chapter 10 - variable products
exchanging one annuity for another. a non taxable event that the customer must benefit from, that may come with additional restrictions
1035 exchange
switching from one annuity to another during the accumulation period
1035 exchange
annuities are generally for investors within the age range of _____ - ______
30 - 55
investments in the separate account may be changed during the ___________________
accumulation phase
the separate account is valued in terms of ___________________
accumulation units
accumulation units are purchased __________ tax, no deduction
after
while still in the accumulation phase, withdrawals are controlled by the ______________
annuitant
when is the accumulation unit value calculated?
at the end of the business day
An individual annuitizes his variable annuity contract and begins receiving payments using a straight life settlement option; however, she later decides that a joint and last survivor life annuity settlement option is more appropriate. Which of the following is TRUE concerning this situation? a. The individual is permitted to change the settlement option without restriction. b. The individual is not permitted to change the settlement option. c. The individual could change the settlement option with an additional fee. d. The individual is limited to changing to a settlement option with a fixed period payout.
b (Once an individual has annuitized her contract, no changes can be made to the settlement option. The accumulated value of the contract is converted into a stream of income and no additional withdrawals are permitted from the annuity outside of the chosen the settlement option.)
The growth in the value of a variable annuity is: a. Taxable to the investor in the year it's declared b. Allowed to accumulate on a tax-deferred basis c. Used to reduce the cost basis of the investment d. Tax-deferred only if the investor has retired
b (The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.)
When engaging in a 1035 exchange, an individual should be aware that: a. The exchange is a taxable event b. The exchange is not a taxable event, but the new annuity may come with additional restrictions c. The exchange is not a taxable event and the policies of the old annuity remain in place d. The exchange is only permitted if it's unsolicited
b (The primary benefit of a 1035 exchange is that it's not taxable. However, the new annuity may come with new restrictions, thereby making it unsuitable for the investor.)
lower fees and longer surrender period
b shares
In order to sell variable annuities to clients, a person must hold which of the following? a. A life insurance license only b. A securities registration only c. A life insurance license and securities registration d. No licenses or registrations
c (Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.)
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: a. Variable annuity contract plan b. Insurance sector based index fund c. Spread load contractual plan d. Variable life insurance contract
d (A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.)
According to FINRA, the maximum sales charge on a variable annuity contract is: a. 0% b. 5% c. 8.5% d. An amount that is fair and reasonable
d (There is no statutory maximum sales charge on variable annuities or variable life insurance policies. The sales charges must be fair and reasonable.)
if account performance is lower than AIR, the annuity payment sill ____________
decrease
investment income in the accumulation phase is tax ________________ until withdrawn
deferred
type of annuity where it is purchased with periodic payments and payout typically starts after retirement
deferred annuity
annuities are generally for persons seeking tax ____________ growth or to offset ______________
deferred, inflation
type of annuity where it is purchased in one lump sum with the payout generally starting immediately
immediate annuity
if account performance is higher than AIR, the annuity payment will ____________
increase
payments are made for life so long as one annuitant is living
joint and last survivor annuity
advisor's fee for making investment decisions in the separate account
management fee
a guarantee that annuitants will be paid for life even if they live beyond life expectancies
mortality risk charges
does a straight life annuity have a beneficiary?
no
the amount of money the policyholder must pay the insurance company to keep the policy in force
premium
no maximum, they must be fair and reasonable
sales charges
annuities are generally unsuitable for __________________ and persons who are seeking _______________________
senior citizens, immediate tax benefits
annuities are generally unsuitable for investors with __________ time horizons
short
the prospectus: - must be filed with ____________ - may be filed ______________ - must provide _________________ disclosure - must detail all _______________ and ongoing expenses of the contract
the SEC, electronically, full and fair, sales charges
If the annuitant dies during the accumulation period, the payout to the beneficiary will represent the greater of: - the ____________________________ OR - the _______________________ of the contract
total contributions made, current value
can loans be taken against the accumulated value?
yes
An accumulation unit in a variable annuity contract is: a. An accounting measure that's used to determine the contract owner's interest in the separate account b. An accounting measure that's used to determine payments to the owner of the variable annuity c. The same as a shareholder's ownership interest in a mutual fund d. The same as the insurance company's profit from the separate account
a (An accumulation unit in a variable annuity contract is an accounting measure that's used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts that each have different objectives and portfolios.)
