Chapter 12 - Basics of Life Insurance and Variable Annuities

Annuity Unit

determines the amount of each payment to the annuitant.

Two basic types of insurance

1. term insurance 2. permanent life insurance

A client has a variable annuity, which has an assumed interest rate of 4%. The client received a first benefit check of $110. The separate account rate of return between the first and second month was 10%. Your client received a second check for $125. What was the actual rate of return of the separate account between the second and third month if the client's third check was also for $125? [A] 4% [B] more than 4% but less than 10% [C] 10% [D] more than 10%

4%

A variable annuity contract is similar to a life insurance policy because it may contain all of the following EXCEPT [A] death benefits. [B] beneficiary designation. [C] loan provisions. [D] guaranteed cash values

guaranteed cash values

An individual assumes which risk when purchasing a variable annuity contract? [A] Investment risk [B] Mortality risk [C] Political risk [D] Legislative risk

investment risk

Examples of permanent life insurance are:

whole life universal life variable life variable universal insurance

Companies issuing non-tax qualified variable annuities must be registered with all of the following EXCEPT [A] FINRA [B] SEC [C] State banking department [D] State Insurance department

State banking department

Which of the following statements is TRUE of a variable annuity contract written with a "10-year period certain" provision? [A] The accumulation period is limited to 10 years. [B] The payout amount will be equal to the 10-year payments paid. [C] The annuitant or the beneficiary will receive payments for a minimum of 10 years. [D] The annuitant is required to make payments for at least 10 years.

The annuitant or the beneficiary will receive payments for a minimum of 10 years.

Deferred annuities may be purchased as which of the following? Single purchase payment plan Series of equal purchase payments plan Series of flexible purchase payments plan [A] I and II only [B] I and III only [C] II and III only [D] I, II and III

all of the above

Section 1035 exchanges permit [A] an exchange from a life insurance policy to a mutual fund, free of taxes. [B] an exchange of non-insurance products for variable annuities. [C] an exchange between annuities or life insurance policies, free of taxes. [D] variable annuity withdrawals that are free of taxes.

an exchange between annuities or life insurance policies, free of taxes.

A customer who is about to retire wants to buy a low risk product that will provide a predictable stream of income. Which of the following products is most suitable for his needs? [A] An immediate fixed annuity [B] An immediate variable annuity [C] A deferred fixed annuity [D] A variable universal life insurance policy

an immediate fixed annuity

Variable Annuities

are basically made up of an investment portfolio of mutual funds or other professionally managed securities held in a special, tax-deferred account of the insurance company called the Separate account. Long term investments

Retail broker/dealer ABC wants to sell a certain variable annuity contract to a customer. Principal underwriter broker/dealer DEF is the distributor of the contracts for the insurance company. What are the FINRA requirements for ABC to be able to buy the contract from DEF at a discount from the public offering price and sell the contract to its customer at the public offering price? [A] Both firms must be members of FINRA and there must be a written sales agreement between them. [B] There must be a written sales agreement between them that provides for a give up of all sales compensation if a variable annuity purchaser redeems the contract within 10 days of purchase. [C] There must be a written sales agreement that is disclosed in the prospectus [D] Both firms must be members of FINRA and an oral sales agreement is sufficient.

both firms must be members of FINRA and there must be a written sales agreement between them.

Administrative Expenses

compensation that is paid to the issuer of the annuity contracts for services such as record keeping, accounting, computation of daily unit values, etc.

term insurance

is "temporary" insurance which is only good for a set period of time, for example 1 year, 5 years, or 10 years

surrender charge

is a fee that a policyholder will incur when selling, cashing in or cancelling an insurance or annuity policy

The primary purpose of life insurance

is income replacement for the Beneficiary or beneficiaries of a life insurance policy related to the life of the Insured person

Permanent Life insurance

is lifetime insurance assuming premiums are paid in full as they come due.

annuity

is simply a series of periodic payments, such as $100 per month, paid to an annuitant for life usually for retirement income or can be paid to an annuitant and their beneficiary for a minimum period certain. suitable investment for an individual with an investment objective of long-term capital appreciation a contract for a series of periodic payments to be made for the life of the annuitant.

