Investment Companies: Variable Annuities (UITs)

When recommending a contractual plan variable annuity, the registered representative should consider which of the following? I. The ability of the customer to make periodic payments into the plan II. The penalties imposed for early withdrawal from the plan III. The front end load that will be earned IV. Whether the customer can handle declining benefit payments in retirement

The ability of the customer to make periodic payments into the plan The penalties imposed for early withdrawal from the plan Whether the customer can handle declining benefit payments in retirement

Which of the following statements are TRUE about variable annuities? I. Investment risk is carried by the purchaser of the annuity II. Salespeople must register with both FINRA and the State Insurance Commission III. Annuity payments may be reduced because of increased expenses experienced by the insurance company IV. Variable annuities are considered to be securities regulated by the Investment Company Act of 1940

Investment risk is carried by the purchaser of the annuity Salespeople must register with both FINRA and the State Insurance Commission Variable annuities are considered to be securities regulated by the Investment Company Act of 1940

Which statement is TRUE about a non-qualified variable annuity? A. Contributions to the contract are tax-deductible B. Investments held in the separate account grow tax-deferred C. Withdrawals from the contract prior to retirement age are tax-free D. Withdrawals from the contract after retirement age are tax-free

Investments held in the separate account grow tax-deferred Contributions to a non-qualified variable annuity contract are not deductible. The separate account grows tax-deferred (the main benefit of the contract), making Choice B true. Any distributions are taxable on amounts above that contributed to the contract. Furthermore, if a premature distribution is taken (prior to age 59 1/2), a 10% penalty tax is imposed as well.

In a variable annuity contract, the number of I. accumulation units is fixed II. accumulation units can vary III. annuity units is fixed IV. annuity units can vary

accumulation units can vary annuity units is fixed During the accumulation phase of a variable annuity contract, new money that is invested buys additional accumulation units of the separate account (analogous to buying shares of a mutual fund). Once the account is annuitized, payments into the separate account must stop. The accumulation units owned at that moment are converted into a fixed number of annuity units (the number of annuity units received is based on that person's expected mortality). The monthly annuity payment is the fixed number of annuity units times the unit value (which will vary with the performance of the underlying mutual fund held in the separate account).

Which is the BEST definition of an "annuity unit"? a. an accounting measure used to determine the number of units the contract holder may purchase in the separate account b. an accounting measure used to establish the contract holder's ownership interest c. an accounting measure upon which the amount of pay out is determined d. an accounting measure used to determine the contract holder's death benefit

an accounting measure upon which the amount of pay out is determined d. an accounting meas

Which annuity payout option usually results in the largest periodic payment? a. unit refund annuity b. joint and last survivor annuity c. life annuity d. life annuity-period certain

life annuity

To sell a variable annuity, what license(s) is (are) needed? a. series 6 only b. series 7 only c. series 6 or series 7 d. series 6 or series 7 plus a state insurance license

series 6 or series 7 plus a state insurance license

In order to recommend a variable annuity to a customer, which statements are TRUE? I. the customer must be informed, in general terms, of the material features of the product II. the representative must believe that the customer would benefit from the product's features III. the representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable IV. the representative must sign a statement that all required representatives and determinations were completed

All of them

To sell variable annuities, salespersons must be registered with (the): I. FINRA II. State Insurance Commission III. State Banking Commission

FINRA State Insurance Commission To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.

An "accumulation unit" of a variable annuity contract is a(n): a. share of common stock representing an interest in the underlying portfolio b. accounting measure of the owner's interest in the separate account c. account measure of the annuity amount to be received by the owner d. share of beneficial interest in a fixed portfolio

accounting measure of the owner's interest in the separate account

The "AIR" stated in a variable annuity prospectus is a: a. guaranteed fixed interest rate for the annuity b. guaranteed minimum interest rate for the annuity c. conservative illustration on an interest rate for the annuity d. guaranteed maximum interest rate for the annuity

