Insurance and Annuities

V LI - Loan interest rate

annual rate

When is the annuity taxed

Gains aren't taxed until payout period begins or surrendered for accumulated cash value, tax deferred until then - major benefit

Guaranteed Minimum Withdrawal Benefits

Guarantees a regular periodic payment, but only until insurance company has paid back the annuitant an amount equal to the principal value, or until end of contract term. No "lifetime" of periodic payments guaranteed

The cash value of a variable life policy I. Is not guaranteed. II. Increases as premiums are paid. III. Fluctuates based on the performance of the securities in the separate account.

I, II and III Variable life policies have guaranteed minimum death benefits, but the cash values are not guaranteed. These are all true statements.

V LI - maximum sales charge

9% computed over period of 20 years

How do annuities grow

Tax deferred, aka you won't pay taxes on them anymore

Current Value of an annuity

The cost basis + any growth in the account

V LI - Exchange Privilege

exchanges of investments in the separate acount are free of any charges and do not create tax liability

Annuity Period

the accumulation period; distribution; annuitant can withdraw value of accumulation units in a lump sum or purchase annuity units with the accumulation units so that periodic payments begin

V LI -Surrender Value

cash value of policy minus outstanding loans or unpaid interest charges

Annuities are used as options for rollovers from

qualified plans resulting from job changes or termination

Main goal of annuities

supplemental income for retirement, not preservation of capital

The death benefit payable during the accumulation period of an annuity contract I. Is based on the greater of the gross payments to date or the value of the account at the time of death. II. Is not payable after annuity payments have started. III. Is the annuity feature that guarantees payments for the life of the annuitant. IV. Is available only with fixed annuity contracts.

I and II The death benefit during the accumulation period protects the beneficiary in case the annuity owner dies before receiving annuity payments. After payments have begun, the annuity option chosen will determine what, if any, payments are made to the beneficiary upon the death of the annuitant.

Which of the following is NOT true about variable annuities? I. They are regulated by the Investment Company Act of 1940. II. They are not securities. III. Investment income and capital gains realized by the portfolio result in current taxable income to the owner. IV. They are regulated by state departments of insurance.

II and III Variable annuities are tax deferred until annuitized. Because they are both a security and an insurance product, variable annuities are regulated by the state insurance departments, as well as the SEC and FINRA.

V LI - Voting Rights

for every $100 in cash value, policy owner has I vote; relate to second account

Deferred Annuity funding

funded with a single lump sum or periodic payment of after-tax dollars, then grow tax deferred

Immediate Annuity funding

funded with a single lump sum payment; distributions begin after deposit is received (either the month or year after deposit);

Straight-Life Annuity benefit

highest periodic payment

Annuity distribution

nnuitant may receive payments at retirement or may annuitize at a time according to the terms of the contract

V LI -Cash Value

no minimum guaranteed cash value; actual amount calculated upon surrender

Can variable life have no death benefit

no, it fluctuates up and down but will never go beneath the face amount

Is the death benefit for variable life set

no, it fluctuates with the separate account

V LI - Conversion Privilege

policyowners have the right to exchange one form of permanent insurance for another type of permanent policy; insurance companies allow conversion to more conventional whole life policy for first 2 years without having insured provide additional evidence of insurability

VA - 1035 Exchange fees

sales charges assessed on new product, but no taxes

Investor's cost basis

the after tax amount invested

Fixed Annuity risks

insurance company assumes investment risk, but owner has inflation risk

V LI - Loan time to repay

3 1 days to pay back enough of loan to bring cash value of contract to positive in the case of underperforming second account

V LI - free look

45 days to receive full refund of premiums paid

V LI - max sale charge in first year

50%

Define Surrender value

Amount received if an payments for an annuity stop during the accumulation period

VA : Surrender Value =

Current Value — Surrender Charges

VA - surrender before 59.5

Income tax on gain and 10% early penalty

Combination annuity

Used to hedge inflation and deflation

VA - Death Benefit

beneficiary will receive the greater of gross payments or accumulated value at time of death

Who has regulatory authority over variable life insurance

both FINRA and state insurance departments have regulatory authority.

Universal life

contract owner is allowed to vary the amount and frequency of premiums as long as the minimum cash value maintained is sufficient to support the cost of insurance; may not have a minimum guaranteed death benefit.

