Unit 12 Test Questions
In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the A) mortality guarantee B) expense guarantee C) insurance guarantee D) payment guarantee
A) In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the
Variable annuity salespeople must register with all of the following EXCEPT: A) the state banking commission. B) the state insurance department. C) the SEC. D) FINRA.
A) 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.
A customer is choosing a payout option for a variable annuity. Maximizing monthly income for the rest of his life is the customer's key objective. This annuitant has no living relatives so beneficiaries are not a concern. Which of the following options available would best meet the needs of this annuitant? A) A straight life payout option B) Take random withdrawals from the contract C) A life with a 5-year period certain payout option D) A life with a 20-year period certain payout option
A) A straight life payout option The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain period of time designated in the contract should the annuitant die within that period. But again, the need to designate beneficiaries is not an issue for this annuitant. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. Reference: 12.3.2.1 in the License Exam Manual
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) reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. 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) complete all paper work to purchase the annuity contract and obtain the clients signature immediately.
A) 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.
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% tax deferred. C) 100% tax free. D) 100% taxable.
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. Reference: 12.3.3 in the License Exam Manual
All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A) the payout plans provide the client income for life. B) the client assumes the investment risk. C) the client may vote for the board of directors or board of managers. D) the investment portfolio is managed professionally.
A) the payout plans provide the client income for life.
All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A) variable annuities. B) IRAs. C) Keogh plans. D) defined contribution plans.
A) variable annuities.
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) I and III. B) II and III. C) I and IV. D) II and IV.
A) 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) I and IV. B) II and IV. C) I and III. D) II and III.
A) Your answer, I and IV., was correct!. 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. Reference: 12.1.2.1.1 in the License Exam Manual.
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) Value of each annuity unit each month. C) Investment risk. D) Mortality risk.
A) Your answer, Purchasing power risk., was correct!. 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. Reference: 12.1.1 in the License Exam Manual.
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? A 45-year-old employed individual with no other retirement accounts in place A 58-year-old individual near retirement who is in good health and anticipates a lengthy retirement A 32-year-old with a company-sponsored 401k plan who will need a lump sum soon to finance graduate school tuition 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 III B) II and III C) I and II D) II and IV
A)The correct answer was: 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. Reference: 12.3.4 in the License Exam Manual.
When may a variable annuity account be surrendered? A) During the accumulation period B) Only during the payout period C) Any time after the accumulation period D) During the annuity period
A)Your answer, During the accumulation period., was correct!. A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option. Reference: 12.2.1 in the License Exam Manual.
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 IV B) I and III C) II and III D) II and IV
A)Your answer, I and IV., was correct!. Mortality assumptions are based on life expectancy or mortality tables prepared by insurance company actuaries. 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 than expected-that is, before receiving some of the expected premium payments. Reference: 12.1 in the License Exam Manual.
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) accumulation units. B) annuity units. C) accumulation shares. D) mutual fund units.
A)Your answer, accumulation units., was correct!. 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. Reference: 12.2.1 in the License Exam Manual.
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 III. C) II and IV. D) I and III.
B) 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).
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 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) The entire amount is taxed as ordinary income, because it is not life insurance.
B) 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.
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) Mutual fund portfolio consisting of blue chip stocks B) Fixed Annuity C) Variable Annuity D) Exchange traded Funds (ETFs) or Exchange traded Notes (ETNs)
B) 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.
For a retired person, which of the following investments would provide the greatest protection against inflation? A) Municipal bonds. B) Variable annuities. C) Corporate bonds. D) Fixed annuities.
B) Your answer, Variable annuities., was correct!. 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. Reference: 12.1.2 in the License Exam Manual.
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) II and IV B) I and II C) I and III D) II and III
B) 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.