An insurance premium

is the amount a policyholder pays for a life insurance policy

cash surrender value (CSV)

is the amount available in cash upon the voluntary termination of a policy if the policyholder surrenders or cancels the policy before it becomes payable by death.

Which of the following types of variable annuity offers the largest payout to annuity holders, but ends at the time of death of the annuitant with no additional payments? [A] A Life Annuity [B] A Life Annuity with a Period Certain [C] A Unit Refund Annuity [D] A Joint and Last Survivor Annuity

life annuity

A variable annuity guarantees [A] dollar payments based on a fixed value of a fixed number of units each month. [B] lifetime payments of a fixed amount in dollars each month. [C] lifetime payments based on fluctuating dollar value of a fixed number of units each month. [D] payments of a fixed amount in dollars each month for a specific number of years.

lifetime payments based on fluctuating dollar value of a fixed number of units each month.

Concerning a variable annuity, what do you call the charge to the annuity's separate account that relates to the potential of the annuitants outliving the annuity's life expectancy assumptions? [A] Mortality risk fee [B] Annuitization fee [C] Death benefit charge [D] Systemic risk charge

mortality risk fee

An annuity unit in a variable annuity is most like a: [A] pension payment [B] insurance unit [C] IRA contribution [D] mutual fund shares or units

mutual funds shares or units

What is the tax treatment on payments received by an annuitant during the annuity period on a non-qualified annuity? [A] Payments are subject to tax only on the annuitant's cost basis. [B] Payments are taxed as ordinary income on the portion that is not attributable to the annuitant's cost basis. [C] Payments are taxed entirely as ordinary income. [D] Payments are tax-exempt.

payments are taxed as ordinary income on the portion that is not attributable to the annuitant's cost basis

Variable Annuity

pays a fluctuating dollar amount each period, for example $100 in January, $103 in February, $99 in March. the policy holder bears the investment risk

Fixed Annuity

pays the same predetermined dollar amount each period, for example $100 per month. The insurance company bears the investment risk

All of the following are ways to acquire a variable annuity except: [A] making a single premium payment with an immediate payout [B] periodic payments with an immediate payout [C] periodic payments over time using deferred payout [D] single premium payment with deferred payout

periodic payments with an immediate payout.

Which of the following terms are associated with a variable annuity? [A] Special Account. [B] Investment Company Account. [C] Separate Account. [D] General Account.

separate account

One of your clients is a 65 year-old male. Several years ago, this client purchased a variable annuity for $40,000 that is currently worth $60,000. The client decides to make a single, one-time withdrawal of $9,000 to pay off a credit card and take a cruise with his wife. The tax implications of this withdrawal are: [A] that $3,000 will be tax free, and $6,000 will be taxable since that is the increase in value on the cost basis. [B] that since a FIFO accounting method is used on such annuities, the man's withdrawal is entirely tax-free. [C] that since a LIFO accounting method is used on such annuities, the withdrawal in its entirety is taxable. [D] that since the man is over 60, he has passed the required age for such an annuity and the withdrawal is tax free.

that since a LIFO accounting method is used on such annuities, the withdrawal in its entirety is taxable.

Annuitant

the individual who will receive annuity payments from a contract

Contract Holder

the investor that buys the variable annuity is referred to as the __________________

The sales charge breakpoints on a variable annuity are determined by which of the following? [A] The total amount invested in the variable annuity contract [B] The total number of annuitants purchasing the contracts [C] The overall performance of the variable annuity portfolio [D] The turnover rate of securities held in the variable annuity portfolio

the total amount invested in the variable annuity contract

A "Statement of Additional Information" must be delivered to any investor interested in a mutual fund or variable annuity [A] with each purchase. [B] upon request. [C] with the delivery of the prospectus. [D] annually.

upon request

Accumulation Unit (pay-in period)

used to determine the contract owner's interest in the separate account an accounting measure used to determine a contract owner's interest in the Separate Account during the accumulation period of a deferred variable annuity contract.

Annuitization

when the annuity owner selects a payout option, accumulation units are exchanged for annuity units. the value of the accumulation units is used to determine the number of annuity units issued.