SIE Exam, Chapter 08

Which of the following statements is NOT a characteristic of a 529 plan?

Contributions are unlimited. Further Info: Contributions to a 529 plan are not unlimited. Instead, each state determines the dollar value that may be contributed.

Which of the following statements is TRUE concerning periodic payment variable annuities?

A client's number of annuity units never changes. Further Info: 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.

Which of the following amounts may a customer contribute each year to a 529 college savings plan without incurring any taxes?

An amount equal to the annual gift tax exclusion. Further Info: 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.

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?

Joint and last survivor life annuity. Further Info: 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 factors will impact the value of a variable life insurance policy?

The performance of the separate account. Further Info: The cash value of a variable life insurance policy is primarily based on the performance of the separate account.

What is the maximum contribution that can be made to a 529 plan without being subject to gift taxes?

$150,000 from a married couple if no further contributions are made for the next five years. Further Info: 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.

Which of the following calculations describes the payout on a variable annuity?

A fixed number of annuity units multiplied by a variable dollar amount. Further Info: 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.

Which of the following investors is not a typical candidate for a variable annuity?

A senior investor. Further Info: 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:

Allowed to accumulate on a tax-deferred basis. Further Info: The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.

Which of the following is TRUE concerning a 529A or ABLE account?

Earnings will not be taxed if they're used for any qualified expense. Further Info: 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.

For variable annuities, which of the following payout options provide the highest payout?

Life annuity. Further Info: 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 concerning a tax-qualified annuity is TRUE?

It has a zero cost basis and grows tax-deferred. Further Info: 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.

The beneficiary of a Section 529 plan may make qualified withdrawals from the plan for:

Paying the tuition for an out-of-state college. Further Info: Qualified higher education expenses include tuition, books and supplies, as well as room and board while attending college. Although not referenced in this question, on an annual basis, up to $10,000 in distributions from 529 plans can be used to pay for private school tuition and books for grades K through 12. The other withdrawals are subject to federal tax liabilities.

Which of the following statements is TRUE about variable annuities?

Payout is based on a number of annuity units, which remains fixed for the duration of the payout period. Further Info: 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.

When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:

Probate fees. Further Info: 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.

Which of the following features applies to a variable annuity, but not to a mutual fund?

Tax-deferred growth. Further Info: For investors, one of the key benefits of a variable annuity is tax-deferred growth. Mutual funds do not have this feature.

The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that:

The account owner may lose financially if the student does not attend a public school in that state. Further Info: 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.

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?

The investor is permitted to change the allocation of the investments within the separate account. Further Info: 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.

Regarding the characteristics of an annuity contract, which of the following statements is TRUE?

The type of annuity chosen will partially impact the payment amounts to the annuitant. Further Info: The specific type of annuity (e.g., fixed or variable) and payout option selected (e.g., straight life or joint and last survivor) will impact the amount of money an investor will receive from an annuity. Investors can use annuities to help save for retirement; however, investors are taxed on the earnings or growth when money is withdrawn. The amount of money investors receive when they annuitize their contracts into a stream of payments is dependent on their age and gender. During the annuitization phase of a variable annuity, the payouts are based on performance of the separate account, not on the insurance company's returns.

A person who invests in a fixed annuity is most concerned with the performance of the insurance company's:

General account. Further Info: 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.

A 529A or ABLE account is permitted for which of the following persons?

A person who has a significant disability. Further Info: 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.

Which of the following entities typically sponsors a 529 plan?

A state. Further Info: 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.

An accumulation unit in a variable annuity contract is:

An accounting measure used to determine the contract owner's interest in the separate account. Further Info: 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.

If an individual is considering moving to the payout phase of a variable annuity, she should understand that the payments will:

Be based on the performance of the subaccount products in the separate account. Further Info: When a person purchases a variable annuity, she assumes the investment risk. Once annuitized, the number of annuity units on which payments are based remains the same, but the payments will be influenced by the performance of the subaccount products in the separate account as well as the settlement option chosen. If the value of the separate account falls below the investor's cost basis, the payments may amount to less than the cost basis.

Which of the following features applies to a variable annuity, but not to a mutual fund?

Death benefit. Further Info: 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.

Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)?

It is considered a security. Further Info: 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.

A person who invests in a variable annuity would be MOST concerned with the performance of the insurance company's:

Separate account. Further Info: 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.

A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?

Proceeds in excess of cost are taxable as ordinary income to the beneficiary. Further Info: 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 assets in a Section 529 College Savings Plan may be transferred to another beneficiary without a tax penalty:

Provided the second beneficiary is a member of the first beneficiary's family. Further Info: 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.

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?

Straight life with period certain. Further Info: 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.

All of the following statements are TRUE about 529 Prepaid Tuition Plans, EXCEPT:

The beneficiary may use the tuition credits purchased at virtually any college or university in the United States. Further Info: 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.

When determining the suitability of the recommendation of a 529 college savings plan, which of the following should a registered representative consider?

The deductibility of contributions from state income taxes. Further Info: Contributions to a 529 plan are non-deductible at the federal level; however, if an investor uses his home state's plan, contributions are often deductible for state income taxes. If an investor uses assets from a 529 plan for qualified education expenses, the earnings are tax-free at the federal level (i.e., like a Roth IRA). Unlike an UGMA or UTMA account, 529 plan assets don't need to be transferred when the beneficiary reaches the age of majority.