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) I and III. B) I and II. C) II and IV. D) III 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. Reference: 12.3.2.3 in the License Exam Manual
Which of the following are defined as securities? Fixed annuities. Variable Annuities. Options. CDs insured by the FDIC. A) I and III. B) II and III. C) I and IV. D) II 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. Reference: 12.1.2 in the License Exam Manual
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 funds 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) 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. 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. Reference: 12.3.3 in the License Exam Manual
An accumulation unit in a variable annuity contract is: A) none of these. B) an accounting measure used to determine the contract owner's interest in the separate account. C) fixed in value until the holder retires. D) an accounting measure used to determine payments to the owner of the variable annuity.
B) 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. Reference: 12.2.1 in the License Exam Manual
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) the safety of the principal invested. B) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. C) the yield is always higher than mortgage yields. D) the yield is always higher than bond yields.
B) 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. Reference: 12.1.2.1.1 in the License Exam Manual
A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) all return of cost basis and nontaxable B) part earnings and part cost basis C) earnings only and taxable D) exempt from taxes
B) part earnings and part cost basis
A joint-and-last-survivor annuity is a payout option where: A) payments continue until the death of the primary owner. B) two people are covered and payments continue until the second death. C) payments continue until age 70-½. D) payments continue for a pre-determined period of time.
B) two people are covered and payments continue until the second death. Explanation 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. Reference: 12.3.2.3 in the License Exam Manual
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 her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. C) unsuitable because the return on something as conservative as a variable annuity tends to be low. D) suitable due to the death benefit features of a variable annuity.
B) 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.
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 has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.
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) Growth mutual funds B) A variable annuity C) Tax-free municipal bonds D) Corporate debt securities
B) 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.
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) with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually B) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed C) a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero 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
B) 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.
With regard to a variable annuity, all of the following may vary EXCEPT: A) value of accumulation units. B) number of annuity units. C) value of annuity units. D) number of accumulation units.
B) Your answer, number of annuity units., was correct!. 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. Reference: 12.2.1 in the License Exam Manual.
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 III. B) II and IV. C) I and IV. D) III and IV.
B)The correct answer was: 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. Reference: 12.3.3 in the License Exam Manual.
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) Variable annuity. C) Universal variable life policy. D) IPO.
B)Your answer, Variable annuity., was correct!. 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. Reference: 12.1.2 in the License Exam Manual.
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) variable annuities will protect an investor against capital loss. C) separate account may consist of mutual funds. D) the invested money will be professionally managed according to the issuers' investment objectives.
B)Your answer, variable annuities will protect an investor against capital loss., was correct!. 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. Reference: 12.1.4.1 in the License Exam Manual.
An annuity may be purchased under all of the following methods EXCEPT A) single payment immediate annuity B) periodic payment deferred annuity C) periodic payment immediate annuity D) single payment deferred annuity
C) A periodic payment immediate annuity is a contradiction in terms. The annuitant may not contribute and withdraw simultaneously.
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
C) Age 40, currently unemployed Of the 4 customer profiles, the individual already making the maximum retirement account contributions, with cash to invest, would be most suitable for a VA recommendation. Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. Reference: 12.1.2 in the License Exam Manual
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) II and III B) III and IV C) I and IV D) I and II
C) 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. Reference: 12.1.4.1 in the License Exam Manual
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 lower. B) It will stay the same. C) It will be higher. D) It cannot be determined until the April return is calculated.
C) It will be higher.
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 exceeding basis B) Capital gains tax on earnings exceeding basis C) Ordinary income tax on earnings exceeding cost basis D) 10% penalty plus payment of ordinary income tax on all funds withdrawn
C) Ordinary income tax on earnings exceeding cost basis
Distributions from nonqualified variable annuities are A) completely taxed as ordinary income with penalties for early withdrawals B) completely tax free with no penalties for early withdrawals C) taxed only to the extent of earnings as ordinary income with penalties for early withdrawals D) taxed at a reduced rate with no penalties for early withdrawals
C) taxed only to the extent of earnings as ordinary income with penalties for early withdrawals As contributions are made with after-tax dollars, only the earnings generated are taxed on withdrawal. Reference: 12.3.3 in the License Exam Manual
Who assumes the investment risk in a variable annuity contract? A) There is no investment risk in a variable annuity B) The investment risk is shared between the insurance company and the policyowner C) The policyowner or annuitant D) The insurance company
C) Your answer, The policyowner., was correct!. Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the policyowner bears the investment risk. Reference: 12.1.2 in the License Exam Manual.
