Annuities and Variable Products
Variable annuities sold by insurance companies must be registered with: I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission
I and IV only Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.
Which TWO of the following statements are TRUE regarding the cash value in a variable universal life policy? I. It is fixed during the life of the contract II. It can fluctuate with the performance of the separate account III. Any loans taken will reduce the cash value IV. Loans have no effect on the cash value
II and III In a variable universal life policy, the performance of the separate account could increase or decrease the cash value. Loans against the policy will reduce the cash value available.
Which TWO of the following statements are TRUE regarding a variable annuity accumulation unit? I. It is an accounting measure used to determine an owner's interest during the pay-in phase II. It is an accounting measure used to determine an owner's interest during the payout phase III. The value of the units will remain fixed IV. The value of the units will fluctuate
I and IV Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase. Their value will vary based on the performance of the separate account. (Annuity units are used during the annuity or payout phase.)
The value of an investor's interest in a variable annuity during the accumulation period is subject to fluctuation according to the: I. AIR II. Amount of money deposited III. Performance of the separate account
II and III only In a variable annuity, as investors add additional deposits to the separate account, the value of their investment will rise through the purchase of additional accumulation units. If the account performance is positive, the value of each accumulation unit will rise. The AIR is important in valuing a variable annuity only during the annuity (payout) period.
Which of the following annuities offers the shortest surrender period to avoid sales charges? a. L shares b. C shares c. A shares d. B shares
A. L shares Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC), typically have surrender periods of seven to eight years before sales charges disappear. A shares, are front-end loaded and C shares typically have associated 12b-1 fees.
As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? a. Fixed annuities b. Variable annuities c. Corporate bonds d. Mortgage-backed securities
B. variable annuities Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods.
According to industry rules, how long should investors wait between 1035 exchanges of variable contracts? a. One year b. Five years c. 36 months d. The lesser of five years or the remaining surrender charge period
C. 36 months Exchanges of variable contract assets must be scrutinized for both frequency and suitability. The relevant look-back period is typically 36 months.
Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? a. There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate b. There are gift taxes due from his beneficiary in the year he died c. The value of the policy will be included in Richard's estate for tax purposes d. The policy proceeds are federally taxable to the beneficiary
C. the value of the policy will be included in Richard's estate for tax purposes Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.
The separate account of a variable life policy has performed poorly for some time. A client is concerned about her cash value and death benefit. Which of the following statements is TRUE? a. The cash value is guaranteed b. The cash value may decline, but not below a contractual minimum c. The death benefit is the lesser value of the contract or the amount of the investment d. The death benefit may decline, but not below a contractual minimum
D. the death benefit may decline, but not below a contractual minimum If the performance of the separate account of a variable life insurance policy is less than the assumed interest rate (AIR), the death benefit will decline. However, the death benefit can never drop below the face value of the policy. The cash value may also decline. However, there is no guaranteed minimum.
Suitability in variable annuity transactions does not apply in which of the following situations? a. A purchase of a new variable annuity b. An employee's contribution to his 403(b) plan c. A 1035 exchange from one variable annuity to another d. The allocation of funds to the subaccount products within a variable annuity
B. an employee's contribution to his 403(b) plan FINRA focuses on the suitability of annuity transactions in the purchase of new contracts, exchanges, and the allocation of funds to the subaccount products within the annuity. Annuity transactions in tax-qualified, employer-sponsored annuity programs (e.g., 403(b) plans) is not subject to FINRA's rules. However, the allocation of funds to the various subaccount products within the qualified plans is covered.
Within how many days of receipt must a principal approve or disapprove an application to purchase a variable annuity? a. 3 business days b. 5 business days c. 7 business days d. 10 business days
C. 7 business days An application to purchase a variable annuity received by a broker-dealer must be approved or disapproved by a principal no later than 7 business days after receipt. Should an insurance company receive an application without a principal's approval, the application must be rejected.
A person who purchases an annuity with an expectation that she may consider exchanging into another better performing annuity after three years, should consider purchasing: a. B shares b. L shares c. A shares d. None of these type of shares since a person should not exchange into another annuity within such a short period
B. L shares Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC) typically have surrender periods of seven to eight years before sales charges disappear. Suitability is the main consideration when deciding whether to purchase or exchange into an annuity. Generally, exchanges that are made within three years are considered unsuitable, especially if deferred sales charges apply. However, L shares offer an opportunity to avoid sales charges after the short surrender period.