conservative illustration on an interest rate for the annuity

Which rollover would result in a tax event? a. exchange of one variable annuity contract for another variable annuity contract b. exchange of a life insurance contract for a another variable annuity contract c. exchange of a variable annuity contract for a life insurance contract d. exchange of a life insurance contract for another life insurance contract

exchange of a variable annuity contract for a life insurance contract

All of the following are features of variable annuities EXCEPT: a. professional management b. right to vote for change in objectives c. insured against losses d. death benefits

insured against losses

All of the following are true statements about variable annuities EXCEPT: a. the portfolio funding the separate account is professionally managed b. the portfolio is invested in other management company shares c. dividends and capital gains must be reinvested until annuitization occurs d. investors get an interest rate guarantee

investors get an interest rate guarantee

A 50-year old man has purchased a variable annuity contract. He wants payments for his life, but wants to make sure that payments are made for at least 20 years, should he die prematurely. He should choose a: A. joint and last survivor annuity option B. systematic withdrawal plan that provides for 20 years of payments C. life annuity with a 20 year period certain D. unit refund annuity

life annuity with a 20 year period certain A life annuity with a 20 year period certain will pay for the life of the annuitant, but if the annuitant dies early, it will pay for a minimum of 20 years regardless. These payments will be made to a designated beneficiary.

Variable annuity contracts contain which of the following guarantees? I. mortality guarantee II. expense guarantee III. interest rate guarantee

mortality guarantee expense guarantee

Which of the following statements are TRUE about variable annuities? I. Investment risk is carried by the issuer of the annuity II. salespeople must register with both FINRA and the State Insurance Commission III. Annuity payments may be reduced because of increased expenses experienced by the insurance company IV. Variable annuities are considered to be securities regulated by the Investment Company Act of 1940

salespeople must register with both FINRA and the State Insurance Commission Variable annuities are considered to be securities regulated by the Investment Company Act of 1940

Which statement is TRUE regarding a variable annuity offering a GMIB? a. the contract guarantees a minimum death benefit if the contract holder dies before the separate account is depleted b. the contract guarantees a minimum growth rate for the separate account at the time of annuitization c. the contract guarantees a minimum number of annuity payments d. the contract guarantees a maximum rate at which the contract expenses can grow

the contract guarantees a minimum growth rate for the separate account at the time of annuitization

If the actual interest rate earned in the separate account underlying a variable annuity contract is lower than the "AIR," the annuity payment: A. will increase B. will decrease C. is unaffected D. is fixed at a minimum amount

will decrease The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

A customer invests $30,000 in a variable annuity contract. Over the years, the contract grows to $60,000 in value. At age 65, the customer takes a $40,000 lump sum distribution from the contract. The tax consequence is: a. $40,000 non-taxable income b. $40,000 taxable income c. $10,000 taxable income; $30,000 non-taxable return of capital d. $30,000 taxable income, $10,000 non-taxable return of capital

$30,000 taxable income, $10,000 non-taxable return of capital

All of the following are purchase and payout options for variable annuity contracts EXCEPT: A. Lump sum payment; Deferred annuity B. Periodic payments; Immediate annuity C. Periodic payments; Deferred annuity D. Lump sum payment; Immediate annuity

Periodic payments; Immediate annuity An investor can buy a variable annuity contract with a lump sum payment. Once the moneys are used to purchase accumulation units, annuitization can occur immediately or can occur years in the future. An investor can also make periodic payments into a variable annuity contract, but cannot annuitize until payments stop. Thus, there is no option of periodic payments with an immediate annuity. The annuity must be deferred until the payments are completed.

