Unit 9 series 7
1035 exchange
A tax-free exchange between like contracts. This provision applies to transfers from annuity to annuity, life to life, and life to annuity. It cannot be used for transfers from an annuity to a life insurance policy. compared to mutual fund exchange priviledge where there is no sales charge but for tax purposes it is considered a sale and new purchase 1035 exchange is done without current taxation 1035 exchange applies to transfers of cash values for everything except A to L no FINRA is concerned about reg rep not pointing out possible disavdantage: Possible surrender charges on the old policy a new surrender charge period on the new policy ppossible loss of a higher death benefit that existed on the old policy
Assumed Inteest Rate
Death benefit payable under a variabel life policy is abjusted on an annual baiss and cn increase or decreased ased on perf of sep act compared with an assumed interest rate AIR one of beenfits of variable life insurnace is that the death beenefit can adjust upward and possibly keep pace with inflation AIR is min rate of return necessary to provide the level death benefit it is determined by the insurance company's actuaries and is stated in the policy contract. It is simply a target, not a projection If the seperate act returns are greater than the AIR, these extra earnings are reflected in an increase in death beenfit and cash value IF seperate ac returns Variable death benefit is adjsuted annually contrast this with the monthyl valulation of cash valutaion
1035 suitability exchanges sales personnel recmmoending that an invesotr switch from esisitin contract to a new one if done properly under proviosn of IRS section 1035 are tax free manadatory that reg rep and their supervisors evaluate the suitabilty of the exchange in light of invesors finacial contion neg conditions to be aware of surrnder charges imposed by the insurance company begigign of a new surrender period possible reduction in death benefit how the espesnes of new contract cmpare witht hose of old contract benefits included in new contract may not be needed by th epurcahser taking into considertaion whether exhcange is suitable ir whether the cust has has another deferred variable annuity excahnge wihtin the preceeding 36 months it must be determiend whether the cust has made a variable annuity exchange using the meber it is also required that mmebr make reasonable efforts to ascertain whether the cust has had an exchane at any other BD within the precedding 36 months an inquiry to the customer as to whether the customer has had an exchange with another BD wihtin 36 months would consitutue a reasonable effot in this context members must document in writing both the nature og the inquiry and the response from the customer FINRA rule 2330 is specifically targered at sale of deferred variable annuities FINRA doesnt have rules regarding fixed annuties and whole life insurance policies becasue they arent securiites
SEC has no speciifc testabel rules regarding variable annutiies the seperate accounts are registerd as invest cmpnaies under invest comp act 1940 policy loands like traditional whole life insurance a variable life insurance allowed to booro against cash value that has accumualate in the contract however certain restrictions esits ususllay he insured may borrow a percentage of the cash value min percentage that must be made avaiblale after the policy has been effect for 3 yrs is 75% if death ebenfit becomes payable during any period that a loan is outstanding the loan amt is deducted from death beenfit before payment interest rate cahrged is stated in the policy se min 75% of cash value must be available for policy loan after policy has been in force 3 yrs the insurer is never req to loan 100% of cash value full cash vlaue is obtained by surrendering the policy to the issuer if the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan if the insured surrenders the contract with a loan outstanding, cash value is reduced by the amount of the loan
Variable life insurnace has fixed scheduled prem but differs from whole life in that prems are split part of prem is placed in genral assets of insuranc e company these general assets are used to gurantee a min death beenfit the baclance of the prem is place in the seperate act and represents th ecash value of the policy Because th cash value is invested in the seperate account, which fluctuates in value, its cash value is not guaranteed. The policys death beenfits may increase above the min guaranteed amt as result of investment results but may never fall belwo the min as long as premiums are paid although value of the sperate account is calculated daily the policyholders cash value in a variable life contract is reported monthly
VAriable life as long as premiums are paid and the policy remins in forece even if sep accounts lsoe moneye vert yr once the premum has been determined and the expenses have been deducted, the net premium is invested in subaccounts of the seprate act Objecitves in variable life inclue growth balance income index or indices and money market (it has more options than variable annuty which only has growth and income)
Accumulation phase pay in period for a deferred annuity is known as accumulation stage (there is no accumualtion period for an immediate annuity) During the accumulation stage an annuity contract, the contract terms are flexible an investor who missses a periodic payment is in no dnager of forefeiting the rpeccedidng contribtuion thecontract holder cna temriante the contract at any time durirng the accumulation stage, although the contract holder is liekyly to incure cusrener charges on amts withdraws first 5-10 ys afterissuance of contract
accumulation unit is an acting measure that presresentsamn investors share of ownership in the seperate act an accumulation unit's value is determined in the same way as the value of mutual fund shares Unit value changes with value of securities held in the sperate acct the accumulation unit has a NAV Accumulation doesnt refer to a putchase option they pay in period for an annuity is known as the accumulation stage A single prem def annuity is an anniuty with a limp sum invesment, with payment of ebenfits deferred until the annutiitant elects tor eceive them periocd payment def annuites allows a person to make periodic apyments over time immediate annuties alow an investor to deposit a lump sum with the sunrance company payout of the annuitiant's beneiffts starting immediately, usually withing 60 days
Life annuity with period certain allows for payments to a benefiicary to gurantee that a min number fo paments are amde even if annutiant dies this option can be chosen contract will speicaillfy allow the choice of a period of 10 or 20 yrs annutiant is guranteed monthly income for life with this option but if death should occur within a period certain, a named benefiicay received payments for the remainder of the period because there is a named benefircary for the period certain, the zise of this check will be smaller than a striaght life option The insruance company is obligated to pay the named benefiicary an income if death occurs during the period certain
assume a client selects a life annuity with 10 yr period cetain if annuitant lives to be 150 yrs old, annuity payments are still made by the insurer, but if the anuuitant dies after receiving payments for 2 yrs the beeifiicary will reeive apyments for 8 more yrs
FINRA Rule 2330 memebers respon regarding deferred variable annuities (not imeediate) vaiable annuities and exchanges deferred and recommendidned inital subaccoutn allocations rule doesnt apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity once investor has made the initialpurchase any subseuwnt investments dont comeunder th eufle likewise once the niital subaccount decisions have been made, later changes are not covered by the rule no memebr or person assoc with memebr shall recomend to any customer the purcahse or exchange of a deferred variable annuity unless the memebr or person associated with a member has a reasonable bass to beleive that it is suitable
egregious behavior is recommenidng that a client take a home equity loan and use the proceeds to fund the purchase of a deferred variable annuity although there are general suitiabilty rules that aplly there is a reasonable basis to beleive that -the cust has been informed in general terms-of various features of defreered varibale annuities, such as the potential surrender period and surrender chare, which may include potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 591/2 mortality and expense fees investment advisory fees potential charges for and features of riders the insurance and investment componenets of deferred variable annuities and market risk customer would benfit from certain features of deferred variable annuties such as tax deferred frowth, annutization, or death or living benefit and the particular deferred vraible annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or excahnge of the deferred variable annuity and riders and similar product enahcnements, if any are suitable and in cases of exchange the transaction as a whole also is suitable