During annuitization, a variable annuity owner will receive payments that are based on a: a. Fixed number of annuity units b. Fixed number of accumulation units c. Varying number of annuity units d. Varying number of accumulation units
a (During annuitization (payout), a variable annuity owner will receive payments that are based on a fixed number of annuity units. However, the annuity owner's payments will vary due to the fluctuations in the value of the annuity units. Annuity unit values fluctuate based on the performance of the securities in the separate account.)
Which of the following statements is TRUE concerning periodic payment variable annuities? a. The number of a client's annuity units never changes b. The number of a client's accumulation units never changes c. They never have a beneficiary d. The monthly payout is fixed by the inflation index
a (During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The first monthly payout is determined actuarially and thereafter is based on the performance of the separate account.)
An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be: a. Ordinary income on the entire amount b. Ordinary income on the amount in excess of the original investment c. Ordinary income on the amount in excess of the original investment and a capital gain on the original investment d. A capital gain on the entire amount
b (A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original amount invested is treated as a return of capital and the earnings in the account (amount above the original investment) is treated as ordinary income.)
Which TWO of the following statements are TRUE regarding a variable annuity accumulation unit? i. It is an accounting measure used to determine an owner's interest during the pay-in phase. ii. It is an accounting measure used to determine an owner's interest during the payout phase. iii. The value of the units will remain fixed. iv. The value of the units will fluctuate. a. I and III b. I and IV c. II and III d. II and IV
b (Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase. (Annuity units are used during the annuity or payout phase.) Their value will vary based on the performance of the separate account.)
Which of the following annuity settlement options would provide the longest stream of income over the lives of two individuals? a. Life annuity with a 20-year period certain b. Joint and last survivor annuity c. Unit refund life annuity d. Straight-life annuity
b (The joint and last survivor settlement option would provide the longest stream of income as it guarantees payments until the last annuitant dies. The life annuity with 20-year certain would result in payments ending after 20 years even if the survivor was still alive. The unit refund life annuity will only refund the balance of what is left over after the annuitant dies. Payments cease after the annuitant dies in a straight-life annuity.)
Which of the following statements is TRUE regarding separate accounts and general accounts? a. Both types of accounts are registered under the Investment Company Act of 1940. b. Both types of accounts pay a guaranteed minimum return. c. The subaccounts of a variable annuity may include both types of accounts. d. General accounts hold bonds, while separate accounts hold equities.
c (A variable annuity may allow an investor to allocate funds between several subaccounts. One of these accounts may be the general account of the insurance company, which offers a minimum guaranteed rate of return. The other subaccounts may consist of various accounts, each with a different portfolio and investment objective. Some subaccounts hold equities, some hold bonds, and some actually may hold both. The return on a subaccount is not guaranteed; therefore, the purchaser assumes the investment risk. Only separate accounts are registered under the Investment Company Act of 1940.)
An investor is approaching the age she would decide to annuitize a contract. She is considering different settlement options and wants you to explain the benefit of selecting a straight-life payout option. You would explain that this option is attractive because it: a. Is the most conservative method for receiving payments b. Allows for a beneficiary for the entire payout period c. Provides the maximum cash flow of all life payout options d. Provides an equal amount each month for the investor's lifetime
c (The annuitant will receive the greatest cash flow from the straight-life annuity payout option. This option allows the annuitant to receive payments as long as the annuitant is alive. At death, the payments stop. Moreover, since no beneficiary is designated, the insurance company is relieved of its liability to pay the balance of the plan. The annuitant also has the greatest degree of risk with this type of payout option.)
