Variable Annuities (UITs)
Are Variable Annuities sold without a sales charge?
No
A customer invests $30,000 in a variable annuity contract. Over the years, the contract grows to $60,000 in value. At age 65, the customer takes a $40,000 lump sum distribution from the contract. The tax consequence is:
$30,000 taxable income; $10,000 non-taxable return of capital
A customer has invested $20,000 in a variable annuity. In the first year, the NAV increases to $21,100. At what rate will the $1,100 gain be taxed?
0 There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account. When distributions are taken, they are taxable at ordinary income tax rates.
What is true when comparing fixed annuities to variable annuities
A fixed annuity account grows at a guaranteed rate, a fixed annuity is suitable for a customer seeking preservation of capital, variable annuities are subject to investment risk
What is true about the taxation of dividends, interest and capital gains in the separate account during the accumulation phase?
All dividends, interest and capital gains are tax deferred.
A mom,60, wishes to withdraw money from her variable annuity to pay for her sons college education. What is true regarding the distribution?
Any amount withdrawn above the cost basis is taxable
A registered representative that wishes to recommend a variable annuity to a customer must make reasonable efforts to obtain the customer's: I intended use of the variable annuity II investment time horizon III existing assets including insurance holdings IV liquidity needs
I, II, III
What is true regarding mutual funds and variable annuities that are in the accumulation phase
Distributions to mutual fund shareholders are taxable to the holder in the year the distribution is made, distributions to variable annuity holders are tax deferred
An accumulation unit is an accounting measure used for valuing a variable annuity holder's interest in the separate account. The separate account buys shares of a designated mutual fund. The performance of the mutual fund determines the annuity amount to be paid. Direct investments in shares of stock cannot be made in the separate account; the account only buys shares of open-end management companies (mutual funds).
During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.
Which Recommendation would be most suitable for a 40 yr old client whose main objective is retirement income and preservation of capital?
Fixed Deferred annuity
The purchaser of a variable annuity bears which of the following risks? I Interest rate risk II Expense risk III Mortality risk IV Investment risk
I and IV
When comparing fixed annuity contracts to variable annuity contracts, the customer should be made aware that: I fixed annuities guarantee a rate of return that is not affected by investment risk II variable annuities guarantee a rate of return that is not affected by investment risk III fixed annuity payments depend on the performance of the securities held in the underlying separate account IV variable annuity payments depend on the performance of the securities held in the underlying separate account
I and IV
Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? I All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units II All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units III All interest, dividends, and capital gains from the securities in the account are taxable IV All interest, dividends, and capital gains from the securities in the account are tax deferred
I and IV
To sell variable annuities, salespersons must be registered with (the): I FINRA II State Insurance Commission III State Banking Commission IV State Securities Commission
I, II, And IV
The "death benefit" associated with a variable annuity contract: I applies prior to annuitization II applies after annuitization III means that, upon death, the insurance company will make a lump sum payment to complete the terms of the contract IV means that, upon death, the insurance company will pay a beneficiary at least the amount invested in the contract
II & III
Variable annuity contracts: I have the issuer bear the investment risk II have the purchaser bear the investment risk III are non-exempt securities IV are exempt securities
II and III
What is not a variable annuity payment option?
Joint tenants with rights of survivorship
What is true for both Mutual funds and variable annuities that are in the accumulation phase?
The underlying portfolios are managed, the investment company act of 1940 is the regulating legislation, the return to investors is dependent on the performance of the securities in the underlying portfolio
T/F During the Accumulation phase of a variable annuity payment can be made into the plan but distributions may not be taken from the plan
True
If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the air the annuity payment:
Will increase`
A customer, age 50, invests $50,000 in a variable annuity. The account has grown in value to $60,000 and at age 55, the customer takes a lump sum withdrawal of $15,000. Which statement is TRUE about the taxation of the withdrawal?
plus a 10% penalty tax; $5,000 of the withdrawal is not taxable
A customer buys a variable annuity and elects a payout option of Life Income with a 20 year period certain. This means that payments will continue for:
the annuitant's life but if he dies before 20 years elapse payments continue to his heir
During the accumulation phase of a variable annuity
Funds cannot be distributed to unit holders as interest dividends and capital gains are received these must be reinvested in more accumulation units.
