Annuity Suitability Training
When does the 10% early withdrawal penalty cease to apply?
-Distribution is made after the owner is disabled -Distribution is made under an immediate annuity contract -Distribution is attributable to the investment in the contract prior to August 1982
What is a Flexible Premium Deferred Annuity? (FPDA)
-Offers a flexible premium and an accumulation period -Can be a fixed or variable annuity -Premiums may be paid as frequently or infrequently as the owner wishes -Amount of premiums may vary, but must exceed a company set minimum -No front end loading
What is a Joint-and-Survivor annuity?
-Pays the benefits until the last of two people die -Higher premiums than an annuity for one single individual -Can have single or periodic premiums -Can be immediate or deferred -Can be fixed or variable
What is a Single Premium Immediate Annuity?
-Premium payment is made one time -Payout is immediate and begins one payment interval after the first premium is paid -No accumulation periods -Payout can be fixed or variable
How does the SEC and FINRA regulate Variable Annuities?
-Require Best Interest Disclosures -Require producers provide a Client Relationship Summary -Implementing Rule 2330 (exchange of a deferred variable annuity rules) -Establish Principal Review and Approval Obligations -Establish Supervisory Procedures -Require a Firm Training Program
What is a Single Premium Deferred Annuity? (SPDA)
-Same as a Flexible Premium Deferred Annuity, except the premium payment is made one time -Payout is deferred - long accumulation period -May be fixed or variable -Includes a bailout provision -Provides for a minimum guaranteed rate of interest
What is a Deferred Variable Annuity?
-Seeks to provide inflation protection -Payout can be immediate or deferred -Purchase method may be single or periodic
What is one of the greatest advantages of annuities?
-Tax deferred cash values The interest credited to the cash value of the contract is not taxed - compound interest
What happens when the investment in the contract equals or exceeds the expected return?
-The Exclusion Ratio equals 100% and payments to the owner will be fully excludable from gross income
How are Qualified Annuities taxed?
-The employer can deduct its contributions and exclude the amount of contributions from gross income -Employees do NOT pay income tax on the employer contributions; taxes are deferred until distribution -Employees may roll over annuity balances into other qualified plans and they will continue to be tax deferred
What is the NAIC Annuity Disclosure Model Regulation?
-sets standards for producers on disclosing certain information about annuities -specifies the minimum information that must be disclosed to prospects
What are the duties of insurance producers and insurance companies?
1. Best Interest Obligation 2. Care Obligation 3. Disclosure Obligation 4. Documentation Obligation
What are 5 types of investments?
1. Cash and Money Markets 2. Bonds 3. Stocks 4. Mutual Funds 5. Alternatives (real estate, hedge funds)
What is the overall gain/loss in a Separate Account determined by?
1. Dividend Income 2. Interest Income 3. Realized Capital Gains/Losses (when a stock is sold for more or less than what it costs) 4. Unrealized Appreciation/Depreciation (when the value of a stock in the Separate Account rises or falls)
What are the living benefits in Variable Annuities?
1. Guaranteed Minimum Income Benefit (GMIB) 2. Guaranteed Minimum Accumulation Benefit (GMAB) 3. Guaranteed Minimum Withdrawal Benefit (GMWB) 4. Guaranteed for Life Income Benefit (GLIB)
List the two contractual provisions of a Variable Annuity.
1. Mortality Guarantee - payment will continue as long as the owner lives 2. Expense Guarantee - the expense load will not increase during accumulation, and annuity payments will not decrease
What are the Nonforfeiture Provisions of an annuity?
1. Paid Up Option - owner receives a benefit equal to the number of annuity payments made 2. Surrender Option - surrender the contract for it's cash value during the accumulation period 3. Loans - if a loan from the annuity is repaid, the loan amount will return to the account 4. Conversion to Fixed Account - some variable annuities allow owners to convert into a fixed annuity
What are the two purposes of annuities?
