Unit 9 Qbank Qs
On April 15, 2016, your client purchased a variable life insurance policy with a death benefit of $450,000. The November 2019 statement showed a cash value of $28,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least A) $21,000. B) $28,000. C) $25,200. D) $14,000.
A) $21,000. Once a variable life policy is in force for a minimum of three years (this one is a bit longer than that), there is a requirement to make the loan provision available. At the three-year mark, that minimum becomes 75% of the computed cash value. Seventy-five percent of cash value of $28,000 is $21,000.
A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $25,200. B) $18,000. C) $16,450. D) $11,750.
A) $25,200. Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $72,000.
It would generally be considered unsuitable for a registered representative to recommend a Section 1035 exchange of a deferred variable annuity contract if there had been one in the previous A) 36 months. B) 24 months. C) 30 months. D) 12 months.
A) 36 months. Among other requirements, FINRA Rule 2330 covers the suitability of a deferred annuity exchange under Section 1035 for a particular customer. Suitability considerations include, among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges, and if the customer has had another exchange within the preceding 36 months.
Your customer in her 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) A variable annuity B) Tax-free municipal bonds C) Growth mutual funds D) Corporate debt securities
A) 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.
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) I and II B) II and IV C) III and IV D) I and III
A) I and II 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. The time of distribution of the prospectus can be before the sales presentation or at the same time as the presentation. It is incorrect to state that it must precede every sales presentation.
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) II and III B) II and IV C) I and IV D) I and III
A) II and III 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.
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty. A) II and IV B) III and IV C) I and IV D) II and III
A) 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 59½ and must pay an additional 10% penalty on the taxable amount.
The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Life annuity B) Joint and last survivor annuity C) Joint tenants annuity D) Life annuity with period certain
A) Life annuity 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.
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) Variable annuity B) Variable life insurance policy C) IPO D) Money market fund
A) Variable annuity 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 variable life insurance policy should be purchased primarily for its insurance features, not its investment features.
Once a variable annuity has been annuitized A) each annuity unit's value varies with time, but the number of annuity units is fixed. B) each annuity unit's value is fixed, but the number of annuity units varies with time. C) the number of annuity units is fixed, and their value remains fixed. D) each annuity unit's value and the number of annuity units vary with time.
A) 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.
With regard to a variable annuity, all of the following may vary except A) number of annuity units. B) value of annuity units. C) value of accumulation units. D) number of accumulation units.
A) number of annuity units. 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.
A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) part earnings and part cost basis. B) all return of cost basis and nontaxable. C) earnings only and taxable. D) exempt from taxes.
A) part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.
A registered representative (RR) recommends a variable annuity (VA) 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 two 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 client's proposed funding of the investment. B) complete all paper work to purchase the annuity contract and obtain the client's signature immediately. C) contact the issuer of the client's existing VA contract to facilitate the client's surrender of the contract. D) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase.
A) reevaluate whether the recommendation for the VA contract is still suitable based on the client's proposed funding of the investment. Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short 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.
Changes in payments on a variable annuity correspond most closely to fluctuations in A) the value of underlying securities held in the separate account. B) the prime rate. C) the Dow Jones Industrial Average. D) the cost of living.
A) the value of underlying securities held in the separate account. Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio.
A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $16,450. B) $17,500. C) $12.500. D) $11,750.
B) $17,500. Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $50,000.
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) I and III D) II and IV
B) II and III 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).
For a retired person, which of the following investments would provide the greatest protection against inflation? A) Fixed annuities B) Variable annuities C) Municipal bonds D) Corporate bonds
B) Variable annuities 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.
FINRA Rule 2330 deals with a member's responsibility in the sale of certain insurance company-based products. Specifically the concern is with A) fixed-index annuities. B) deferred variable annuities. C) immediate variable annuities. D) variable life insurance.
B) deferred variable annuities. The subject of the FINRA rule is deferred variable annuities. It applies to the sale or exchange of this specific product.
All of the following statements regarding variable annuities are true except A) insurance companies keep variable annuity funds in separate accounts from other insurance products. B) variable annuities offer the investor protection against capital loss. C) variable annuities are classified as insurance products. D) variable annuities may only be sold by registered representatives.
B) 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.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $25,200. B) $18,000. C) $11,750. D) $16,450.
C) $11,750. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $47,000.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $11,750. B) $25,200. C) $16,450. D) $18,000.
C) $16,450. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000.
In light of the many cases involving variable annuities where there was failure to supervise egregious unethical behavior, FINRA's Rule 2330, Members' Responsibilities Regarding Deferred Variable Annuities, evolved. One of the specific concerns that the regulators have with deferred variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. In the case of variable annuities, these exchanges are normally done under the provisions of IRS Section 1035. One of the factors in determining if the exchange is suitable is whether the customer has had another deferred variable annuity exchange within the preceding A) 24 months. B) 12 months. C) 36 months. D) 30 months.