The "death benefit" associated with a variable annuity contract: I applies during the accumulation phase II applies during the annuity phase III prior to annuitization, the insurance company will pay to a beneficiary, at least the amount invested in the contract IV after annuitization, the insurance company will pay for the insured's burial expenses
I And IV
Which of the following statements are TRUE regarding a life annuity? I The shorter the expected annuity period, the larger the monthly payment II The longer the expected annuity period, the larger the monthly payment III A life annuity usually pays the largest amount of all of the annuity payment options IV A life annuity usually pays the smallest amount of all of the annuity payment options
I and III
In order to recommend a variable annuity to a customer, which statements are TRUE? I The customer must be informed, in general terms, of the material features of the product II The representative must believe that the customer would benefit from the product's features III The representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable IV The representative must sign a statement that all required representations and determinations were completed
I, II, III, IV
Which of the following statements are TRUE when describing a variable annuity separate account? I The separate account is part of the insurance company's general account holdings II The separate account is legally segregated from the insurance company's general account holdings III The separate account invests in shares of a designated mutual fund IV The separate account makes direct investments in shares of stock
II and III
A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed: I increases sale proceeds II reduces sales proceeds III is deductible IV is not deductible
II and IV
An annuity payout option of Life-with Period Certain means that the annuity continues for the customer's life, but if he dies before the "period certain" (20 years in this case) is completed, payments will continue to a beneficiary until the 20 year period is completed.
The benefit of an annuity contract to an older person is the assurance of receiving income for life - however this only happens if the customer annuitizes the contract. If the customer chooses installments, there is no guarantee of payments for life - when the money in the account is depleted, payments stop.
When a variable annuity contract is annuitized what is true?
The number of annuity units is fixed, the annuity unit value is fixed
Variable annuities are non-exempt securities that must be sold with a prospectus. T/F?`
True
When describing a Variable Annuity separate account what is true?
The Separate account is legally segregated from the insurance company's general account holdings Variable annuity purchasers buy accumulation units in the separate account
What is true regarding the air stated in variable annuity prospectus:
The air is a conservative illustration of an interest rate for the annuity, the air is not a guaranteed rate of return
Any changes in value of a variable annuity accumulation unit are directly related to changes in the:
Value of the securities funding the separate account
The owner of a variable annuity does not have the right to vote:
for distributing income and capital gains
Growth in the separate account of a variable annuity is:
Not guaranteed as to minimum rate, and capped as to maximum rate
An annuitized account in a variable annuity is most similar to
Pension payments
What is true regarding variable annuities during the accumulation phase?
Periodic Payments of fixed dollar amounts can be made into the separate account, periodic payments of varying dollar amounts can be made into the separate account
A customer, age 60, is looking for an investment that will provide life-long income at retirement. The BEST recommendation would be for the customer to:
Purchase a variable annuity and annuitize the separate account at retirement
Who carries the investment risk in a variable annuity contract?
Purchaser
Any changes in value of a variable annuity unit are directly related to changes in the:
Value of the securities funding the separate account
Annuity payment options include a life annuity; life annuity with a period certain (which pays for a minimum guaranteed period, regardless); and a joint and last survivor annuity (which covers 2 lifespans, such as both a husband and wife). Joint tenants with rights of survivorship is an ownership option for a joint account, where each tenant 100% owns the account (typical for a husband and wife).
The shorter the time period to "expected death" when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to "expected death" when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person's life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.
A variable annuity prospectus includes an air illustration using a 5% rate this means that:
return could be less than 5%
A variable annuity is an
security regulated under the investment company act of 1940 and a security that must be sold with a prospectus.
Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.
To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state's "Blue Sky" laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
Both mortality risk (the risk that the annuitant lives longer than expected) and expense risk (the risk that expenses of running the separate account are higher than expected) are borne by the issuer of a variable annuity contract. The customer assumes the investment risk, since the annuity payment varies with the performance of the securities funding the separate account. With any investment, customers assume legislative risk and interest rate risk. Legislative risk for a variable annuity contract would be Congress changing the tax law. Interest rate risk is inherent in any product that gives the holder a stream of payments - if market interest rates rise, the value of the stream of payments decreases.
To sell variable annuities, both an insurance and a securities registration are required. The issuer gives an expense guarantee, limiting the amount of expenses that the issuer can charge against the contract. Variable annuities are considered to be securities because the purchaser bears the investment risk. Investment risk in a variable annuity is carried by the purchaser, not the issuer of the contract.
The "death benefit" associated with a variable annuity contract means that if the contract holder dies:
prior to annuitization the amount invested in the contract is returned to the beneficiary