Variable Annuities
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) 2800. B) 0. C) 3800. D) 4200.
A) 2800. *This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 x 28%). Because the client is older than age 59-½, he does not pay 10% premature distribution penalty tax.
Your 55-year-old client invested $50,000 four years ago in a nonqualified variable annuity. The original investment has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will the tax liability to the IRS be? A) 4000. B) 0. C) 3000. D) 4500.
A) 4000. *Since this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59-½ when making the withdrawal, he also pays a 10% penalty, or $1,000. This makes a total of $4,000 tax and penalty paid on the random withdrawal.
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) A variable annuity B) Corporate debt securities C) Tax-free municipal bonds D) Growth mutual funds
A) A variable annuity *Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. None of the other investments listed here offer tax-deferred growth.
Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? A) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan B) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children C) Age 40, currently unemployed D) Age 27, saving for first home
A) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan *BEST Suited for VA-Age 56, available cash to invest, maxes out IRA and 401(k) plan... VA will be supplemental income, would not be suitable for cust. who needs access to the sum invested at later time.
Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and social security benefits. As part of his profile he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Based on the clients profile which of the following would be the best recommendation? A) Fixed Annuity B) Exchange traded Funds (ETFs) or Exchange traded Notes (ETNs) C) Mutual fund portfolio consisting of blue chip stocks D) Variable Annuity
A) Fixed Annuity Though its stated return might not be as high as the other choices potential returns, only a fixed annuity fits the objective and risk averse traits of this client. VAs, blue chip mutual fund portfolios, ETFs and ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client.
A prospectus for a variable annuity contract: must provide full and fair disclosure. is required by the Securities Act of 1933. must be filed with FINRA. must precede every sales presentation. A) I and II. B) I and III. C) II and IV. D) III and IV.
A) I and II *A variable annuity is a security and must be registered with the SEC, not FINRA. As part of the registration requirements, a prospectus must be filed and distributed to prospective investors. Distribution can take place before or during any solicitation for sale.
Once a customer annuitizes a variable annuity, which of the following statements are TRUE? The number of annuity units is fixed. The number of annuity units varies. The value of the annuity units is fixed. The value of the annuity units varies. A) I and IV. B) I and III. C) II and III. D) II and IV.
A) I and IV. *Once a variable annuity is annuitized, the accumulation units are converted into a fixed number of annuity units. The value of these units varies with the performance of the separate account.
Variable annuities must be registered with: the state banking commission. the state insurance commission. the SEC. FINRA. A) II and III. B) I and III. C) II and IV. D) III and IV.
A) II and III *A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission.
If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? She will receive the annuity's entire value in a lump-sum payment. She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. The annuity unit's value represents a guaranteed return. A) II and III. B) I and III. C) I and IV. D) II and IV.
A) II and III. *When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty. A) II and IV. B) I and IV. C) II and III. D) III and IV.
A) II and IV. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59-½ and must pay an additional 10% penalty on the taxable amount.
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 be higher. B) It will be lower. C) It will stay the same. D) It cannot be determined until the April return is calculated.
A) It will be higher. *If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.
If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be most suitable? A) Life-only annuity B) Life annuity with period certain C) Unit refund life option D) Life annuity with 10-year period certain
A) Life-only annuity Generally, a life-only contract pays the most per month because payments cease at the annuitant's death.
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? A) Ordinary income tax on earnings exceeding basis. B) 10% penalty plus payment of ordinary income tax on all funds withdrawn. C) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis. D) Capital gains tax on earnings exceeding basis.
A) Ordinary income tax on earnings exceeding basis. *Distributions from a nonqualified plan represent both a return of the original investment made in the plan with after-tax dollars (a nontaxable return of capital) and the income from that investment. The income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59-½.
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) Investment risk. C) Mortality risk. D) Value of each annuity unit each month.
A) Purchasing power risk. *An investor who purchases a fixed annuity contract assumes purchasing-power risk. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation.
A joint-and-last-survivor annuity is a payout option where: A) two people are covered and payments continue until the second death. B) payments continue until the death of the primary owner. C) payments continue for a pre-determined period of time. D) payments continue until age 70-½.
A) two people are covered and payments continue until the second death. In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. When the first party dies, the annuity payment is made to the survivor. When the second party dies, all payments cease.
For an investor, which of the following is the most important factor in determining the suitability of a variable annuity investment? A) The fact that the annuity payment may increase or decrease. B) The investor's marital status. C) The investor's concerns about taxes. D) The fact that periodic payments into the contract may increase or decrease.
A) The fact that the annuity payment may increase or decrease. *The most important consideration in purchasing a variable annuity is to be aware that benefit payments will fluctuate with the investment performance of the separate account. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum.