A registered representative has recommended the purchase of a variable annuity to a customer who subsequently completes the application. Which TWO of the following statements are TRUE concerning the application? i. The contract is forwarded directly to the insurance company ii. The contract is forwarded to the representative's Office of Supervisory Jurisdiction (OSJ) iii. A principal need not approve the transaction iv. A principal must approve the transaction within 7 business days a. I and III b. I and IV c. II and III d. II and IV
d (Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company.)
Which TWO of the following statements are TRUE regarding a variable life policy? i. Death benefits are calculated monthly ii. Death benefits are calculated annually iii. Policy loans are taxable iv. Policy loans are charged interest a. I and III b. I and IV c. II and III d. II and IV
d (The death benefits, which vary with the performance of the separate account, are calculated annually. Should an investor choose to take a loan against the accumulated value, interest would be charged.)
charged if expenses are greater than estimated
expense risk charges
when receiving benefits at annuitization, accumulation units are converted into a ________________ number of annuity units
fixed
if account performance is equal to AIR, the annuity payment will ____________
stay the same
annuitant receives payment for life. highest payout with highest risk
straight life annuity
the portfolio into which an investor directs some or all of their money into a variable annuity
sub account product
goes back to broker, used when annuity is terminated early
surrender fee
annuities are products that are sponsored by insurance companies in which investment income grows _________________.
tax deferred
loans during the accumulation phase are considered a _____________ distribution
taxable
Dividends and capital gain distributions in a variable annuity are: a. Taxable to the investor in the year declared b. Allowed to accumulate on a tax-deferred basis c. Used to reduce the cost basis of the investment d. Tax-deferred only if the IRA contribution funding the account is tax-deductible
b (All growth, dividends, and capital gain distributions paid during the accumulation period in a variable annuity are automatically reinvested and grow tax-deferred. Any tax implications commence when distributions begin.)
When comparing variable annuities to fixed annuities, investment risk is assumed by the: i. Investor in a variable annuity ii. Annuity company in a variable annuity iii. Investor in a fixed annuity iv. Annuity company in a fixed annuity a. I and III only b. I and IV only c. II and III only d. II and IV only
b (In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.)
Which of the following calculations describes the payout on a variable annuity? a. A fixed number of annuity units multiplied by a fixed dollar amount b. A fixed number of annuity units multiplied by a variable dollar amount c. A variable number of annuity units multiplied by a fixed dollar amount d. A variable number of annuity units multiplied by a variable dollar amount
b (When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period.)
According to industry rules, how long should investors wait between 1035 exchanges of variable contracts? a. One year b. Five years c. 36 months d. The lesser of five years or the remaining surrender charge period
c (Exchanges of variable contract assets must be scrutinized for both frequency and suitability. The relevant look-back period is typically 36 months.)
Under what circumstances will the payout from a variable annuity increase? a. The rate of inflation exceeds the AIR b. The performance of the separate account exceeds the rate of inflation c. The performance of the separate account exceeds the AIR d. The performance of the separate account for the current period exceeds the performance of the separate account for the previous period
c (Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.)
A 65-year old individual invested $240,000 into a variable annuity, which has since grown to $400,000. If she wants to withdraw $150,000, what's the tax implication of taking the withdrawal? a. She will be taxed on $60,000 as a capital gain. b. She will be taxed on $60,000 as ordinary income. c. She will be taxed on $150,000 as a capital gain. d. She will be taxed on $150,000 as ordinary income.
d (Since the individual is taking a withdrawal, not annuitizing, the first money that comes out of the annuity is considered earnings. In this question, the annuity had generated tax-deferred earnings of $160,000 (from $240,000 to $400,000). Therefore, the full $150,000 being withdrawn is taxed as ordinary income. Any amount withdrawn beyond the first $160,000 is considered a return of the individual's basis and not taxed.)
annuities are generally suitable for people who have maximized ____________
401ks
Which of the following factors is NOT used in determining the value of an annuity unit? a. The assumed interest rate b. The value of the separate account c. Income distributions from securities held in the separate account that are reinvested d. Capital gain distributions from securities held in the separate account that are reinvested
a (The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.)
