Chapter 8 Custom Exam
One of your clients is looking to annuitize a contract and wants a payout option that will provide income for the later of 10 years or death. Which of the following choices is most suitable for this investor? A) Straight life B) Straight life with period certain C) Variable annuity D) Fixed annuity
B) Straight life with period certain A period certain payout guarantees that a minimum number of payments will be made even if the annuitant dies before the period certain has elapsed.
When discussing the purchase of a variable annuity with a client, the RR is not required to disclose: A) Surrender fees B) Mortality fees C) Probate fees D) Administrative fees
C) Probate fees Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed.
A person who invests in a variable annuity would be MOST concerned with the performance of the insurance company's: A) Profitability B) Credit rating C) Separate account D) General account
C) Separate account The performance of a variable annuity is related to the performance of the separate account. The insurance company's general account backs the company's fixed annuities and traditional (guaranteed) insurance products.
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) A fixed number of annuity units multiplied by a variable dollar amount 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.
An individual considering moving to the payout phase of a variable annuity should understand 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 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) Be based on the performance of the subaccount products in the separate account The investor assumes the risk when purchasing a variable annuity. Once annuitized, the number of annuity units remains the same and payments are based on the performance of the subaccount products in the separate account, and the chosen settlement option. Should the value of the separate account fall below the investor's cost basis, the payments may amount to less than the cost basis.
Which of the following is TRUE concerning a 529A or ABLE account? A) Earnings must be used for college or a penalty will be assessed B) Earnings will not be taxed if they're used for any qualified expense C) Earnings will be taxed if they're used for legal expenses D) Earnings will be taxed if they're used for housing
B) Earnings will not be taxed if they're used for any qualified expense One of the benefits of a 529A or Achieving a Better Life Experience (ABLE) account is the tax-deferred growth. Actually, the earnings are tax-free if they're used for qualified expenses, including basic living expenses, education, employment support, housing, financial management, legal fees, transportation, and wellness for disabled persons. However, unlike 529 plans, withdrawals from 529A accounts are not required to be used for qualified education expenses.
The beneficiary of a Section 529 plan may make qualified withdrawals from the plan for: A) Buying an automobile that will be used to get to school B) Paying the tuition for an out-of-state college C) Buying furniture for her dorm room D) Paying the costs of printing and mailing her résumé after graduation
B) Paying the tuition for an out-of-state college Qualified higher education expenses include tuition, books and supplies, as well as room and board while attending college. The other withdrawals are subject to federal tax liabilities.
The assets in a Section 529 College Savings Plan may be transferred to another beneficiary without a tax penalty: A) Provided the second beneficiary is already in college B) Provided the second beneficiary is a member of the first beneficiary's family C) As long as the first beneficiary agrees D) Once every 12 months
B) Provided the second beneficiary is a member of the first beneficiary's family The assets in a 529 plan may be transferred to another beneficiary as long as the second beneficiary is a member of the first beneficiary's family. Family includes spouses, children, grandchildren, siblings, nieces and nephews, and first cousins.
A 529A or ABLE account is permitted for which of the following persons? A) A person who is receiving retirement benefits B) A person who is saving for college C) A person who has a significant disability D) A person who is a minor
C) A person who has a significant disability Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
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) Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract 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.
Which of the following statements concerning a tax-qualified annuity is TRUE? A) It has a zero cost basis and grows tax-free B) It is not subject to contribution limits C) It has a zero cost basis and grows tax-deferred D) It may be subject to tax-free distributions, if qualified
C) It has a zero cost basis and grows tax-deferred Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans.
Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)? A) It offers a guaranteed minimum rate of return B) It provides a return that is based on the performance of a stock market index C) It is considered a security D) It provides tax-deferred growth
C) It is considered a security Equity-indexed annuities (EIAs) are a type of fixed annuity that provide a guaranteed minimum rate of return (unlike variable annuities), but may potentially provide a greater rate of return. An EIA's return is tied to the performance of a stock market index to which it is linked. As with standard annuities, they also provide tax-deferred growth. However, EIAs are not currently considered securities; instead, they are categorized as a life insurance product.