All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. B) the rate of return is determined by the underlying portfolio's value. C) such an annuity is designed to combat inflation risk. D) the number of annuity units becomes fixed when the contract is annuitized.
A) a minimum rate of return is guaranteed. *The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.
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 returned to the separate account. D) be paid to the issuing company to complete the plan.
A) be paid to a designated beneficiary. *The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased.
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. B) the safety of the principal invested. C) the yield is always higher than bond yields. D) the yield is always higher than mortgage yields.
A) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. **Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation.
In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: A) mortality guarantee. B) payment guarantee. C) insurance guarantee. D) expense guarantee.
A) mortality guarantee. *Under the mortality guarantee, the insurance company assumes mortality risk by guaranteeing payments for life, though the amount of each payment is not guaranteed.
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. *The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. ****As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level.
With regard to a variable annuity, all of the following may vary EXCEPT: A) number of annuity units. B) value of annuity units. C) number of accumulation units. D) value of accumulation units.
A) number of annuity units. *During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.
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 free. D) 100% tax deferred.
A) partially a tax-free return of capital and partially taxable. *The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
An annuity may be purchased under all of the following methods EXCEPT: A) periodic payment immediate annuity. B) single payment deferred annuity. C) single payment immediate annuity. D) periodic payment deferred annuity.
A) periodic payment immediate annuity. *A periodic payment immediate annuity is a contradiction in terms. The annuitant may not contribute and withdraw simultaneously.
All of the following statements regarding variable annuities are true EXCEPT: A) variable annuities offer the investor protection against capital loss. B) variable annuities are classified as insurance products. C) insurance companies keep variable annuity funds in separate accounts from other insurance products. D) variable annuities may only be sold by registered representatives.
A) variable annuities offer the investor protection against capital loss. *A variable annuity is both an insurance and a securities product. An annuitant assumes the investment risk of a variable annuity and is NOT PROTECTED by the insurance company from capital losses.
A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as A) waiver of premium B) life income C) early annuity phase-in D) minimum guaranteed death benefit
A) waiver of premium *Waiver of premium is a benefit available on qualified life insurance contracts, usually in the form of a rider, which provides for the waiver of premium payments that fall due while the policyholder is totally disabled.
The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Joint tenants annuity. B) Life annuity. C) Life annuity with period certain. D) Joint and last survivor annuity
B) Life annuity. Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.
When may a variable annuity account be surrendered? A) Only during the payout period. B) During the accumulation period. C) During the annuity period. D) Any time before the accumulation period.
B) During the accumulation period. *A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option.
A joint life with last survivor annuity: covers more than one person. continues payments as long as one annuitant is alive. continues payments only as long as all annuitants are still alive. guarantees payments for a certain period of time. A) III and IV. B) I and II. C) I and III. D) II and IV.
B) I and II. *A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant.
An investor who has purchased a nonqualified variable annuity has the right to: vote on proposed changes in investment policy. approve changes in the plan portfolio. vote for the investment adviser. withdraw funds without any tax consequences. A) II and IV. B) I and III. C) I and IV. D) II and III.
B) I and III. *Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal.
A variable annuity's separate account is: used for the investment of funds paid by contract holders. used to escrow late or otherwise delinquent premium payments. required to be located off of the company's premises. regulated under both securities and insurance laws. A) II and IV. B) I and IV. C) I and III. D) II and III.
B) I and IV. *The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance.
Which of the following are defined as securities? Fixed annuities. Variable Annuities. Options. CDs insured by the FDIC. A) II and IV. B) II and III. C) I and III. D) I and IV.
B) II and III. *A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return.
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) 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. C) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. D) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis.
B) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. *Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Since the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.
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) The policy provides a minimum guaranteed death benefit. B) The death benefit cannot ever be more than the guaranteed benefit. C) 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. D) There is no guarantee regarding the investment results of the separate account.
B) The death benefit cannot ever be more than the guaranteed benefit. *The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.
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) There is no tax as the withdrawal is considered return of capital. D) Two-thirds of the withdrawal is taxable as ordinary income.
B) The entire $10,000 is taxable as ordinary income. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59-½, there will be a tax penalty of an additional 10%.
Who assumes the investment risk in a variable annuity contract? A) There is no risk in a variable annuity. B) The policyowner. C) The insurance company. D) The investment risk is shared between the insurance company and the policyowner.
B) The policyowner. *Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the policyowner bears the investment risk.
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 proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. C) 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. D) None, because it is the proceeds from a life insurance company.
B) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. *Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.