The payout from a variable annuity contract is: a. Dependent on the investment returns that are earned by the annuitant b. Not dependent on the investor's age and gender c. Dependent on the investor's medical history d. Dependent on the investment returns that are earned by the insurance company
a (The payout that an annuitant receives depends on the investor's returns in their separate account. If the returns exceed the annuity's AIR, the investor's payouts will increase (and vice versa).)
An investor is in the third year of accumulating an interest in a variable annuity that assesses a deferred sales charge. The investor's registered representative recommends for her to switch to a newly created variable annuity that offers a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements may be considered TRUE of this switch? i. FINRA will likely consider the switch unsuitable. ii. FINRA will likely consider the switch suitable, since both annuities are offered with a deferred sales charge. iii. The switch will be taxable if it qualifies as a 1035 exchange. iv. The switch will not be taxable if it qualifies as a 1035 exchange. a. I and III b. I and IV c. II and III d. II and IV
b (Since the investor is in the third year of accumulation, if she accepts the switch recommendation, she will incur a deferred sales charge. Additionally, by switching to another variable annuity, the investor's holding period will restart with the new annuity and she will be subject to the highest deferred sales charge. For these reasons, the switch recommendation is likely unsuitable. Under IRS Section 1035, an exchange of annuities is not a taxable event.)
A person who purchases an annuity with an expectation that she may consider exchanging into another better performing annuity after three years, should consider purchasing: a. B shares b. L shares c. A shares d. None of these type of shares since a person should not exchange into another annuity within such a short period
b (Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC) typically have surrender periods of seven to eight years before sales charges disappear. Suitability is the main consideration when deciding whether to purchase or exchange into an annuity. Generally, exchanges that are made within three years are considered unsuitable, especially if deferred sales charges apply. However, L shares offer an opportunity to avoid sales charges after the short surrender period.)
A 57-year old father was in the accumulation phase of his variable annuity when he passed away. What are the tax implications if the annuity is inherited by his son? a. If liquidated, the entire amount is taxed as ordinary income to the son. b. If liquidated, any amount above the cost basis is taxed as ordinary income to the son. c. If liquidated, any amount above the cost basis is taxed as a capital gain. d. If liquidated, the amount is received tax-free by the son.
b (When inheriting a variable annuity that's still in its accumulation phase, any amount above the decedent's cost basis is considered ordinary income to the recipient. Unlike inheriting other securities, there's no stepped-up basis. In addition, unlike death benefits that are paid on insurance policies, the appreciation is taxable to the beneficiary as ordinary income.)
An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is: a. Straight life annuity b. Joint and last survivor life annuity c. Unit refund life annuity d. Straight life annuity with period certain
c (The annuity payout option that provides the beneficiary with a lump-sum payment at the time of the annuitant's death (which reflects the value of the remaining annuity units) is referred to as a unit refund life annuity.)
An investor has been making payments into a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? i. The investment risk is assumed by the insurance company ii. The investment risk is assumed by the customer iii. The amount of the payment to the customer is guaranteed by the insurance company iv. The amount of the payment to the customer is not guaranteed a. I and III b. I and IV c. II and III d. II and IV
d (Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment could increase, decrease, or remain the same since the amount is not guaranteed.)
The prospectus for a variable annuity contract: Must be filed with the SEC May be delivered electronically Must provide full and fair disclosure Must detail all sales charges and ongoing expenses of the contract a. I and II only b. I, II, and III only c. I, III, and IV only d. I, II, III, and IV
d (Variable annuity products are subject to the provisions of the Securities Act of 1933 which requires delivery of a prospectus. The prospectus details all material facts of the contract and can be delivered electronically. However, if a person requests a printed copy one must be delivered.)