1. To Provide a Lifetime Income 2. To Accumulate a Retirement Fund
How does the Accumulation Phase differ between Fixed Annuities and Variable Annuities?
A fixed annuity guarantees a fixed rate of return on funds during this phase A variable annuity has NO guaranteed rate of return
What unique benefit do annuities posses that other financial options do not?
A payout you cannot outlive
What is the Bail Out Provision for a Single Premium Deferred Annuity?
A provision that states if the interest rate ever falls below a specific amount, the owner may withdraw all funds from the annuity without a surrender charge
What is a 1035 Exchange?
A tax-free exchange of one annuity for another, allowed under Section 1035 of the Tax Code
What is an Indexed Annuity?
A type of Fixed Annuity whose interest rate is published in a stock market index - the interest earned is tied to the performance of that index note: the funds are NOT directly invested in individual securities invested within the index, but rather the index as a whole
What is a Temporary Annuity payout?
A type of payout that does NOT guarantee a lifetime income Offers a Fixed-Period payout option, or the Fixed-Amount payout option
During the accumulation phase of a Variable Annuity, the contract is valued in terms of what?
Accumulation Units
Which type of investor seeks out very risky stock companies with a high Price to Earnings ratio?
Aggressive Growth Investors Tolerate the highest level of risk - compared to a venture capitalist
What is a Free Withdrawal Provision?
Allows the contract owner to withdraw a certain percentage of the annuity's accumulated value without charge
What is a Deferred Annuity?
An annuity purchased by several premium payments made over a long period of time, whose benefits are not immediate but delayed to a specified future date - allows for an accumulation period
What is a Single Premium?
An annuity purchased with a lump-sum, single premium - often used by those with a large distribution from a retirement plan
What is an Immediate Annuity?
An annuity purchased with one lump-sum payment, whose benefits begin one payment interval after the premium is paid - no accumulation period
What is a Variable Annuity?
An annuity that offers the ability for cash to accumulate at the same pace as inflation - acts as a hedge against inflation The interest earned accumulates at a varying rate of return
What is a Joint-and-100% Survivor Annuity?
An annuity that pays the benefits equal to those paid when BOTH annuitants were alive -(husband dies, wife receives the full joint annuity benefit)
What is a Joint-Life Annuity?
An annuity that pays the benefits for as long as BOTH of two designated annuitants are alive - payments end when the first joint annuitant dies
What is a Single-Life Annuity?
An annuity that pays the benefits for as long as the ANNUITANT lives - payments stop at the annuitant's death
What is a Joint-and-Survivor Annuity?
An annuity that pays the benefits of two or more individuals for as long as either of them are alive - utilized by spouses
What is a Fixed Annuity?
An annuity that specifies a fixed, guaranteed minimum rate of interest paid on the principal
What is a Qualified Longevity Annuity?
An income stream that begins at an advanced age and continues throughout the individuals life -Has an increased number of maximum allowed investments -Allows for the return of premium death benefit -Protects against unintentional payment of excess longevity
During the payout phase of a Variable Annuity, the contract is valued in terms of what?
Annuity Units
Which of the following plans are covered by ERISA? A. a defined benefit plan offered by a manufacturing company to employees B. a pension plan offered to employees of the City of Detroit Michigan C. a deferred compensation plan offered to select employees of a CPA firm D. a 457 plan
Answer A: a defined benefit plan offered by a manufacturing company to employees -only private-sector plans are covered by ERISA, NOT state or local governments (public sector)
Among the eligibility requirements to open a health savings account is A. the individual must be on Medicare B. the individual must be claimed as a dependent on another individual's tax return C. the individual must have a HDHP D. if married, you must have a joint HSA
Answer C: the individual must have a HDHP -in order to be eligible for a Health Savings Plan, an individual must be enrolled in a HDHP. If both spouses work for the same employer, they may open a joint HSA, but they do not HAVE to
ERISA rules and regulations include all of the following, except: A. ERISA protects participants in private-sector retirement plans such as a pension from creditors of a corporation B. a retirement plan covered by ERISA may not discriminate against who is eligible to participate C. it defines when employer contributions become the employee's money D. ERISA allows the corporation to be the beneficiary of plan benefits for employees before their retirement
Answer D [the incorrect statement]: ERISA does NOT allow the corporation to be a beneficiary of plan benefits for an employee
What are market value adjustment charges?