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 does not guarantee any type of return B) a variable annuity contract will provide a fluctuating monthly check upon the annuitization of the contract C) a variable annuity contract is not required to be sold by prospectus because it is an insurance contract D) a variable annuity contract is subject to fluctuating values due to market fluctuations of the underlying separate accounts
C) 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.
Once a customer annuitizes in a variable annuity contract, 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) II and IV B) I and III C) I and IV D) II and III
C)The correct answer was: 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. Reference: 12.2.1 in the License Exam Manual.
Of the four client profiles below which might be the best suited for a variable annuity recommendation? A) A 25 year old public school teacher who would like to save enough for the purchase of her first home within the next 3 to 5 years. B) A 30 year old construction worker recently unemployed who wants to invest his severance pay amounting to 9 months' salary. C) 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 75 year old woman, 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.
C)Your answer, 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., was correct!. 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. Reference: 12.3.4 in the License Exam Manual.
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) I and IV. B) II and IV. C) II and III. D) I and III.
C)Your answer, II and III., was correct!. 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. Reference: 12.3.1 in the License Exam Manual.
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 periodic payments into the contract may increase or decrease B) The investor's concerns about the tax consequences C) The fact that the annuity payment may increase or decrease D) The investor's marital status
C)Your answer, The fact that the annuity payment may increase or decrease., was correct!. 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. Reference: 12.1.2.1.1 in the License Exam Manual.
In a variable life annuity with 10-year period certain, a contract holder receives: A) 10 years of variable payments. B) variable payments for 10 years, followed by fixed payments for life. C) a minimum of 10 years of variable payments, followed by additional variable payments for life. D) fixed payments for 10 years, followed by variable payments for life.
C)Your answer, a minimum of 10 years of variable payments, followed by additional variable payments for life., was correct!. 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. Reference: 12.3.2.2 in the License Exam Manual.
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) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract B) not suitable because a lifetime income rider is only for someone who is already retired C) not suitable D) suitable regardless of funding sources
C)Your answer, not suitable, was correct!. 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. Reference: 12.3.2.1 in the License Exam Manual.
Once a variable annuity has been annuitized: A) the number of annuity units is fixed, and their value remains fixed. B) each annuity unit's value is fixed, but the number of annuity units varies with time. C) each annuity unit's value varies with time, but the number of annuity units is fixed. D) 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. 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.
All of the following statements regarding variable annuities are true EXCEPT: A) variable annuities may only be sold by registered representatives. B) variable annuities are classified as insurance products. C) variable annuities offer the investor protection against capital loss. D) insurance companies keep variable annuity funds in separate accounts from other insurance products.
C)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. Reference: 12.1.4.1 in the License Exam Manual
If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? It was a lump-sum purchase. Distribution of dividends occurs during the accumulation period. Distributions to the annuitant will fluctuate during the payout period. The investor purchased accumulation units. A) II and IV B) I and II C) III and IV D) I and III
D) 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.
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) Zero B) 4500 C) 3000 D) 4000
D) 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
If the owner of a variable annuity dies during the accumulation period, any death benefit will: A) be paid to the issuing company to complete the plan. B) be returned to the separate account. C) be paid to any legal heirs as recognized by the annuitant's state of domicile. D) be paid to a designated beneficiary.
D) 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.
Which of the following statements regarding variable annuities are TRUE? The number of accumulation units is always fixed throughout the accumulation period. The number of accumulation units can rise during the accumulation period. The number of annuity units is fixed at the time of annuitization. The number of annuity units rises once annuitization begins. A) I and IV. B) II and IV. C) I and III. D) II and III.
