Unit 12 Quiz

If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? A) Purchasing power risk. B) Mortality risk. C) Value of each annuity unit each month. D) Investment risk.

A) Purchasing power risk.

For a retired person, which of the following investments would provide the greatest protection against inflation? A) Variable annuities. B) Corporate bonds. C) Fixed annuities. D) Municipal bonds.

A) Variable annuities.

An accumulation unit in a variable annuity contract is: A) an accounting measure used to determine the contract owner's interest in the separate account. B) an accounting measure used to determine payments to the owner of the variable annuity. C) none of these. D) fixed in value until the holder retires.

A) an accounting measure used to determine the contract owner's interest in the separate account.

If the owner of a variable annuity dies during the accumulation period, any death benefit will: A) be paid to a designated beneficiary. B) be paid to any legal heirs as recognized by the annuitant's state of domicile. C) be paid to the issuing company to complete the plan. D) be returned to the separate account.

A) be paid to a designated beneficiary.

A separate account will invest in a number of different securities. The separate account is NOT likely to invest in: A) municipal bonds. B) equity funds C) corporate stock. D) money market funds.

A) municipal bonds.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are: A) partially a tax-free return of capital and partially taxable. B) 100% taxable. C) 100% tax deferred. D) 100% tax free.

A) partially a tax-free return of capital and partially taxable.

All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A) the payout plans provide the client income for life. B) the client may vote for the board of directors or board of managers. C) the client assumes the investment risk. D) the investment portfolio is managed professionally.

A) the payout plans provide the client income for life.

Variable annuity salespeople must register with all of the following EXCEPT: A) the state banking commission. B) the SEC. C) the state insurance department. D) FINRA.

A) the state banking commission.

Changes in payments on a variable annuity correspond most closely to fluctuations in the: A) value of underlying securities held in the separate account. B) Dow Jones Industrial Average. C) cost of living. D) prime rate.

A) value of underlying securities held in the separate account.

All of the following statements regarding variable annuities are true EXCEPT: A) variable annuities offer the investor protection against capital loss. B) variable annuities may only be sold by registered representatives. C) insurance companies keep variable annuity funds in separate accounts from other insurance products. D) variable annuities are classified as insurance products.

A) variable annuities offer the investor protection against capital loss.

All of the following statements concerning a variable annuity are correct EXCEPT: A) variable annuities will protect an investor against capital loss. B) the invested money will be professionally managed according to the issuers' investment objectives. C) separate account may consist of mutual funds. D) a majority vote from the shareholders is required to change the investment objectives.

A) variable annuities will protect an investor against capital loss.

Your customer in his early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A) Growth mutual funds B) A variable annuity C) Corporate debt securities D) Tax-free municipal bonds

B) A variable annuity

The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Life annuity with period certain. B) Life annuity. C) Joint and last survivor annuity. D) Joint tenants annuity.

B) Life annuity.

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? A) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. B) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. C) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. D) Capital gains taxation on the earnings withdrawn in excess of the owner's basis.

B) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis.

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) Any tax due is deferred. B) The entire $10,000 is taxable as ordinary income. C) Two-thirds of the withdrawal is taxable as ordinary income. D) There is no tax as the withdrawal is considered return of capital.

B) The entire $10,000 is taxable as ordinary income.

In a variable life annuity with 10-year period certain, a contract holder receives: A) variable payments for 10 years, followed by fixed payments for life. B) a minimum of 10 years of variable payments, followed by additional variable payments for life. C) 10 years of variable payments. D) fixed payments for 10 years, followed by variable payments for life.

B) a minimum of 10 years of variable payments, followed by additional variable payments for life.

All of the following statements about variable annuities are true EXCEPT: A) the rate of return is determined by the underlying portfolio's value. B) a minimum rate of return is guaranteed C) such an annuity is designed to combat inflation risk. D) the number of annuity units becomes fixed when the contract is annuitized.

B) a minimum rate of return is guaranteed

An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) the yield is always higher than mortgage yields. B) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. C) the safety of the principal invested. D) the yield is always higher than bond yields.

B) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices.

Once a variable annuity has been annuitized: A) each annuity unit's value is fixed, but the number of annuity units varies with time. B) each annuity unit's value varies with time, but the number of annuity units is fixed. C) each annuity unit's value and the number of annuity units vary with time. D) the number of annuity units is fixed, and their value remains fixed.

B) each annuity unit's value varies with time, but the number of annuity units is fixed.

A registered representative recommends a variable annuity with an income rider to a client. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased 2 years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information the RR should: A) contact the issuer of the clients existing VA contract to facilitate the clients surrender of the contract. B) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. C) complete all paper work to purchase the annuity contract and obtain the clients signature immediately. D) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase.

B) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment.