For variable annuities, which of the following payout options provide the highest payout? A) Joint and last survivor life annuity B) Life annuity with period certain C) Life annuity D) Unit refund life annuity
C) Life annuity Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.
Which of the following statements is TRUE about variable annuities? A)The dollar amount of payments is guaranteed B) Participants may not vote to change objectives C) Payout is based on a number of annuity units, which remains fixed for the duration of the payout period D) Annuity payments are of a constant dollar amount throughout the payout period
C) Payout is based on a number of annuity units, which remains fixed for the duration of the payout period A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences? A) All proceeds are considered a return of capital. B) The growth is taxable as a capital gain to the beneficiary. C) Proceeds in excess of cost are taxable as ordinary income to the beneficiary. D) The growth above cost is not taxable if the beneficiary rolls it over into a retirement plan.
C) Proceeds in excess of cost are taxable as ordinary income to the beneficiary. 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.
The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that: A) Distributions that are not used to pay for educational expenses are subject to a 10% tax penalty B) Qualified distributions may be used to pay for tuition, books, room and board, and other expenses C) The account owner may lose financially if the student does not attend a public school in that state D) The account owner can lock-in the beneficiary's tuition at a state college at a reduced rate
C) The account owner may lose financially if the student does not attend a public school in that state The main disadvantage of a prepaid tuition plan is that the investor may suffer financially if the beneficiary attends an out-of-state or private college. Unlike 529 Savings Plans, prepaid tuition plans do not have distributions. Instead, the account owner purchases credits toward tuition at a state university or college. Prepaid tuition plans generally may not be used to save money for other educational expenses such as room and board. The advantage of a prepaid tuition plan is that the investor is guaranteed a certain number of credits toward the beneficiary's tuition.
Section 1035 of the Internal Revenue Code: A) Permits the tax-free exchange of one annuity contract for another B) Forbids the tax-free exchange of an insurance policy for a new life insurance policy C) Forbids the tax-free exchange of an insurance policy for a new annuity contract D) Permits the tax-free exchange of an annuity contract for a life insurance policy
A) Permits the tax-free exchange of one annuity contract for another 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.
An investor has annuitized a variable annuity and has realized that the payments he's receiving are falling below market return. If the investor wants to reallocate a portion of the investment portfolio within the separate account, which of the following statements is TRUE regarding this situation? A) The investor is permitted to change the allocation of the investments within the separate account. B) The investor is not permitted to change the allocation of the investments within the separate account. C) The investor can only change the allocation to a fixed-income portfolio. D) The investor can only change the allocation to an equity growth portfolio.
A) The investor is permitted to change the allocation of the investments within the separate account. Although some limitations may apply, the investor is permitted to reallocate their investments within the separate account. Keep in mind, both the decision to annuitize and the chosen settlement option are final.
A person who invests in a fixed annuity is most concerned with the performance of the insurance company's: A) Credit rating B) Separate account C) General account D) Stock value
C) General account The insurance company's general account is what backs an insurance company's fixed annuities and traditional (guaranteed) insurance products. On the other hand, the performance of a variable annuity is related to the performance of the insurance company's separate account.
Which of the following factors will impact the value of a variable life insurance policy? A) The age of the owner. B) The payout option chosen by the owner. C) The performance of the separate account. D) The rate of return that the insurance company earns on its investments.
