Unit 2: Session 5: Insurance Based Products
It would be CORRECT to state that variable annuities A)offer a way to accumulate funds on a tax-deferred basis B)generally have somewhat lower operating expenses than mutual funds with the same investment objective C)offer a guaranteed rate of return with an opportunity to benefit from stock market performance D)rarely impose surrender charges
A
Which of the following statements regarding non-qualified annuities is CORRECT? A)It is possible to receive distributions from an annuity before age 59 ½ without incurring tax penalties. B)The exclusion ratio applies to accumulation units only. C)Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. D)Because only insurance companies issue variable annuities, they are not considered securities.
A
Universal variable life policies: - have investment risk that is assumed by the investor. - do not have a separate account. - guarantee the minimum face amount with the opportunity for increases based upon the performance of the separate account. - are purchased primarily for their insurance features.
1 & 4
A client who purchased a variable life insurance policy 15 months ago has suffered a stroke. In addition, he has developed adult onset diabetes. When receiving treatment for the stroke, he was diagnosed with lung cancer. He has decided to convert his variable policy to a whole life policy. Which of the following statements is CORRECT? - He will not be able to convert to a whole life insurance policy because his health has deteriorated to such a severe level. - The new policy will bear the same issue date and age as the original policy. - The face amount must remain the same. - The premium will be rated as his health has taken a marked turn for the worse.
2 & 3
With an annuity: - taxes on earned dividends, interest, and capital gains are paid annually until the owner withdraws money from the contract. - random withdrawals are taxed on a LIFO basis. - money invested in a nonqualified annuity represents the investor's cost basis. - upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.
2, 3, 4
The value of a variable annuity during the accumulation period is determined by the: A)number of accumulation units owned multiplied by the value of each unit. B)number of accumulation units owned multiplied by the number of payments made into the account. C)total payments made by the evaluation date. D)value of the securities in the general account of the insurance company.
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 free. D)`100% tax deferred.
B
A policy owner could surrender a whole life insurance policy and choose from all the following EXCEPT A)purchasing an extended term life policy B)transferring the policy to another person C)taking the cash value D)purchasing a reduced coverage whole life polic
B
All of the following are advantages of universal life insurance EXCEPT: A)ability to adjust the amount of premium payments. B)the policy is guaranteed never to lapse. C)when the cash value is sufficient, no premium payment is required. D)ability to change death benefit amount.
B
In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A)the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months B)a minimum cash value C)a minimum death benefit D)the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years
B
Which of the following statements regarding non-qualified annuities is CORRECT? A)Because only insurance companies issue variable annuities, they are not considered securities. B)It is possible to receive distributions from an annuity before age 59 ½ without incurring tax penalties. C)Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. D)The exclusion ratio applies to accumulation units only.
B
You are meeting with a client and the discussion turns to life insurance. When asked about annual renewable term insurance, you would reply that it has A)an increasing premium, increasing face amount, no cash value B)an increasing premium, level face amount, no cash value C)a fixed premium, level face amount, no cash value D)a fixed premium, reducing face amount, little cash value
B
You are meeting with a client and the discussion turns to life insurance. When asked about annual renewable term insurance, you would reply that it has A)a fixed premium, reducing face amount, little cash value B)a fixed premium, level face amount, no cash value C)an increasing premium, increasing face amount, no cash value D)an increasing premium, level face amount, no cash value
D
You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A)Universal life B)Variable life C)Whole life D)Annual renewable term
D
A 75-year-old customer asks if it is possible to sell his $500,000 variable life insurance policy to a party other than the insurance company that issued the policy. If a sale occurs, known as a life settlement, which of the following would be a violation of industry rules? A)Disclosing that the buyer becomes responsible for all premiums while the insured is living B)Not requiring the insured to pass a physical exam prior to the sale C)Requiring the customer to relinquish all ownership rights to the policy D)Quoting the price using an exclusive buyer that handles all the firm's life settlements
D - Because of the limited secondary market for life settlements, any firm that engages in these transactions should obtain several bids to ensure the customer receives a fair price for her policy.
A policy owner could surrender a whole life insurance policy and choose from all the following EXCEPT A)taking the cash value B)transferring the policy to another person C)purchasing an extended term life policy D)purchasing a reduced coverage whole life policy
B
A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A)increasing term B)variable universal C)renewable level term D)decreasing term
C
Which of the following describe differences between variable and universal variable life insurance? - Variable life insurance has a minimum guaranteed death benefit, whereas universal variable life insurance does not. - Universal variable life insurance typically provides a higher death benefit than variable life insurance. - Variable life insurance provides no inflation protection for the death benefit, whereas universal variable life insurance does. - Variable life insurance requires scheduled premium payments, whereas universal variable life insurance permits flexible premium payments.
1 & 4
Which of the following statements concerning universal life insurance are CORRECT? - Universal life has flexible premiums. - Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. - The death benefit can fluctuate, but never below the guaranteed minimum face amount. - Cash values can fluctuate and may even fall to zero.
1 & 4
Which of these features are common to both variable annuities and scheduled premium variable life insurance? - Income earned in the separate account is tax deferred. - Separate account performance below the AIR causes a reduction in cash value. - Fixed contributions are required. - Contract owners have voting rights.