A registered person recommends the purchase of a variable annuity to one of his clients. He wants to ensure that the client, in addition to meeting suitability requirements, is aware of certain variable annuity contract characteristics. All of the following are accurate statements to make to the client EXCEPT A) a variable annuity contract will provide a fluctuating monthly check upon the annuitization of the contract B) a variable annuity contract is not required to be sold by prospectus because it is an insurance contract C) a variable annuity contract does not guarantee any type of return D) a variable annuity contract is subject to fluctuating values due to market fluctuations of the underlying separate accounts
B) a variable annuity contract is not required to be sold by prospectus because it is an insurance contract *Variable annuity contracts must be sold by prospectus due to the characterization of the separate accounts as securities, which must be registered under the Securities Act of 1933 and the Investment Company Act of 1940.
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) mutual fund units. B) accumulation units. C) annuity units. D) accumulation shares.
B) accumulation units. *The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.
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. *Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.
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 B) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract C) suitable regardless of funding sources D) not suitable because a lifetime income rider is only for someone who is already retired
Based on the information given in the question, the VA recommendation would not be suitable. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase.
A registered representative explaining variable annuities to a customer would be CORRECT in stating that: a variable annuity guarantees an earnings rate of return. a variable annuity does not guarantee an earnings rate of return. a variable annuity guarantees payments for life. a variable annuity does not guarantee payments for life. A) I and IV. B) II and IV. C) II and III. D) I and III.
C) II and III. *A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. However, it does guarantee payments for life (mortality).
The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? The separate account performance compared to last month's performance. The payout compared to the initial payout upon annuitization. The separate account performance compared to an assumed interest rate. The payout compared to last month's payout. A) I and III. B) II and IV. C) III and IV. D) I and II.
C) III and IV. *A variable annuity payout is determined by comparing account performance with AIR, and this month's payout with last month's payout.
Distributions from nonqualified variable annuities are: A) taxed at a reduced rate. B) taxed as ordinary income. C) taxed as ordinary income only to the extent of earnings. D) tax free.
C) taxed as ordinary income only to the extent of earnings. *As contributions are made with after-tax dollars, only the earnings generated are taxed on withdrawal.
Changes in payments on a variable annuity correspond most closely to fluctuations in the: A) Dow Jones Industrial Average. B) prime rate. C) value of underlying securities held in the separate account. D) cost of living.
C) value of underlying securities held in the separate account. *Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio.
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 will make a periodic payment even if the account balance falls to zero 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 is generally in the form of a rider attached to the contract which will come at a cost to the annuitant
C) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed *With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. Each of the remaining statements are true.
Of the four client profiles below which might be the best suited for a variable annuity recommendation? A) A 75 year old women, who is a former executive retired for over ten years who wants to preserve as much capital as she can to leave to her two grandchildren. B) A 30 year old construction worker recently unemployed who wants to invest his severance pay amounting to 9 months salary. C) A 25year old public school teacher who would like to save enough for the purchase of her first home within the next 3 to 5 years. D) A 50 year old individual with $50,000 cash to invest who has already made the maximum contributions to an IRA and the 401(k) plan at his place of employment and would like to minimize some of the tax consequences of his currently high tax bracket.
D) A 50 year old individual with $50,000 cash to invest who has already made the maximum contributions to an IRA and the 401(k) plan at his place of employment and would like to minimize some of the tax consequences of his currently high tax bracket. *Of the four customer profiles the individual already making the maximum retirement account contributions available to him and wanting to minimize the tax consequences of being in a high income tax bracket would be most suitable for a VA recommendation. Supplemental income stream for retirement, not preservation of capital should be the catalyst to consider a VA and for anyone who may need access to the sum invested for any reason a VA would not be considered a suitable recommendation.
An investor owning which of the following variable annuity contracts would hold accumulation units? Periodic payment deferred annuity. Single payment deferred annuity. Immediate life annuity. Immediate life annuity with 10-year period certain. A) I and III. B) II and III. C) II and IV. D) I and II.
D) I and II. *Accumulation units represent units of ownership in a life insurance company's separate account when the contract is in the accumulation stage. Annuity units are units of ownership when the contract is in the payout stage. Immediate annuities purchase annuity units directly.
You have 4 clients each expressing interest in a variable annuity contract. Which 2 of the 4 client profiles would a VA be LEAST suitable for? I. A 45-year-old employed individual with no other retirement accounts in place II. A 58-year-old individual near retirement who is in good health and anticipates a lengthy retirement III. A 32-year-old with a company-sponsored 401k plan who will need a lump sum soon to finance graduate school tuition IV. A 60-year-old individual, nearing retirement who has both IRAs and a 401k in place, is comfortable with market risk associated with the stock market, and has a lump sum in cash available to fund the annuity A) I and II B) II and III C) II and IV D) I and III
D) I and III *VAs are less suitable for individuals who have not yet made maximum contributions to other retirement accounts such as IRAs and 401ks. They are also not considered suitable for anyone who anticipates needing a lump sum within a short time frame to fund other endeavors. They are more suitable for individuals who can fund the annuity with cash, want to supplement existing retirement benefits they have already funded, are comfortable with the market risk associated with a VA separate account portfolio and anticipate a long retirement.