C) The performance of the separate account. The cash value of a variable life insurance policy is primarily based on the performance of the separate account. (17538)
What is the maximum contribution that can be made to a 529 plan without being subject to gift taxes? A) $150,000 from a married couple if no further contributions are made for the next five years. B) $15,000 C) $300,000 from a married couple if no further contributions are made for the next ten years. D) $30,000 from a married couple
A) $150,000 from a married couple if no further contributions are made for the next five years. In a 529 plan, contributions are based on the amount that can be gifted without any tax implication to the donor. Currently, this amount is $15,000 per person, per beneficiary. Contributions to 529 plans can be front-loaded with five years of contributions without penalty. This means that $75,000 (5 x $15,000) per person can be contributed, which can be doubled to $150,000 for married spouses. Prior to 2018, the maximum was $14,000 per year, with $70,000 front-loaded. (17539)
Which of the following amounts may a customer contribute each year to a 529 college savings plan without incurring any taxes? A) An unlimited amount B) An amount equal to the annual gift tax exclusion C) Five times the annual gift tax exclusion D) Ten times the annual gift tax exclusion
B) An amount equal to the annual gift tax exclusion States that offer 529 plans determine the specific plan rules, such as allowable contributions, investment options (e.g., mutual funds), and the deductibility of contributions for state tax purposes. On an annual basis, a person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($15,000) without paying a gift tax. Another choice is that the contributor can make a single, lump-sum gift of up to the five-year cumulative limit ($75,000) for tax free gifting.
All of the following statements are TRUE about 529 Prepaid Tuition Plans, EXCEPT: A) They are generally administered by the states B) They permit investors to pay for a child's tuition expenses at a state college in advance at a reduced rate C) The beneficiary may use the tuition credits purchased at virtually any college or university in the United States D) The account owner is protected against future increases in tuition
C) The beneficiary may use the tuition credits purchased at virtually any college or university in the United States An investor who purchases a prepaid tuition plan is buying tuition credits that may be used for the beneficiary's education at a public school in the state that administered the plan.
Which of the following statements is NOT a characteristic of a 529 plan? A) There are no income limits placed on contributors B) Withdrawals from 529 plans used for educational purposes are not subject to federal taxation C) Earnings in the account are tax-deferred D) Contributions are unlimited
D) Contributions are unlimited Contributions to a 529 plan are not unlimited. Instead, each state determines the dollar value that may be contributed.
Which of the following investors is not a typical candidate for a variable annuity? A) A senior investor B) An investor who is single C) An investor who is married with young children D) An investor who is saving for retirement
A) A senior investor 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.
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) Allowed to accumulate on a tax-deferred basis The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.
Which of the following statements is TRUE concerning periodic payment variable annuities? A) A client's number of annuity units never changes B) A client's number of accumulation units never changes C) Annuity contracts never have a beneficiary D) The monthly payout is fixed by the inflation index
A) A client's number of annuity units never changes 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 monthly payout is determined actuarially and is based on the performance of the separate account.
A 72-year-old grandfather wants to buy an annuity for his son (age 45) and his grandchild (age 15). Which payout option BEST satisfies the grandfather's intentions? A) Straight life annuity with 10-year period certain B) Joint and last survivor life annuity C) Unit refund life annuity D) Straight life annuity
B) Joint and last survivor life annuity A joint and last life survivor annuity will best satisfy the grandfather's intentions. In this payment option, benefit payments are made to the persons in the joint account, then to the survivor, as long as the survivor lives.
Which of the following features applies to a variable annuity, but not to a mutual fund? A) Sales charge B) Management fees C) Administrative expenses D) Death benefit
D) Death benefit A variable annuity may have a death benefit which provides a payment if the annuitant dies during the accumulation period. The amount of the death benefit is the greater of the value of the annuity on the day of the annuitant's death or the total amount contributed.
An accumulation unit in a variable annuity contract is: A) An accounting measure used to determine the contract owner's interest in the separate account B) An accounting measure 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 accounting measure used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure 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, with differing objectives and portfolios.
Which of the following features applies to a variable annuity, but not to a mutual fund? A) Tax-deferred growth B) Management fees C) Administrative expenses D) Sales charge
A) Tax-deferred growth For investors, one of the key benefits of a variable annuity is tax-deferred growth. Mutual funds do not have this feature.
Which of the following entities typically sponsors a 529 plan? A) A broker-dealer B) An employer C) A state D) A mutual fund complex
C) A state Although 529 education savings plans are often administered by a third-party vendor such as a mutual fund family, these plans typically are sponsored by a given state. For example, New Jersey sponsors a 529 plan and New York sponsors its own. Note: clients are permitted to invest in 529 plans from states other than their own state of residence.