Associated with Market Value Adjustment Annuities If the contract owner withdraws money BEFORE the term ends, a market value adjustment is made to the account balance
What do Separate Accounts generally invest in?
Bonds and Mortgages
Which type of investors focus on long-term investments that will increase the value of their accounts over time?
Capital Preservation Investors Not interested in fast growth - build value over time
Which type of annuities allow the owner to withdraw part of the cash value without paying a surrender charge AFTER the first year? (Systematic Withdrawal Option)
Deferred annuities
Each periodic annuity payout is considered a blend of what?
Deposits (premium payments) and interest earned
An annuity is a combination of what three things?
Deposits (premium payments), interest, and the mortality factor
How is the Exclusion Ratio calculated?
Exclusion Ratio = Investment in the Contract / Expected Return
List three fees associated with annuities.
Expense Loads Withdrawal/Surrender Charges Market Value Adjustments
What is the greatest advantage that systematic withdrawal plans offer over regular annuitization methods?
Flexibility Allows for a way around two tax rules: The penalty for early withdrawals, and minimum distribution requirements
What is the Safe Harbor Provision?
Grants protection against liabilities as long as certain conditions are met
Which type of investors seek high rates of growth and capital appreciation?
Growth Investors Tolerate moderate-high levels of risk and invest in stocks with high Price to Earnings ratios
What is the main difference between a Variable Annuity and a Fixed Annuity?
How premium payments are invested - Fixed Annuity is invested in an insurer's General Account Variable Annuity is invested in a Separate Account
What is an Installment Refund annuity payout option?
If the annuitant has a premature death, the beneficiary will receive regular PERIODIC PAYMENTS (not a lump sum) Guaranteed Minimum Payout
How are distributions after the contract owner's death taxed?
If the death occurs before the payout period begins, the exclusion ratio will apply to calculate the taxable portion if: -the entire cash value of the annuity is distributed within 5 years -the cash value is used to purchase a life annuity for the beneficiary within 1 year after death If the death occurs AFTER the payout period begins, the balance must be paid out as it would have been to the owner.
How are dividends and surrender proceeds taxed?
If the value of premium payments does not exceed the original purchase price, then the dividends received are nontaxable If the dividends are received after annuitization begins, they are taxed as income
How is the dollar value of a Variable Annuity expressed?
In units - accumulation units and annuity units
Which type of investors seek reliable income and capital preservation?
Income Investors Most conservative whose investments are known as defensive investments, seek income stocks that pay reliable dividends
How is interest earned on an annuity taxed?
Interest earned is not taxed until the annuity is paid out - therefore, during the interest keeps on earning more interest
How are payment amounts for an annuity divided?
Into two separate parts -a nontaxable portion representing a return of the premium payments -a taxable portion representing interest earned, but not taxed yet
List the Guaranteed Minimum Payout options.
Life Annuity w Period Certain Cash Refund Annuity Installment Refund Annuity Joint-and-Survivor Annuity
Do Variable Annuities offer a guaranteed rate of return, like Fixed Annuities?
NO - at any given time, the value of a Variable Annuity may be more or less than the principal amount invested (purchase price of the annuity)
When does the Exclusion Ratio cease to apply?
Once the amounts are equal to the investment in the contract
What is the minimum death benefit of an annuity?
Only some offer a minimum death benefit If offered, it is equal to the total amount of premium payments
What happens if an annuitant outlives the specified number of payments or years in a Life with Period Certain payout option?
Payments cease upon annuitant's death
What is the Life Annuity Payout option?
Payout is guaranteed for life - cease once the annuitant dies
What are Periodic Level Premiums?