Annuity

contract with an insurance company that provides payments to an annuitant over the life of the contract

VA - 1035 Exchanges allowed

life insurance to life insurance, annuity, or endowment; endowment to endowment or annuity; annuity to another annuity

Variable LI rights

loans, voting rights, expense limitations

FINRA Communication Rules for Variable Annuities

variable products must be clearly identified as variable products; cannot be implied that they are mutual funds; cannot be implied to be liquid short-term investments

Life Annuity with Period Certain beneficiary?

yes, after death payments continue and go to them

Is whole life DB fixed

yes, minus any outstanding loans

Variable Annuity voting rights

Can vote with regard to the separate account; based on number of units

Which statement is true regarding sales charges in a variable life insurance policy? Up to 30% of the premium paid may be deducted for sales charges in the first policy year. The maximum charge is 9% calculated over a 20-year period. The maximum charge is 30% of the premium paid during the first policy year. Sales charges over 10% of the premium paid must be refunded if the policy is surrendered within the first 2 years.

The maximum charge is 9% calculated over a 20-year period. Maximum charges are: 9% calculated over 20 years, 50% of premium during first policy year. Charges in excess of 30% for first year and 10% second year must be refunded if policy is surrendered within first 24 months.

Unit Refund Life

periodic payments made to annuitant while alive, and after death a lump sum payment equal to the remaining value of annuity units is paid to the bene

Joint and Last Survivor

payments are made to 2 people; if one annuitant dies, payments continue to be made to surviving annuitant; all payments cease when remaining annuitant dies

VA - Mortality Guarantee

payments made until death; mortality expense fee charged to protect an annuity company in the event that an annuitant will outlive his/her expected mortality

V LI - Loans

: insurance company must allow a loan of a minimum of 75% of cash value after a policy has been in place for 3 years

GMWBs

Guaranteed Minimum Withdrawal Benefits

What should be recommended before suggesting a VA

Maximum contributions to all other retirement savings vehicles available to an individual should be made before a VA is considered a suitable recommendation. In other words, they are best considered supplements to retirement income one can already anticipate like pensions and IRA or 401(k) distributions.

VA - Level Sales Charge

level load basis; charges are deducted from each installment made in contract

VA - Sales Charges/Expenses

FINRA conduct rules establish fair and reasonable sales charges; breakpoints and rights of accumulation are established in the prospectus

Will Variable annuities earn you more than fixed

No 100% guaranteed. If the separate account does well, you may be better off than with a fixed

Deferred Annuity usually used to

accumulate funds for retirement

How are annuities funded

after-tax dollars

V LI - Expense Limitation

insurance company responsible for charges above agreed upon amount

When an annuitant terminates an annuity during the accumulation phase, which of the following is true? The annuitant will receive surrender value. The annuitant will receive cost basis but forfeit growth. The annuitant will be taxed at capital gains rates. There is no termination; the annuity is a binding contract that may not be terminated.

The annuitant will receive surrender value. The annuitant will receive current account value (cost basis plus growth) less any surrender charges, which equals surrender value.

V LI -nonforfeiture clause

allows policy owner to receive accumulated cash value should premium payments cease/surrender

Variable Annuity

annuitant assumes investment risk in a separate account; separate account performance will determine the amount of income an annuitant receives

Straight-Life Annuity

annuitants receive payments as long as they live; once annuitant dies, payments cease

Life Annuity with Period Certain

annuity payments made for a minimum period of time; annuitant will continue to receive payments until death

VA - Expense Guarantee

establishes maximum charge that an annuity company can charge; annuity company then held responsible for additional charges; operating expense risk fee charged to protect company

Assumed Interest Rate (AIR):

insurance company will assign this interest rate to a separate account as a projection of future returns; if the separate account underperforms the AIR, the next monthly payment is reduced accordingly; vice versa

Straight-Life Annuity benefit beneficiary?

none. After death, payments stp

John had been receiving monthly payments from his variable annuity for several years. Upon his death, his widowed wife received a lump-sum payment. This type of annuity was a

Variable unit refund annuity. When a beneficiary receives a lump-sum payment, the annuity was a unit refund annuity. If the beneficiary had received the payment in installments, this would have been an installment refund annuity.

Deferred Annuity

distribution delayed until contract is annuitized

Immediate Annuity distributions

distributions begin after deposit is received (either the month or year after deposit); distribution amount based on annuitant's life/settlement option

What part of the annuity is taxed

everything over the cost basis, aka earnings

Fixed Annuity

guarantee certain amount of income based on purchase payments

Fixed annuity distribution

guaranteed income throughout life of contract; guaranteed minimum rate of return

First monthly payment is based off

of age, life expectancy, and settlement option selected

V LI -Termination

owner entitled to surrender value of policy

Variable Life Insurance

policy owners seek greater death benefits and higher cash values than traditional whole life and universal life policies; use a separate account to resist inflation

Accumulation units are bought at

the separate accounts NAV, after deducting sales charges/fees