checkpoint unit 9 annuities
D) the customer has had another deferred variable annuity exchange within the preceding 36 months. Explanation FINRA Rule 2330 specifies the suitability conditions surrounding the recommended exchange of an existing deferred variable annuity contract for a new one. Included in the list of considerations is determining if the customer has made another variable annuity exchange within the previous 36 months. Unlike life insurance, where the insured's health is important, there are no health questions on an annuity application. It is safe to assume that any annuity exchange will be done under the provisions of Section 1035. This means there are no tax consequences. The assumed interest rate is for internal purposes; it is not a differentiator when deciding which variable contract to purchase. LO 9.e
FINRA Rule 2330 states: no member or person associated with a member shall recommend to any customer the exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe the exchange suitable, taking into consideration whether A) the customer is at least 59½ and will not be subject to the 10% tax penalty. B) the new annuity has a higher assumed interest rate. C) the customer's health has declined since the purchase of the initial annuity. D) the customer has had another deferred variable annuity exchange within the preceding 36 months.
B) I and III Explanation This rule applies to recommended purchases and exchanges of deferred (not immediate) variable annuities and recommended initial subaccount allocations (there is no such thing as initial reallocations). On the other hand, this rule does not apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity.
FINRA Rule 2330, which deals with members' responsibilities regarding variable annuities, applies under which of the following circumstances? The initial purchase of a deferred variable annuity. The initial purchase of an immediate variable annuity. The initial subaccount allocations. The initial subaccount reallocations. A) I, II, III, and IV B) I and III C) I, II, and III D) II and IV
A II and III Explanation 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.
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) II and III B) I and IV C) I and III D) II and IV LO 9.c
C) $80,427.75. Explanation Once a variable life insurance policy has been in effect for at least three years, the policy must allow for a policy loan equal to a minimum of 75% of the current cash value. LO 9.e
One of your customers purchased a fixed premium variable life insurance policy five years ago. The face value of the policy is $2 million and the current cash value is $107,237. The customer calls you and asks about taking a policy loan. Although the exact details are in the prospectus, you know that the minimum amount that could be borrowed is A) $107,237.00. B) $1,500,000.00. C) $80,427.75. D) $96,513.30.
B) I and II Explanation Under the Investment Company Act of 1940, face amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract. LO 9.a
Which of the following must be registered as investment companies under the Investment Company Act of 1940? Closed-end investment companies Separate accounts of insurance companies offering variable products Variable annuity contracts Variable life insurance policies A) III and IV B) I and II C) II and III D) I and IV
D) 5% Explanation Each month's payout depends on the actual earnings compared to the AIR. If the actual rate of return equals the assumed interest rate, the check will stay the same. We don't compare one month's return to another's; we compare the actual to the assumed. If the actual is higher, the following month's check goes up. If the actual is lower, the following month's check goes down. And, as stated earlier, if the actual equals the assumed, there is no change. LO 9.c
Your customer owns a variable annuity contract. The assumed interest rate (AIR) stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and she received a check in February based on this return for $200. In February, the rate of return was 10%, and she received a check in March for $210. For her April check to be $210, what rate of return would the separate account have to earn in March? A) 10% B) 3% C) 7% D) 5%
B) her situation exposes her to surrender charges and early withdrawal penalties.
n 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is unsuitable because A) an 18-year-old can't own a variable annuity. B) her situation exposes her to surrender charges and early withdrawal penalties. C) the investment grows tax deferred. D) withdrawal of her cost basis is tax free.
D) A single premium deferred variable annuity Explanation There are two benefits to the deferred variable annuity. The first is that taxes on all earnings are deferred until withdrawal. The second is that, if the proper separate account subaccounts are selected, there is potential inflation protection. An index fund will meet the second objective, but, even though index funds tend to be tax efficient, there will be certainly be dividend distributions from an S&P 500 index fund and possibly some capital gains as well. An immediate variable annuity begins payout immediately, so taxes start immediately as well. Variable life will never be an answer to a question unless the question describes a need for life insurance coverage—it cannot be sold strictly as an investment
A 45-year-old client of yours receives an inheritance of $100,000 and wishes to invest it without having to worry about any taxes being due until she reaches age 68. In addition, the client would like to have some protection against inflation. Which of the following would be the most appropriate recommendation? A) An immediate variable annuity B) A single premium variable life insurance policy C) An S&P 500 index fund D) A single premium deferred variable annuity
D) a minimum rate of return is guaranteed.
All of the following statements about variable annuities are true except A) the number of annuity units becomes fixed when the contract is annuitized. B) such an annuity is designed to combat inflation risk. C) the rate of return is determined by the underlying portfolio's value. D) a minimum rate of return is guaranteed.
C) the death benefit can never fall below the guaranteed minimum amount.
An important feature of scheduled premium variable life insurance policies is that A) purchasers must understand that there are no guarantees with these policies. B) better than expected performance of the separate account can lead to reduced premiums. C) the death benefit can never fall below the guaranteed minimum amount. D) the cash value can never fall below the guaranteed minimum amount.
B. ordinary 20k 2k penalty Explanation If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% penalty on the growth withdrawn, a penalty of $2,000 in this case. LO 9.d
Bob Smith, who is in his 40s, has just become covered by an extremely generous defined benefit retirement plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the past 10 years, he has invested $60,000 in the annuity, and its net value is now $80,000. If Bob should go ahead and surrender the annuity, the tax consequences will be A) capital gains tax on $20,000 and a $2,000 penalty. B) ordinary income tax on $20,000 and a $2,000 penalty. C) ordinary income tax on $60,000 and a $6,000 penalty. D) capital gains tax on $60,000 and a $6,000 penalty.