C) 36 months. One requirement Rule 2330 covers is the suitability of a deferred annuity exchange for a particular customer, considering whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, or be subject to increased fees or charges, or if the customer has had another exchange within the preceding 36 months, in addition to other factors.
An individual purchases a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within A) 10 days from the execution of the application, or for 45 days from the time the owner receives the policy, whichever is longer. B) the first 30 days after the policy was delivered to the owner. C) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. D) the first 24 months after the policy was delivered to the owner.
C) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.
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 life with a 5-year period certain payout option B) A life with a 20-year period certain payout option C) A straight life payout option D) Take random withdrawals from the contract
C) 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 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.
You have a 45-year-old client whose traditional IRA contributions are at the maximum. The client would like to provide a larger cushion for retirement and asks for your advice. After reviewing the client's goals, you realize that a $25,000 single premium deferred variable annuity purchase would be the ideal solution. When approaching the client with this recommendation, the client tells you that cash of that magnitude is not readily available. Which of the following would you recommend? A) Open a Roth IRA to double the amount of allowable IRA contributions B) Take a home equity loan to fund the deposit C) Begin a periodic payment deferred annuity program D) Purchase the deferred variable annuity on margin
C) Begin a periodic payment deferred annuity program In this case, if the client cannot supply the funds for the single premium annuity, but in all other respects, the product is suitable, then a period payment program would work. FINRA specifically warns about using mortgage equity (a home equity loan) to fund a deferred variable annuity. Although one can have both types of IRA, the annual maximum cannot exceed the current (2020) level of $6,000 total between them. Variable annuities are not marginable securities.
Which of the following are not defined as securities? A) Variable annuities B) Closed-end investment companies C) Fixed annuities D) Preferred stocks
C) Fixed annuities Fixed annuities are not included in the long list of items that are defined as a security, primarily because the element of risk is not included.
Which of the following would not be covered under the antifraud provisions of the Securities Exchange Act of 1934? A) Nasdaq-listed securities B) National exchange-listed securities C) Fixed annuities D) Municipal bonds
C) Fixed annuities While all securities are subject to the antifraud provisions of the Securities Exchange Act of 1934, fixed annuities are insurance company products not deemed to be securities. Variable annuities would be covered.
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) II and III B) I and III C) I and IV D) II and IV
C) I and IV 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.
A registered representative with ABC Securities has recently become aware of a new variable annuity. As tax time is approaching, the representative decides to recommend the variable annuity to all of her customers as an attractive addition to their portfolios. The representative should recommend the variable annuity to all of her clients because the tax advantage almost always results in a greater return. recommend the variable annuity to those clients whose needs and objectives match the investment. recommend the variable annuity to all of her clients because of the performance potential of the subaccounts. not recommend the investment to all of her clients in spite of the tax advantages and additional features. A) I and III B) II and III C) II and IV D) I and IV
C) II and IV Recommendations may be made only when it is suitable for the customer's needs. Therefore, she would not recommend the variable annuity to all because some of them may not be able to benefit from those tax advantages.
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, 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) Capital gains taxation on the earnings 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) 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 last-in, first-out basis, with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.
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) Two-thirds of the withdrawal is taxable as ordinary income. B) Any tax due is deferred. C) The entire $10,000 is taxable as ordinary income. D) There is no tax, as the withdrawal is considered return of capital.
C) The entire $10,000 is taxable as ordinary income. 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 last-in, first-out). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be an additional tax penalty of 10%.
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) the yield is always higher than bond yields. C) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. D) the yield is always higher than mortgage yields.
C) 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.
Although there are general suitability rules that always apply, FINRA's Rule 2330 on variable annuity suitability specifies that, to be considered suitable, there is a reasonable basis to believe that the customer has been informed—in general terms—of various features of A) deferred annuities of all types. B) single premium variable annuities. C) deferred variable annuities. D) immediate variable annuities.
C) deferred variable annuities. FINRA's primary suitability concern is with deferred variable annuities. That does not mean there are no requirements for being careful with the others, it is just that most of the violations have involved the deferred VA.
One of the specific concerns that the regulators have with variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. It would generally raise a "red flag" if the customer A) has had another deferred variable annuity exchange within the preceding 60 months. B) elects to make the exchange under the provisions of IRS Section 1035. C) has had another deferred variable annuity exchange within the preceding 36 months. D) has had another deferred annuity exchange within the preceding 36 months.