Which of the following statements are TRUE regarding a life annuity? I. The shorter the expected annuity period, the larger the monthly payment II. The longer the expected annuity period, the larger the monthly payment III. A life annuity usually pays the largest amount of all of the annuity payment options IV. A life annuity usually pays the smallest amount of all of the annuity payment options

The shorter the expected annuity period, the larger the monthly payment A life annuity usually pays the largest amount of all of the annuity payment options The shorter the time period to "expected death" when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to "expected death" when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person's life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

When comparing fixed annuities to variable annuities, which statements are TRUE? I. A fixed annuity account grows at a guaranteed rate II. A variable annuity account grows at a guaranteed rate III. Fixed annuities are subject to investment risk IV. Variable annuities are subject to investment risk

A fixed annuity account grows at a guaranteed rate Variable annuities are subject to investment risk Fixed annuity premiums are invested in an insurance company's general account and grow at a guaranteed rate (which is usually fairly low). There is no investment risk. At retirement, the customer receives a fixed periodic payment for life. Variable annuity premiums are invested in an insurance company "separate account" which buys shares of a designated mutual fund. The account grows based on the performance of the underlying mutual fund, so the investor is subject to investment risk.

Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? I. All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units II. All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units III. All interest, dividends, and capital gains from the securities in the account are taxable IV. All interest, dividends, and capital gains from the securities in the account are tax deferred

All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units All interest, dividends, and capital gains from the securities in the account are tax deferred During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.

Which statements are TRUE about variable annuities? I. Contributions are tax deductible II. Contributions are not tax deductible III. Distributions are taxable IV. Distributions are not taxable

Contributions are not tax deductible Distributions are taxable Variable annuity contributions are not tax-deductible. Earnings in the account build tax-deferred. When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. The portion that represents the original contribution (already taxed dollars) is returned without any further tax due.

Which recommendation would be most suitable for a 40-year old client whose main objective is retirement income and preservation of capital? A. Fixed deferred annuity B. Fixed immediate annuity C. Variable deferred annuity D. Variable immediate annuity

Fixed deferred annuity Because this customer is looking for income in retirement and he or she is only 40 years old, a deferred annuity is the right choice. Because the customer wants preservation of capital, a fixed annuity ensures a fixed guaranteed growth rate, while the growth rate of a variable annuity can go higher, or lower, or negative. So for preservation of capital, a fixed annuity is best.

Which of the following statements are TRUE regarding the taxation of payments from variable annuities? I. FIFO accounting is used to determine the taxation II. LIFO accounting is used to determine the taxation III. The tax deferred amount above the basis comes out first, followed by the original contribution IV. The original contribution comes out first, followed by the tax deferred build-up

LIFO accounting is used to determine the taxation The tax deferred amount above the basis comes out first, followed by the original contribution The IRS requires that LIFO account be used when withdrawing from a variable annuity. This means that taxable earnings (the tax deferred build-up) comes out first, followed by the tax free return of original capital (the original after-tax capital contribution).

Which statements are TRUE regarding the annuitization of a variable annuity contract? I. A Life Annuity payout option must be elected by the policy holder II. Life Annuity-Period Certain may be elected by the policy holder III. The number of annuity units will vary IV. The annuity payment will vary

Life Annuity-Period Certain may be elected by the policy holder The annuity payment will vary Variable annuity contracts allow the holder to elect a payout option that meets that person's individual requirements. The statement that a life annuity payout option must be elected is erroneous - the choice of payout method depends on the needs of the annuitant. Once the contract is annuitized, the number of annuity units is fixed. However, the value of each unit varies with the performance of the underlying securities, hence the monthly annuity payment will vary.

If an individual, aged 65, wishes to withdraw money from her variable annuity, which of the following statements are TRUE regarding the taxation of her withdrawal? I. All of the withdrawal is subject to income tax II. Part of the withdrawal is subject to income tax III. The amount is subject to a 10% penalty tax for early withdrawal IV. The amount is not subject to a 10% penalty tax for early withdrawal

Part of the withdrawal is subject to income tax The amount is not subject to a 10% penalty tax for early withdrawal Since this person is above age 59 1/2, any withdrawals from the retirement plan are not subject to the 10% penalty tax for a premature distribution. Since the contribution amount in the non-tax qualified plan was not tax deductible (meaning the amount contributed was already taxed), this portion of the investment is returned without any tax consequence. Thus, only part of the monthly payment is taxable (the portion that represents the tax deferred build up). The portion that represents the original after-tax contribution of capital is not taxed.

