tax Code. Here, we have $9,000 worth of growth taxable at 38% (28% + 10% penalty) because James is younger than 59½. Yes, the earnings on a nonqualified annuity are subject to the 10% penalty; only the principal escapes the tax and penalty. The remaining $7,000 withdrawn is considered a withdrawal of principal and is therefore nontaxable.
Alexander Wimpton purchased a variable life insurance policy 10 years ago. The policy has a $500,000 face amount that has grown to $525,000 due to the performance of the selected separate account subaccounts. Three years ago, Wimpton borrowed $50,000 against the policy that has never been repaid. The effect of this is that Wimpton's total death benefit today is
$475,000. The death benefit of a variable life insurance policy is the current face amount ($525,000) or the guaranteed minimum, whichever is greater, less any outstanding loans ($50,000).
Thirty years ago, an investor deposited $100,000 into a single premium deferred variable annuity. Today, the value of the accumulation units is $1.5 million. The investor is ready to annuitize and wishes to maximize monthly payments to be received. You would suggest which of the following settlement options? A) Straight life B) Life with 20 years certain C) Life with 10 years certain D) Joint and survivor
A) Straight life
A variable annuity annuitant bears all of the following risks except A) mortality risk B) interest rate risk C) market risk D) inflation risk
A) mortality risk
Larry purchased a deferred annuity and, on his 65th birthday, annuitized the product under a life with 15-year certain option. His spouse, Linda, is the beneficiary. Which of the following statements is correct? A) Payments will be made to Larry until he is 80 and then to Linda for the remainder of her life. B) Payments will be made to Larry as long as he lives, but should he die prior to reaching age 80, Linda will receive payments until Larry's 80th birthday. C) Payments will be made to Larry until he is 80 and then cease. D) Payments will be made to Larry until his death and then to Linda for another 15 years.
B) Payments will be made to Larry as long as he lives, but should he die prior to reaching age 80, Linda will receive payments until Larry's 80th birthday.
In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) a minimum death benefit B) a minimum cash value C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months D) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years
B) a minimum cash value
The return that will be earned over the life of a fixed annuity A) may decrease over time due to the increase in surrender charges B) will always be at least equal to the guaranteed minimum specified in the contract C) is tied to an investment index such as the Standard & Poor's 500 D) is tied to a portfolio of common stocks selected by the annuity owner
B) will always be at least equal to the guaranteed minimum specified in the contract
Which of the following is considered an advantage of annuitization? A) Once annuitized, the client's draw from the annuity is limited to the annuity payment. B) Payments under a variable annuity could be reduced if there is a declining market. C) It guarantees income that will last for the client's lifetime. D) A fixed, level periodic payment tends to lose buying power over time due to inflation.
C) It guarantees income that will last for the client's lifetime.
In a scheduled premium variable life contract, which of the following has a guaranteed minimum? A) The expense ratio B) The maturity value C) The death benefit D) The cash value
C) The death benefit
A variable annuity annuitant bears all of the following risks except A) inflation risk B) market risk C) mortality risk D) interest rate risk
C) mortality risk
Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is not true? A) A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. B) A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. C) An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days). D) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity.
D) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity.
An agent presenting a variable life insurance (VLI) policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) The insured may request that the insurance company exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, within two years. The insurance company retains the right to have medical examinations for underwriting purposes. C) Within the first 18 months, the insured may exchange the VLI policy for either a permanent form of life insurance or a universal variable policy, issued by the same company, with no additional evidence of insurability. D) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, for two years with no additional evidence of insurability.
D) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a permanent form of life insurance policy, issued by the same company, for two years with no additional evidence of insurability.
A married couple, both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs? A) Single premium deferred fixed annuity B) Single premium deferred variable annuity C) Periodic payment deferred fixed annuity D) Periodic payment deferred variable annuity
D) Periodic payment deferred variable annuity
Which of the following would most likely put a limit on the amount of interest to be credited to an index annuity? A) The CDSC B) The participation rate C) The annuity reset rate D) The cap rate
D) The cap rate
Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the proceeds pass to the beneficiary free of federal income tax. B) If death should occur before age 59½, the 10% early withdrawal penalty does not apply. C) Upon death, the beneficiary will receive the benefit as a lump sum. D) The principal amount at death is the greater of the total of premium payments or the current market value.
D) The principal amount at death is the greater of the total of premium payments or the current market value.
Variable annuities A) provide a guaranteed minimum annuity payout. B) may invest only in money market mutual funds. C) generally provide more security of principal than fixed annuities. D) may have 20 or more subaccount investment options.
D) may have 20 or more subaccount investment options.
When a client purchases an annuity with a 5% bonus, it means A) the bonus is added to the death benefit. B) the bonus is included every payment period. C) the bonus is added at the last payment. D) the bonus is added to the initial payment.
D) the bonus is added to the initial payment.
Which of these features are common to both variable annuities and scheduled premium variable life insurance? I. Income earned in the separate account is tax deferred. II. Separate account performance below the AIR causes a reduction in cash value. III. Fixed contributions are required. IV. Contract owners have voting rights.
I and IV
The difference between a fixed annuity and a variable annuity is that the variable annuity I. offers a guaranteed return II. offers a payment that may vary in amount III. will always pay out more money than the fixed annuity IV. attempts to offer protection to the annuitant from inflation
II and IV
An investor in a variable annuity will be purchasing
accumulation units.
One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is
universal life
If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is
universal life.