An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is: A) unsuitable because the return on something as conservative as a variable annuity tends to be low. B) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. C) suitable due to the death benefit features of a variable annuity. D) suitable due to the relative safety of the investment.

B) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.

All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A) defined contribution plans. B) variable annuities. C) IRAs. D) Keogh plans.

B) variable annuities.

Your client owns a variable annuity contract with an AIR of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would his April payment compare to his March payment? A) It will stay the same. B) It will be lower. C) It will be higher. D) It cannot be determined until the April return is calculated.

C) It will be higher.

A registered representative's (RR) customer is speaking of a variable life insurance contract he owns. He makes several statements regarding the contract. Which of the following is NOT an accurate statement concerning a variable life insurance contract? A) There is no guarantee regarding the investment results of the separate account. B) The policy provides a minimum guaranteed death benefit. C) The death benefit cannot ever be more than the guaranteed benefit. D) The portion of the premium invested in the insurance company's general account is used to provide for the minimum guaranteed amount of the death benefit.

C) The death benefit cannot ever be more than the guaranteed benefit.

John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) The entire amount is taxed as ordinary income, because it is not life insurance. B) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59-½ years old. C) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. D) None, because it is the proceeds from a life insurance company.

C) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate.

A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would best meet the customer profile? A) IPO. B) Money market fund. C) Variable annuity. D) Universal variable life policy.

C) Variable annuity.

If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: A) accumulation shares. B) mutual fund units. C) accumulation units. D) annuity units.

C) accumulation units.

A joint-and-last-survivor annuity is a payout option where: A) payments continue for a pre-determined period of time. B) payments continue until the death of the primary owner. C) two people are covered and payments continue until the second death. D) payments continue until age 70-½.

C) two people are covered and payments continue until the second death.

Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. He makes the following four statements, all of which are true EXCEPT A) a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant B) with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually C) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed D) a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero

C) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 4 years ago; it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) 0. B) 3800. C) 4200. D) 2800.

D) 2800.

Your customer, still working, informs you that she will be funding a variable annuity you have recommended from 2 sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another variable annuity that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. Based only on these facts, the variable annuity recommendation is A) not suitable because a lifetime income rider is only for someone who is already retired B) suitable regardless of funding sources C) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract D) not suitable

D) not suitable

With regard to a variable annuity, all of the following may vary EXCEPT: A) value of annuity units. B) value of accumulation units. C) number of accumulation units. D) number of annuity units.

D) number of annuity units.

A joint life with last survivor annuity: I. covers more than one person. II. continues payments as long as one annuitant is alive. III. continues payments only as long as all annuitants are still alive. IV. guarantees payments for a certain period of time.

I and II

A prospectus for a variable annuity contract: I. must provide full and fair disclosure. II. is required by the Securities Act of 1933. III. must be filed with FINRA. IV. must precede every sales presentation.

I and II

An investor who has purchased a nonqualified variable annuity has the right to: I. vote on proposed changes in investment policy. II. approve changes in the plan portfolio. III. vote for the investment adviser. IV. withdraw funds without any tax consequences.

I and III

A variable annuity's separate account is: I. used for the investment of funds paid by contract holders. II. used to escrow late or otherwise delinquent premium payments. III. required to be located off of the company's premises. IV. regulated under both securities and insurance laws.

I and IV

Universal variable life policies I. have investment risk that is assumed by the investor II. do not have a separate account III. can be sold by someone with only an insurance license IV. are purchased primarily for their insurance features

I and IV

A registered representative explaining variable annuities to a customer would be CORRECT in stating that: I. a variable annuity guarantees an earnings rate of return. II. a variable annuity does not guarantee an earnings rate of return. III. a variable annuity guarantees payments for life. IV. a variable annuity does not guarantee payments for life.

II and III

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? I. She will receive the annuity's entire value in a lump-sum payment. II. She may choose to receive monthly payments for the rest of her life. III. The accumulation unit's value is used to calculate the total value of the account. IV. The annuity unit's value represents a guaranteed return.

II and III

Variable annuities must be registered with: I. the state banking commission. II. the state insurance commission. III. the SEC. IV. FINRA.

II and III

Which of the following are defined as securities? I. Fixed annuities. II. Variable Annuities. III. Options. IV. CDs insured by the FDIC.

II and III

Which of the following statements regarding variable annuities are TRUE? I. The number of accumulation units is always fixed throughout the accumulation period. II. The number of accumulation units can rise during the accumulation period. III. The number of annuity units is fixed at the time of annuitization. IV. The number of annuity units rises once annuitization begins.

II and III

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? I. The entire amount is taxed as ordinary income. II. The growth portion is taxed as ordinary income. III. The growth portion is taxed as a capital gain. IV. The growth portion is subject to a 10% penalty.

II and IV