D) 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.
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 annuity with period certain B) Unit refund life option C) Life annuity with 10-year period certain D) Life-only annuity
D) Your answer, Life-only annuity., was correct!. Generally, a life-only contract pays the most per month because payments cease at the annuitant's death. Reference: 12.3.2.1 in the License Exam Manual.
A married couple intending to work another 2-4 years wants to fund a variable annuity to add monthly income during their retirement years. Having utilized all other available retirement investment vehicles, they want to invest $150,000 in savings toward the retirement objective. They note that these funds need to be paid out for as long as they live. Which of the following would be the most suitable and cost effective? A) Two separate joint with last survivor contracts B) Two separate life income contracts, one for each spouse C) A single life with period certain contract on one of the spouses with the other as named beneficiary D) A single joint with last survivor contract
D) A single joint with last survivor contract The most suitable option and one considered effective for married couples is a single joint and last survivor contract. These contracts cover both lives and will continue to make payments until the last spouse dies. Dividing the funds available so as to fund 2 separate contracts, whether they be joint with last survivor or life income, would not be cost efficient for spouses. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. This would not align with the couple's criteria for coverage as long as they both live. Reference: 12.3.2.3 in the License Exam Manual
A customer, who has contributed to an IRA and to an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. Which is it? A) Variable annuity contract with a discussion regarding interest rate risk B) Variable annuity contract with a discussion regarding legislative risk C) Fixed annuity contract with a discussion regarding timing risk D) Fixed annuity contract with a discussion regarding purchasing power risk
D) Fixed annuity contract with a discussion regarding purchasing power risk Explanation A VA with its investments in the separate account subject to market risk would not align with the customer's objective. Therefore only a fixed annuity could be considered as suitable. However, a discussion should occur regarding the risks that are associated with a fixed annuity; purchasing power risk. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. Reference: 12.1.1 in the License Exam Manual
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) II and IV. B) I and III. C) III and IV. D) I and II.
D) I and II. Explanation 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. Reference: 12.1.2 in the License Exam Manual
Variable annuities must be registered with: the state banking commission. the state insurance commission. the SEC. FINRA. A) I and III. B) II and IV. C) III and IV. D) II and III.
D) 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. Reference: 12.1.2 in the License Exam Manual
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 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. B) There is no guarantee regarding the investment results of the separate account. C) The policy provides a minimum guaranteed death benefit. D) The death benefit cannot ever be more than the guaranteed benefit.
D) 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. Reference: 12.4 in the License Exam Manual
All of the following statements about variable annuities are true EXCEPT: A) the rate of return is determined by the underlying portfolio's value. B) the number of annuity units becomes fixed when the contract is annuitized. C) such an annuity is designed to combat inflation risk. D) a minimum rate of return is guaranteed.
D) a minimum rate of return is guaranteed. Explanation 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. Reference: 12.1.2.1.1. in the License Exam Manual
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 each month compared to the initial payout upon annuitization The separate account performance compared to an assumed interest rate (AIR) The payout compared to last month's payout A) II and IV B) I and II C) I and III D) III and IV
D)The correct answer was: 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. Reference: 12.3.1 in the License Exam Manual.
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)Your answer, 2800., was correct!. 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. Reference: 12.3.3 in the License Exam Manual.
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) early annuity phase-in B) minimum guaranteed death benefit C) life income D) waiver of premium
D)Your answer, waiver of premium, was correct!. 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. Reference: 12.4.1 in the License Exam Manual.
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.
The correct answer was B) 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%.
A separate account will invest in a number of different securities. The separate account is NOT likely to invest in: A) corporate stock. B) money market funds. C) municipal bonds. D) equity funds.
The correct answer was: 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. Reference: 12.1.4.2 in the License Exam Manual.
