Series 66 - Unit 15

A variable life insurance plan may charge a maximum sales charge of

9% over a period not to exceed 20 years.

John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments?

His annuity payments are partly taxable and partly tax-free return of capital.

randow withdrawals from an annuity use

L:IFO

there are no

age restrictions with annuities

EIAs (equity indexed annuities) almost always come with a

cap rate, a ceiling beyond which earnings cannot be credited to the investor's account.

EIA offers a

guaranteed floor (minimum return)

The owner of a fixed annuity is protected against

longevity risk.

the equity index annuity is

not considered a security.

variable annuity

offers an investor the opportunity to have tax-deferred participation in the equity markets

64-year-old woman wishes to withdraw funds from her nonqualified single premium deferred variable annuity purchased a number of years ago. The withdrawal would be

taxed as ordinary income Yes, I know that only the portion of the withdrawal that exceeds the cost basis is subject to tax, but what else are you going to pick here? Sometimes you have to go with the best choice, even if it isn't the most accurate.

sump sum withdrawals

use LIFO

An investor purchases a single premium deferred index annuity with a 6% bonus feature. The premium was $100,000. The annuity has an 80% participation rate with a 10% cap. If the underlying index increased by 15%, the account's value at the end of the year would be closest to

$116,600. The 6% bonus means that the client's initial payment is increased by 6%. That means the account shows a starting balance of $106,000. Although the index increased by 15% and the participation rate of 80% would be a 12% growth rate, the cap of 10% comes into play. That makes the calculation: $106,000 x 110% or $116,600.

bonus ann

- not uncommon for index annuities (and variable) to offer a bonus on top of the investor's intial contribution - if investing 60k with a 5% bonus would result in an initial 63K balance

Withdrawals from nonqualified annuities (all annuities on the exam are nonqualified unless otherwise specified) are taxed on a

LIFO basis. That is, the last money in (the earnings) is considered the first money withdrawn

maximize monthly payments to be received

Straight life When one annuitizes, the amount of the annuity payment is highest when the annuitant takes the most risk (and the insurance company the least). Straight life payments end upon the death of the individual, and if that should be the following month, the insurance company keeps the rest of the money.

the participation rate

The percentage of the index's return the insurance company credits to the annuity is determined by the participation rate

It is not uncommon to find index annuities offering

a bonus added to the premium

annuity unit

a measure of value used only during an annuitized contract's payout period

AIR

basis of determining distribution from a variable annuity

Both Variable and EIA are issued

by life insurance companies

The face value in an insurance policy is the

death benefit.

Universal life

does not invest in the market through a separate account universal variable does

there may be a surrender charge in the case of

early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares

universal life has

flexible premiums

In a variable life policy, the face value will

fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.

In general, variable annuity expenses are

higher than those of a mutual fund with similar objectives

high-water mark

highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year - can provide highest gains

Incurring the surrender fee for the 1035 exchange of one contract and initiating a new long-term contract is

inappropriate for a customer, in general, and particularly for this customer, considering her need to access her funds only two years later.

As long as the policy has cash value,

loans are permitted

An index annuity does not participate in

losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at the same

annual reset has a

lower participation rate than point to point

Using the annual high-water mark with look back will generally result in

the highest return during periods of high volatility

point-to-point

the interest is computed based on the value of the index at the end of the contract compared to the beginning - a variation is annual point-to-point

annual-reset

the interest to be creditied to the acccount is computed bu comparing the index value at the end of the year to the value at the beginning of the year - has a lower participation rate then point to point

averaging

the most common is a monthly average and this can be the best options when markets are expected to highly volatile

theoretically, no limit as to how much one could earn with a

variable annuity.