If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? I. It was a lump-sum purchase. II. Distribution of dividends occurs during the accumulation period. III. Distributions to the annuitant will fluctuate during the payout period. IV. The investor purchased accumulation units. A) I and II. B) II and IV. C) III and IV. D) I and III.
D) I and III. *An immediate annuity has no accumulation period. A single lump-sum investment is made, and payments begin immediately, since the investor has purchased annuity units. During payout, distributions will fluctuate due to performance in the separate account.
Universal variable life policies have investment risk that is assumed by the investor do not have a separate account can be sold by someone with only an insurance license are purchased primarily for their insurance features A) I and II B) II and III C) III and IV D) I and IV
D) I and IV *Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both insurance and securities licenses.
For an insurance company, mortality risk turns out unfavorably if: an annuitant lives longer than expected. an annuitant dies sooner than expected. a life insurance holder lives longer than expected. a life insurance holder dies sooner than expected. A) I and III. B) II and III. C) II and IV. D) I and IV.
D) I and IV. *Mortality risk- If an annuitant lives longer than expected, the insurance company will have to continue payments longer than expected. If an insurance holder dies sooner than expected, the insurance company will have to pay the death benefit sooner
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. A) I and III. B) I and IV. C) II and IV. D) II and III.
D) II and III. *The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of annuity units is fixed.
For a retired person, which of the following investments would provide the greatest protection against inflation? A) Fixed annuities. B) Municipal bonds. C) Corporate bonds. D) Variable annuities.
D) Variable annuities. *Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance.
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) Money market fund. B) IPO. C) Universal variable life policy. D) Variable annuity.
D) Variable annuity. *Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. A universal variable life policy should be purchased primarily for its insurance features, not its investment features.
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) fixed payments for 10 years, followed by variable payments for life. C) 10 years of variable payments. D) a minimum of 10 years of variable payments, followed by additional variable payments for life.
D) a minimum of 10 years of variable payments, followed by additional variable payments for life *The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop.
An accumulation unit in a variable annuity contract is: A) an accounting measure used to determine payments to the owner of the variable annuity. B) fixed in value until the holder retires. C) none of these. D) an accounting measure used to determine the contract owner's interest in the separate account.
D) an accounting measure used to determine the contract owner's interest in the separate account. *When money is deposited into the annuity, it is purchasing accumulation units.
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) the number of annuity units is fixed, and their value remains fixed. C) each annuity unit's value and the number of annuity units vary with time. D) each annuity unit's value varies with time, but the number of annuity units is fixed.
D) each annuity unit's value varies with time, but the number of annuity units is fixed. *During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison to the assumed interest rate.
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) complete all paper work to purchase the annuity contract and obtain the clients signature immediately. B) contact the issuer of the clients existing VA contract to facilitate the clients surrender of the contract. C) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase. D) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment.
D) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. *Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short period of time is not suitable. These contracts come with high surrender charges. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. Of the answer choices given the best would be to reevaluate the recommendation based on the new information tendered by the client.
All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A) the investment portfolio is managed professionally. B) the client may vote for the board of directors or board of managers. C) the client assumes the investment risk. D) the payout plans provide the client income for life.
D) the payout plans provide the client income for life. *Only variable annuities have payout plans that provide the client income for life.
Variable annuity salespeople must register with all of the following EXCEPT: A) the SEC. B) FINRA. C) the state insurance department. D) the state banking commission.
D) the state banking commission. *Variable annuity salespeople must be registered with FINRA and the state insurance department. Registration with FINRA is de facto registration with the SEC; no registration is required by the state banking commission.
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) suitable due to the relative safety of the investment. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. C) suitable due to the death benefit features of a variable annuity. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.
D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. *This customer has no spouse or dependents, which negates the value of the death benefit. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-½.
All of the following statements concerning a variable annuity are correct EXCEPT: A) a majority vote from the shareholders is required to change the investment objectives. B) the invested money will be professionally managed according to the issuers' investment objectives. C) separate account may consist of mutual funds. D) variable annuities will protect an investor against capital loss.
D) variable annuities will protect an investor against capital loss. *As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. Many variable annuities invest the separate account in mutual funds.