1 & 4
One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is not used as a method to compute the amount of interest to be credited to the account? A)Participation rate B)High-water mark C)Annual reset D)Point-to-point
A
In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT A)both offer an opportunity for unlimited gain B)only the variable annuity is considered a security C)both are issued by life insurance companies D)only the EIA has a minimum guaranteed return
A - EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account.
An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose: A)the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative. B)the scheduled premium policy because the contract is issued with a minimum guaranteed face amount. C)the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value. D)the scheduled premium policy because earnings do not affect the contract's face amount.
B
For a given amount of principal, which annuity option would produce the largest monthly income stream? A)Joint and 100% survivor. B)Straight life. C)Life with term certain. D)Joint and 50% survivor.
B
A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A)decreasing term B)renewable level term C)variable universal D)increasing term
B
A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of + 20% in the first year, - 5% the second year, and +10% the third year. The investor's current value is approximately A)$117,829 B)$125,350 C)$126,500 D)$128,620
B
A 64 year-old woman wishes to withdraw funds from her non-qualified single premium deferred variable annuity purchased a number of years ago. The withdrawal would be: A)subject to the required minimum distribution rules. B)subject to a 10% penalty unless annuitized. C)taxed as capital gain. D)taxed as ordinary income.
D
An individual purchasing a flexible premium variable life contract should know which of the following? - Timing and amount of premiums generally are discretionary. - The death benefit will generally be higher than that of a comparable whole life policy. - The face amount is fixed at the beginning of the contract. - The performance of the separate account directly affects the policy's cash value.
1 & 4
A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a deferred variable annuity to take advantage of the tax deferral and death benefit features. This recommendation is: A)unsuitable. B)suitable because it offers a growth opportunity with a death benefit for a portion of her holdings. C)suitable because it provides tax deferral features. D)suitable because it provides diversification.
A
All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT: A)better than anticipated results in the separate account could lead to a reduction in annual premium. B)once selected, the policy owner may change payment modes. C)the policy owner has the right to change the selection of subaccounts. D)premiums are determined based upon age and sex of the insured.
A
Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT A)capital gains treatment on any realized gains upon withdrawal B)a guaranteed death benefit for death prior to annuitization C)avoiding probate upon the death of the investor D)basically, no limit on the amount that can be contributed
A
Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is NOT true? A)An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity. B)A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. C)A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. D)An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days).
A
A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A)Variable annuity. B)Common stock. C)Fixed annuity. D)REIT.
A - Longevity risk is the uncertainty that one will outlive his money. The only instrument that guarantees a payout for as long as one lives is an annuity. Because the question asks for a security, only the variable annuity is correct, otherwise the fixed annuity would also offer protection.
The death benefit of a variable life policy must be calculated at least: A)monthly. B)annually. C)weekly. D)semiannually.
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)Capital gains taxation on the earnings withdrawn in excess of the owner's basis. 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)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn.
C
A customer in his twenties, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. A registered representative might consider recommending: A)whole life insurance with the option of purchasing additional coverage. B)term life insurance. C)variable life insurance. D)an aggressive, long-term strategy of investment in small-cap stocks.
C
A thirty-five year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is: A)9% per premium payment. B)8.5% per premium payment. C)9%. D)8.5% of total premiums over the life of the plan.
C
Current IRS regulations permit an unlimited contribution to which of the following tax-deferred plans? A)Roth IRA B)SEP-IRA C)Annuity D)401(k)
C
For a given amount of principal, which annuity option would produce the largest monthly income stream? A)Life with term certain. B)Joint and 50% survivor. C)Straight life. D)Joint and 100% survivor.
C
Marianne has a fixed premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease: A)to 50% of the original face value. B)to 25% of the original face value. C)to the original face value. D)to 0.
C
The death benefit of a variable life policy must be calculated at least: A)weekly. B)semiannually. C)annually. D)monthly.
C
Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is NOT true? A)A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. B)An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days). C) A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. D)An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity.
D
Barb funds an immediate annuity with $100,000. She chooses life with 10 years certain as her settlement option and passes away 7 years after payments commence. Barb's beneficiary will A)receive a death benefit equal to the initial investment minus payments made to Barb B)continue to receive monthly payments until the end of 10 years after the date of Barb's death C)receive a lump sum equal to the present value of the remaining payments D)continue to receive monthly payments until the end of 10 years after payments commenced
D
It would be CORRECT to state that variable annuities A)generally have somewhat lower operating expenses than mutual funds with the same investment objective B)rarely impose surrender charges C)offer a guaranteed rate of return with an opportunity to benefit from stock market performance D)offer a way to accumulate funds on a tax-deferred basis
D
Surrender charges may cause a reduction to all of the following EXCEPT A)the redemption value of Class B mutual fund shares B)the cash value of a variable life insurance policy C)the liquidation value of a variable annuity D)the death benefit of a variable life insurance policy
D
Surrender charges may cause a reduction to all of the following EXCEPT A)the redemption value of Class B mutual fund shares B)the liquidation value of a variable annuity C)the cash value of a variable life insurance policy D)the death benefit of a variable life insurance policy
D