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a: a. Fixed number of annuity units b. Fixed number of accumulation units c. Varying number of annuity units d. Varying number of accumulation units
d (When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.)
better for investors who may want to cash out early. higher fees and shorter time frame
l shares
payments are made to the annuitant or to the beneficiary for a specified minimum number of years
life annuity with period certain
while in the earnings phase, what portion of a withdrawal is taxable
the earnings portion
annuitant receives an amount at least to his original investment. at death, any remaining amount is paid to a beneficiary
unit refund life annuity
Which of the following is an expense or charge NOT normally associated with a variable annuity? a. Investment management fees b. Expense charges c. Redemption fees d. Administrative expenses
c (Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.)
for taxes on annuities, _________ is the system used. this means that premiums paid in (already taxed) are returned __________, while the excess is taxable as ____________.
FIFO, first, income
Which of the following investors is not a typical candidate for a variable annuity? a. senior investor b. An investor who's single c. An investor who's married and has young children d. An investor who's saving for retirement
a (Generally, variable annuities are not suitable for senior investors; instead, they're more appropriate for investors with long-term investment goals who don't anticipate needing access to their money for at least five to seven years. The other investors listed may be candidates for variable annuities.)
Suitability in variable annuity transactions does not apply in which of the following situations? a. A purchase of a new variable annuity b. An employee's contribution to his 403(b) plan c. A 1035 exchange from one variable annuity to another d. The allocation of funds to the subaccount products within a variable annuity
b (FINRA focuses on the suitability of annuity transactions in the purchase of new contracts, exchanges, and the allocation of funds to the subaccount products within the annuity. Annuity transactions in tax-qualified, employer-sponsored annuity programs (e.g., 403(b) plans) is not subject to FINRA's rules. However, the allocation of funds to the various subaccount products within the qualified plans is covered.)
An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that: a. She may make this change without restriction b. Once annuitized, she may no longer make a change c. Once annuitized, she may change only the settlement option d. She is limitied to a 1035 exchange
b (Once a variable annuity has been annuitized, changes are not permitted. A 1035 exchange is switching from one annuity to another during the accumulation period.)
Within how many days of receipt must a principal approve or disapprove an application to purchase a variable annuity? a. 3 business days b. 5 business days c. 7 business days d. 10 business days
c (An application to purchase a variable annuity received by a broker-dealer must be approved or disapproved by a principal no later than 7 business days after receipt. Should an insurance company receive an application without a principal's approval, the application must be rejected.)
If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact? a. There is a 10% penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital b. There is no penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital c. There is a 10% penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates d. There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates
d (As a general rule, if an annuitant withdraws the proceeds of his variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable at ordinary income tax rates.)
A 65-year-old individual has retired and started receiving money from a qualified variable annuity. Which TWO of the following statements are TRUE concerning the distributions from the annuity? i. It is treated as ordinary income for tax purposes ii. It is fully taxable at the investor's tax bracket iii. It is treated as a capital gain for tax purposes iv. It is partially taxable at the investor's tax bracket a. I and II b. II and III c. III and IV d. I and IV
a (A tax-qualified variable annuity is one used as part of a qualified retirement plan. The monies contributed are a tax deduction (pretax monies), grow tax-deferred, and all monies withdrawn are taxed as ordinary income. There is no exclusion allowance since the distribution has never been taxed.)
Which of the following is a benefit of purchasing variable life insurance? a. The death benefit can exceed the guaranteed minimum based on the value of the subaccount products. b. The minimum death benefit is based on the value of the subaccount products. c. The entire premium paid is invested in subaccount products. d. The premiums paid to purchase a variable life insurance policy are tax deductible.
a (Variable life insurance policies provide a guaranteed minimum death benefit. However, the death benefit may be increased based on the performance of the subaccount products into which the owner directs the excess premiums. When an individual purchases a variable life insurance policy, a portion of the premium is used to pay for the minimum death benefit, with much of the balance directed to purchasing subaccount products. The premiums payments are not tax-deductible.)