C) has had another deferred variable annuity exchange within the preceding 36 months. FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035 - no red flag raised there.
Your customer, who still works, informs you that she will be funding a variable annuity (VA) you have recommended from two 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 VA she recently purchased within the past two years without a lifetime income rider like the one you have recommended. Based only on these facts, the VA recommendation is A) suitable regardless of funding sources. B) not suitable because a lifetime income rider is only for someone who is already retired. C) not suitable. D) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract.
C) not suitable. 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.
FINRA Rule 2330 deals with a member's responsibility in the sale of certain insurance company-based products. Specifically the concern is with A) purchases and sales of deferred annuities. B) taking loans against the cash value of a variable life insurance policy. C) purchases and sales of deferred variable annuities. D) subsequent changes to the separate account allocations in a deferred variable annuity.
C) purchases and sales of deferred variable annuities. This FINRA rule applies to purchases and sales of deferred variable annuities and initial allocations to the separate account. It does not apply to fixed annuities or variable life insurance. Because it only deals with the purchase or sale or initial allocations, a client with a deferred variable annuity wishing to change the separate account allocation does not come under the rule.
When a person is calculating cost basis for a nonqualified variable annuity, the person is using A) the pretax dollars contributed. B) the earnings in excess of dollars contributed. C) the after-tax dollars contributed. D) the dollars contributed minus any gains at the time of payout.
C) the after-tax dollars contributed. For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.
A customer who has contributed to an IRA and 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 options would achieve that objective, but a suitability discussion regarding its risk should also occur. Which option is it? A) Variable annuity contract with a discussion regarding legislative risk B) Variable annuity (VA) contract with a discussion regarding interest rate 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 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.
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. A) II and IV B) I and III C) III and IV D) I and II
D) I and II A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant.
Which of the following are defined as securities? Fixed annuities Variable Annuities Options Bank CDs insured by the FDIC A) I and III B) I and IV C) II and IV D) II and III
D) 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.
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 III B) II and IV C) I and IV D) II and III
D) II and III 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.
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 entire amount is taxed as ordinary income because it is not life insurance. C) It is the ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59½ years old. D) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate.
D) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. 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 owns a variable annuity contract with an annual interest rate (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 her April payment compare to her March payment? A) It cannot be determined until the April return is calculated. B) It will be lower. C) It will stay the same. D) It will be higher.
D) It will be higher. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.
An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions? A) At age 72 or when no longer working, whichever is later B) At age 72 C) At age 59½ D) Never with a nonqualified annuity
D) Never with a nonqualified annuity On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.
Which of the following characteristics is not shared by both a mutual fund and a variable annuity's separate account? A) The investment portfolio is managed professionally. B) The client assumes the investment risk. C) The client may vote for the board of directors or board of managers. D) The payout plans provide the client income for life.
D) The payout plans provide the client income for life. Only variable annuities have payout plans that provide the client income for life.
One of the features of variable insurance products is the ability to withdraw money from the policies. Which of the following statements is correct? A) Withdrawals from both are taxed on a LIFO basis. B) Withdrawals from variable annuities are taxed on a FIFO basis, while those from variable life are taxed on a LIFO basis. C) Withdrawals from both are taxed on a FIFO basis. D) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis.
D) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis. One advantage to withdrawing cash value from a variable life insurance policy is that it receives FIFO treatment. That means there is no tax until the withdrawal reaches the cost basis (premiums paid) of the policy. With annuities, the taxation is LIFO. Therefore, the first money withdrawn is taxable. In addition, if the policyowner is not yet 59, the 10% penalty applies. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
In a variable life annuity with 10-year period certain, a contract holder receives A) fixed payments for 10 years, followed by variable payments for life. B) 10 years of variable payments. C) variable payments for 10 years, followed by fixed payments for life. D) a minimum of 10 years of variable payments, followed by additional variable payments for life.
D) a minimum of 10 years of variable payments, followed by additional variable payments for life. 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. For example, if a life annuity with a 10-year period certain contract holder died after five years, payments would continue for five more years to the beneficiary and then stop.
An accumulation unit in a variable annuity contract is A) an accounting measure used to determine payments to the owner of the variable annuity. B) none of these. C) fixed in value until the holder retires. D) an accounting measure used to determine the contract owner's interest in the separate account.
D) 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.
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) be paid to a designated beneficiary. 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.
All of the following statements concerning a variable annuity are correct except A) the invested money will be professionally managed according to the issuer's investment objectives. B) a majority vote from the shareholders is required to change the investment objectives. C) an insurance and securities license is needed to sell a variable annuity. D) variable annuities will protect an investor against capital loss.
D) variable annuities will protect an investor against capital loss. 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.
