Variable Annuities

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) II and III. C) I and IV. D) III and IV.

A

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 her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. B) suitable due to the relative safety of the investment. C) suitable due to the death benefit features of a variable annuity. D) unsuitable because the return on something as conservative as a variable annuity tends to be low.

A

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

B

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 A) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. B) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. C) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. D) Capital gains taxation on the earnings withdrawn in excess of the owner's basis.

C

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) Keogh plans. C) variable annuities. D) IRAs.

C

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 A) 10% penalty plus payment of ordinary income tax on all funds withdrawn. B) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis. C) Ordinary income tax on earnings exceeding basis. D) Capital gains tax on earnings exceeding basis.

C

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) None, because it is the proceeds from a life insurance company. 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) The entire amount is taxed as ordinary income, because it is not life insurance.

C

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 and the number of annuity units vary with time. C) each annuity unit's value varies with time, but the number of annuity units is fixed. D) the number of annuity units is fixed, and their value remains fixed.

C

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

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) Two-thirds of the withdrawal is taxable as ordinary income. C) There is no tax as the withdrawal is considered return of capital. D) The entire $10,000 is taxable as ordinary income.

D

Distributions from nonqualified variable annuities are: A) tax free. B) taxed at a reduced rate. C) taxed as ordinary income. D) taxed as ordinary income only to the extent of earnings.

D

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) annuity units. B) mutual fund units. C) accumulation shares. D) accumulation units.

D

When may a variable annuity account be surrendered? A) Only during the payout period. B) During the annuity period. C) Any time before the accumulation period. D) During the accumulation period.

D

Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 four years ago. The annuity has grown to value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A) 3000. B) 4500. C) 0. D) 4000.

D

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) 3800. B) 0. C) 4200. D) 2800.

D