Premiums of a fixed amount, made on a regular, periodic basis - offer forced savings aspect
What are Periodic Flexible Premiums?
Premiums that allow owners to vary the amount of payments *made on a periodic basis*
What are Fixed Annuities usually invested in?
Relatively safe bonds and mortgages that have a somewhat low rate of return
What are expense loads?
Sales and administrative charges Can be a fixed percentage deducted from each premium payment (Level Sales Charge) Can be an amount that is disproportionately deducted from the first few premium payments (Front End Loaded Sales Charge)
What is a Life with Period Certain payout option?
States if the annuitant dies before a specific number of payments are made to them, or a specific number of years, then the beneficiary listed will continue to receive payments until annuity is paid out Guaranteed Minimum Payout
What securities does the Separate account (which Variable Annuities are invested in) consist of?
Stocks, Bonds, or other securities which determine the variable rate of return for premium payments
What is the difference between the Cash Refund payout option, and the Installment Refund payout option?
The Cash Refund option pays out the annuity benefit in a LUMP SUM. The Installment Refund option pays out the benefit in PERIODIC PAYMENTS.
What is used to calculate the portion of each annuity payout that is excluded from gross income called?
The Exclusion Ratio
What is the Assumed Investment Return (AIR) of a Variable Annuity?
The assumed interest rate is used to determine the amount of each annuity payment Takes place of the guaranteed minimum interest rate of a Fixed Annuity
Who bears the investment risk of a Variable Annuity?
The contract owner, NOT the insurance company
How is the death benefit of an annuity received?
The death benefit is received tax free - BUT any gains from interest are taxed
What is the Net Cost of an annuity?
The net investment in the contract (total premiums paid minus dividends received)
How do premium payments earn interest during the accumulation period?
The payment of the premium earns interest and that interest is then added to the principal. The principal-plus-interest THEN earns even more interest year after year = Compound Interest
What is a Fixed Annuity payout?
The payout of benefits expressed in a fixed dollar amount - a stream of periodic payments
What is a Variable Annuity payout?
The payout of benefits is expressed in annuity units - acts as a hedge against inflation Annuitant will receive the VALUE of a certain number of annuity units for each payment. The number of units will remain fixed during the payout period, but the value of the units will change from payment to payment depending on investment performance
What initiates the accumulation period of an annuity?
The purchaser's first premium payment
What are Variable Annuities usually invested in?
The stock market - riskier, but a higher potential for return
What is the limit on the type of investments allowed in a Separate Account?
There is none
What is the Cash Refund annuity payout option?
This guarantees the return of all, or part, of the annuity's purchase price IF the annuitant has a premature death Pays the difference between an annuity's purchase price and the total payments received up until the annuitant's death as a LUMP SUM to the beneficiary Guaranteed Minimum Payout
What is the Joint-and-Survivor annuity payout option?
This option pays the benefit as long as either of the joint annuitants is alive - assures payments will not cease at first death Guaranteed Minimum Payout
What does the NAIC Suitability and Training Act require of producers?
To act in the best interest of the consumer
What is the purpose of a Supervision System?
To ensure compliance with the NAIC Suitability regulation
Why are Variable Annuity premium payments kept in a Separate Account?
To ensure that gains/losses in the Separate account will not affect the insurance company's ability to meet its obligations - i.e. Gains/losses only affect the policy owner's asset balance, NOT the insurance company's
Which type of investors seek stocks whose value is underpriced and invest in companies with low Price to Earnings ratios?
Value Investors Invest with companies who may have been overlooked in the market and have extremely stable underlying business assets
When is no duty owed to the consumer?
When: -No recommendation was made -A recommendation was made based on inaccurate information provided by the client -A consumer refused to provide reasoning as to why the product is suitable and the producer does not recommend it -A consumer enters into an annuity transaction that is not based on the insurers recommendation
What qualifies as a 1035 exchange?
the replacing contract must retain all attributes of the old contract