An individual who's considering moving to the payout phase of a variable annuity should understand that the payments will: a. Never be less than the cost basis in the separate account b. Be based on the performance of the subaccount products in the separate account compared to the AIR c. Be based on the performance of the subaccount products in the separate account plus the AIR d. Be based on the performance of the subaccount products in the separate account minus the AIR
b (Once a variable annuity is annuitized, each payment will represent the same number of annuity units, but the payment amounts are based on the performance of the subaccount products in the separate account compared to the assumed interest rate (AIR). If the performance of the separate account exceeds the AIR, the payment will increase. If the performance of the separate account is below the AIR, the payment will decrease. If the performance of the separate account equals the AIR, the payment will remain the same as the previous payment.)
A customer owns a variable annuity that has a life annuity payout option with a 20-year period certain. If the customer dies after 14 years of payments: a. Future payments will continue for life to a named beneficiary b. Future payments will continue for 20 years to a named beneficiary c. Future payments will continue for six years to a named beneficiary d. No additional payments will be made
c (If the owner of an annuity with a 20-year period certain dies, the annuity company will pay a named beneficiary for the time remaining on the 20-year period. Since the customer died after 14 years, the remaining six years will be paid to a beneficiary and then payments cease. If the customer lives beyond the 20-year period certain, she continues to receive payments for the remainder of her life, with no payment made to a beneficiary at death.)
According to suitability rules, 1035 exchanges should occur not more frequently than once every: a. 12 months b. 24 months c. 36 months d. 48 months
c (1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include: Age Annual income Financial situation and needs Investment experience and objectives Intended use of the deferred variable annuity Investment time horizon (not intended for senior citizens) Existing assets Liquidity needs Liquid net worth Risk tolerance Tax status)
An investor purchased a fixed annuity twenty years ago from a top-rated insurance company. The investor is now considering whether to annuitize on a straight life basis, or to take a lump-sum settlement and invest it elsewhere. If economists are now forecasting an extended period of significant inflation, which of the following is the greatest risk facing the investor if she chooses to annuitize? a. Credit risk b. Market risk c. Purchasing-power risk d. Exchange-rate risk
c (An investor who annuitizes a fixed annuity on a straight life basis will receive the same fixed payment for life. Since, in this case the insurance company is highly rated, there is little credit risk (risk of default). However, the purchasing power of any fixed payment is subject to erosion over time due to inflation. It is this disadvantage of fixed annuities that led to the creation of variable annuities.)
An investor might take advantage of a Section 1035 exchange if: a. The new contract carries a new or longer surrender period b. The enhanced features do not apply to her c. Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract d. The total cost of the exchange outweighs the benefits of the exchange
c (In order for the 1035 exchange to avoid scrutiny, the customer must be able to benefit from at least some of the features received on the new contract. Should the customer lose benefits, incur additional charges, or be subject to a longer surrender period, the 1035 exchange is likely to be viewed as unsuitable.)
A person purchased a variable life contract one year ago. Although the contract performed well, the policyholder has never really understood the policy and has informed his RR that he wants out of the contract. What option is available to the policyholder? a. A full refund of the policyholder's money must be made under the policy's free-look provisions. b. The policyholder must sell his contract, pay any taxes that are due, and may reinvest the funds in any manner. c. The policyholder may be able to convert his policy into a whole life contract that is offered by the same firm. d. The policyholder must cancel his policy, but he is able to roll over all of the contract assets into a self-directed IRA to avoid taxation.
c (Many variable life insurance contracts have a conversion privilege which allows the contract owners to convert the policy to a traditional whole life policy within the first two years. This benefit does not guarantee that the client will not lose money on the variable contract investment. Instead, the privilege indicates that the owner may convert his more complex variable policy to a simpler-to-understand whole life policy.)