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I. Distributions are taxable to the holder in the year the distribution is made II. The underlying portfolios are managed III. The Investment Company Act of 1940 is the regulating legislation IV. The return to investors is dependent on the performance of the securities in the underlying portfolio

The underlying portfolios are managed The Investment Company Act of 1940 is the regulating legislation The return to investors is dependent on the performance of the securities in the underlying portfolio The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies. Both are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential. Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested.

The "death benefit" associated with a variable annuity contract: I. applies prior to annuitization II. applies after annuitization III. means that, upon death, the insurance company will make a lump sum payment to complete the terms of the contract IV. means that, upon death, the insurance company will pay a beneficiary at least the amount invested in the contract

applies prior to annuitization means that, upon death, the insurance company will pay a beneficiary at least the amount invested in the contract The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."

All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: a. the return of investors is dependent on the performance of the securities in the underlying portfolio b. the Investment Company Act of 1940 is the regulating legislation c. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made d. the underlying portfolios are managed

distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made

All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: A. the return to investors is dependent on the performance of the securities in the underlying portfolio B. the Investment Company Act of 1940 is the regulating legislation C. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made D. the underlying portfolios are managed

distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested. Both mutual funds and variable annuities are managed, are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential.

The owner of a variable annuity has all of the following rights EXCEPT the right to vote: a. for the Board of Trustees b. to change the separate account's investment objective c. for distributing income and capital gains d. for dissolutions of the trust

for distributing income and capital gains

A variable annuity is a(n) A. exempt security under the Securities Act of 1933 B. non-exempt security under the Securities Act of 1933 because the purchaser bears the investment risk C. non-exempt security under the Securities Act of 1933 because the issuer bears the investment risk D. insurance product that is not defined as a security, and thus is not subject to securities regulations

non-exempt security under the Securities Act of 1933 because the purchaser bears the investment risk Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

A variable annuity is a(n): I. security regulated under the Investment Company Act of 1940 II. insurance product that is not regulated under the Investment Company Act of 1940 III. security that must be sold with a prospectus IV. insurance product that has no prospectus requirement

security regulated under the Investment Company Act of 1940 security that must be sold with a prospectus Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940.

Payments into a variable annuity contract are deposited to the insurance company's: A. general account B. special account C. separate account D. special memorandum account

separate account Monies deposited to a variable annuity are deposited into a separate investment account (that is, separate from the insurance company's general investment account). The separate account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity received.

Distributions from variable annuity contracts at retirement age are: A. non-taxable B. taxable as ordinary income on any amount above the customer's cost basis C. taxable as long term capital gains on any amount above the customer's cost basis D. 100% taxable

taxable as ordinary income on any amount above the customer's cost basis Contributions to variable annuity contracts are not tax deductible. Therefore, they go into the separate account as "after-tax" dollars and are considered to be the "cost basis" in the account for tax purposes. Any "build-up" (earnings) in the account is tax deferred. When distributions commence, only the "build-up" portion is taxed - this is the amount above the cost basis in the account.

A registered representative has a customer, age 50, in the 35% tax bracket, who just sold his house for a 1-time gain. The customer intends to downsize, and after buying a smaller home, will have $400,000 to invest. The customer intends to retire in 15 years. The registered representative could recommend that the customer purchase a variable annuity separate account with a growth objective because: A. once the customer reaches retirement age, there is no tax due on distributions taken B. a variable annuity investment held long term will always outperform a fixed annuity contract C. the contribution will be tax deductible, giving the customer a substantial 1-time tax savings D. the earnings build tax-deferred during the 15 year period until retirement

the earnings build tax-deferred during the 15 year period until retirement There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account. Since the return will vary based on the performance of the underlying growth mutual fund, it is not true that it will always be higher than the return from a fixed annuity. When distributions are taken at retirement age, they are taxable as ordinary income, so it is not true that there is no tax due when distributions are taken.