Chp 5 Quizzes
An annuitant receives payment under a variable annuity for a number of years. At his death, his widow receives a lump-sum payment. The annuity is a [A] variable life annuity. [B] variable joint and last survivor annuity. [C] variable unit refund annuity. [D] 20-year endowment annuity.
Answer: C An annuity where the beneficiary receives a lump-sum payment upon the death of the annuitant reflecting the value of the remaining annuity units is called a unit refund annuity. If the beneficiary received the value of the remaining annuity units in installments, it is called an installment refund annuity.
Which of the following types of risk would apply most to an investor that purchased a Variable Annuity Contract? [A] Mortality Risk [B] Interest Rate Risk [C] Investment Risk [D] Social Risk
Answer: C The investor carries the investment risk, and could incur a loss if the value of the portfolio declines.
Mr. Elderly has reached retirement age and is about to exchange his accumulation units in a variable annuity for annuity units. His cash flow will be the greatest if the payment option he selects is [A] Unit Refund Life Annuity. [B] Life Annuity. [C] Life Annuity, period certain. [D] Joint and Last Survivor Life Annuity.
Answer: B Life Annuity investors receive regular payments until death, regardless of how long the investor lives. This payout method gives the investor the largest payment of all methods of payout.
Which of the following is a characteristic of an unregistered equity-indexed annuity? [A] Throughout the trading day, the annuity's value is updated to reflect movements in the related index. [B] There is a cap on the percentage of returns that may be collected by owners of such contracts. [C] This type of annuity is generally taxed a more favorable rate compared with more conventional annuities. [D] Throughout the lifetime of such contracts, interest returns are fixed.
Answer: B Equity indexed annuities provide annuity payments linked to a specific stock index. There's usually a cap on the percentage return on the upside and a floor on the downside. They usually have early withdrawal penalties. At this time, they do not have to be registered, but supervision of the sales of this product is required as if it were a security.
An investor wants to purchase a single-life variable annuity in which he would receive payments until he died and would continue to make payments to his beneficiary should he die before the end of a specified period of time. He should purchase which of the following? [A] Life annuity with period certain [B] Annuity with installments for a designated amount [C] Joint and last survivor life annuity [D] Annuity with installments for a designated period
Answer: A Since the client wants to receive payment for life and further wants his beneficiary to receive payments after his death, the best choice is Life Annuity-period certain.
One of your clients has a variable annuity. She is currently 60 years old and wishes to purchase a second property for vacation purposes using the surrender value of the annuity. For tax purposes, how are gains in the variable annuity treated when she surrenders the policy? [A] The investor will pay ordinary income taxes on the surrender value of the annuity and will also pay an additional 10% penalty tax. [B] The investor will pay ordinary income taxes on the surrender value of the annuity. [C] The investor will pay capital gains taxes of 20% on the surrender value of the annuity and will also pay an additional 10% penalty tax. [D] The investor will pay capital gains taxes of 20% on the surrender value of the annuity.
Answer: B Because the investor is more than 59 ½ there would not be a 10% penalty but the gain would be treated as ordinary income and subject to taxation at the investor's full tax rate.
Which of the following is TRUE of an annuitized variable annuity contract? [A] The annuitant receives a lump sum payment. [B] The value of the accumulation units is used to determine the number of annuity units. [C] The accumulation unit value is used to determine the annuity unit value. [D] The assumed interest rate is recalculated.
Answer: B When the annuity owner selects a payout option, accumulation units are exchanged for annuity units.
One of your clients is an annuitant who recently retired. The individual's main source of income during retirement will be the variable annuity. It is important that this individual understands what aspect of her situation? [A] The current long-term capital gains rate will be applied to all payments that are distributed to the annuitant. [B] The fluctuations and performance of the separate account of the annuity will determine the payments received by the annuitant. [C] If the annuitant made monthly payments into the annuity, then the annuitant can expect a minimum of the invested monthly amount in payments once the plan is annuitized. [D] Fluctuations in the payments of the annuity will be tied to the ratings and financial performance of the issuing insurance company.
Answer: B Variable annuities fluctuate with that of an underlying securities portfolio contained in the Separate Account of the insurance company. Generally, there is no guaranteed minimum payment. The payments are taxed as ordinary income, not capital gains. The credit rating of the insurance company does not direct effect the annuity payments.
Which of the following would NOT be an effect of fluctuations in a variable life insurance policy's separate account? [A] Decreases in the cash value of the account [B] Increases in the policy's death benefits [C] Decreases in the policy's minimum death benefit [D] Increases in the cash value of the account
Answer: C Cash surrender values and the death benefit are affected by fluctuations in the value of the Separate Account. The minimum death benefit is guaranteed and would not be affected.