A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? a. All proceeds pass to the beneficiary tax-free b. Proceeds in excess of cost are taxable as capital gains to the beneficiary c. Proceeds in excess of cost are taxable as ordinary income to the beneficiary d. Proceeds are not taxable if the beneficiary rolls them over into an IRA
c (When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.)
A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis? a. Zero, since her purchases and reinvested distributions were in pretax dollars b. Only the amount she paid when accumulating units, since reinvestments of distributions were in pretax dollars c. Only the amount of reinvested distributions, since her purchases were in pretax dollars d. The total amount, since the purchases from her payments and reinvested distributions were in after-tax dollars
c (When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the cost basis. Reinvestment of distributions is automatic and done in pretax dollars.)
The most appropriate buyer for a variable life insurance policy is/are: a. A person who requires the discipline of forced savings b. Parents with a modest income who have young children c. A person who wants the assurance of a guaranteed cash value d. A person with an understanding of investments who can tolerate risk
d (A person who is knowledgeable about investments is a candidate for variable life insurance because stocks and bonds are the foundation of the policy. As the market values of the securities fluctuate, cash value and death benefits change. Therefore, the insured must be able to tolerate risk.)
As far as variable annuities are concerned, which of the following statements is TRUE? a. The investment risk is borne by the insurance company as in a fixed annuity b. Payments of a variable annuity can be decreased because of an increase in the expenses of the insurance company c. RRs selling variable annuities are not required to register with the SEC or FINRA d. Variable annuity nonqualified separate accounts are registered under the Investment Company Act of 1940
d (The only true statement listed concerning variable annuities is variable annuity nonqualified separate accounts (the mutual fund portion) are registered under the Investment Company Act of 1940. The investment risk (fluctuation in the market value of the separate account) is borne by the annuity owner, not by the insurance company as in the case of a fixed annuity. Payments of a variable annuity cannot be decreased because of an increase in the expenses of the insurance company. RRs selling variable annuities are required to register with the SEC and FINRA.)
When a beneficiary receives the death benefit from a variable annuity, the amount received is: a. Tax-free to the beneficiary b. Fully taxable to the beneficiary c. Taxable above the cost basis to the annuitant d. Taxable above the cost basis to the beneficiary
d (When a beneficiary receives the death benefit from a variable annuity, the amount above the cost basis is taxable as ordinary income to the beneficiary.)
A client has annuitized a variable annuity which has an AIR of 4% but was sold to her by an RR who used an illustration containing a 7% growth rate. This past period, the separate account grew at a rate of 4%. The client's next payment will: a. Rise by the 3% AIR differential b. Rise by the lesser of the AIR or interest rate used in the illustration c. Rise by 7% since an illustration is a guaranteed return d. Remain the same
d (When an investor annuitizes a variable annuity the investor exchanges accumulation units for a fixed number of annuity units. The number of annuity units and value of each unit is determined by 3 factors: 1) the value of the contract at annuitization; 2) the life expectancy of the investor in years multiplied by the frequency of payments (monthly, quarterly, annually, etc.); and 3) An assumed investment rate (AIR). This rate is only an assumption that the funds chosen in the separate account will continue to grow in the future as they have in the past. There is no guarantee that this will occur. After each payment, we compare actual performance to what was initially assumed. If the funds in the separate account grow faster than what was assumed, the liquidation value of the remaining units will be worth more and the payments will increase. Should the funds underperform what was assumed at annuitization, payments will decrease. If the funds perform exactly as assumed, the payment amounts will remain the same. An illustration is a marketing tool only. It is used by the rep during the initial sale to project hypothetical results. It has no bearing on the terms of the contract nor the actual results achieved. A hypothetical illustration is not part of the annuity contract and cannot be used to imply actual results.)
for loans during the accumulation phase, ____________ is charged which ____________ the number of accumulation units
interest, reduces
the separate account is regulated under the _____________________
investment company act of 1940