When engaging in a 1035 exchange an individual should be aware that: a. The exchange is a taxable event b. The exchange is not a taxable event but the new annuity may come with additional restrictions c. The exchange is not a taxable event and the policies of the old annuity are remain in place d. The exchange is only permitted if it is unsolicited
B. the exchange is not a taxable event but the new annuity may come with additional restrictions The primary benefit of a 1035 exchange is that it is not taxable. However, the new annuity may come with new restrictions making it unsuitable for the investor.
A 60-year-old investor has contributed $30,000 to a non-qualified variable annuity. The annuity's value has increased to $40,000. If the investor withdraws $20,000 and is in a 28% tax bracket, his tax liability is: a.0 b.$1,400 c.$2,800 d.$5,600
C. $2,800 The amount contributed to a non-qualified variable annuity may not be deducted from income; in other words, the contribution is made after-tax. However, all of the earnings will accrue on a tax-deferred basis. Any withdrawal from the annuity will be taxed on a LIFO basis, which means that the earnings (last in) will be considered the first to be withdrawn and will be taxed. If being withdrawn, the earnings are taxed as ordinary income, but the invested amount is considered a return of capital and is not taxed. In this question, the annuity has earnings of $10,000 (from $30,000 to $40,000), but the investor is withdrawing $20,000. Therefore, the first portion of the withdrawal is the $10,000 of earnings (which is taxable at the investor's ordinary rate) and the remaining $10,000 is considered a return of capital (which is untaxed). This results in tax liability of $2,800 ($10,000 of earnings x 28% tax bracket).
Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)? a. It offers a guaranteed minimum rate of return b. It provides a return that is based on the performance of a stock market index c. It is considered a security d. It provides tax-deferred growth
C. it is considered a security 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.
The fluctuations in the value of a variable annuity will correspond with the fluctuations in the: a. Dow Jones Industrial Average b. Value of the index or average on which the payout is based c. Value of the securities held in the separate account of the annuity d. Cost of living index
C. value of the securities held in the separate account of the annuity The fluctuations in the value of a variable annuity will correspond with the fluctuations in the value of the securities held in the separate account of the annuity. This is the securities portion of the annuity.
In order to sell variable annuities to clients, a person must hold which of the following? a. A life insurance license only b. A securities registration only c. A life insurance license and securities registration d. No licenses or registrations
C. a life insurance license and securities registration Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.
According to FINRA, the maximum sales charge on a variable annuity contract is: a. 0% b. 5% c. 8.5% d. An amount that is fair and reasonable
D. an amount that is fair and reasonable There is no statutory maximum sales charge on variable annuities or variable life insurance policies. The sales charges must be fair and reasonable.
Which of the following statements is TRUE concerning periodic payment variable annuities? a. A client's number of annuity units never changes b. A client's number of accumulation units never changes c. Annuity contracts never have a beneficiary d. The monthly payout is fixed by the inflation index
A. a client's number of annuity units never changes 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 statements is TRUE concerning the suitability of a Section 1035 exchange? a. Exchanges made within 36 months of a previous exchange are generally considered inappropriate b. The exchange is suitable if the new contract provides a higher return c. New surrender periods are not considered important when making an exchange d. The representative need not sign off on the recommended exchange
A. exchanges made within 36 months of a previous exchange are generally considered inappropriate In order for a 1035 exchange to be considered appropriate, the individual must benefit from the new contract, and the representative must sign off on its suitability. Exchanges made within 36 months of a previous exchange are generally considered inappropriate. Higher returns do not guarantee suitability. Surrender periods on the new contract are one of the major factors in determining suitability.
Which annuity settlement option provides a payout period of at least 20 years or for the annuitant's lifetime, whichever is greater? a. Life annuity with period certain b. Life annuity c. Joint and last survivor life annuity d. Unit refund life annuity
A. life annuity with period certain This is a description of a life annuity with period certain (in this case, 20 years). It is the best settlement payout option. This option will provide monthly or other periodic payments to the annuitant for life. However, if the annuitant dies prior to the end of the specified period, the beneficiary will receive a lump-sum payment or continue to receive installments until the end of the period certain. A life annuity is a contract in which an annuitant receives payments for as long as she lives, but this method makes no provision for a designated beneficiary. Under a unit refund life annuity, periodic payments are made during the annuitant's lifetime. If the annuitant dies before an amount equal to the value of the annuity units is paid out, the remaining units will be paid to a designated beneficiary. A joint and last survivor life annuity is an option in which payments are made to two or more persons.
Which of the following choices is found in a variable annuity but not in a mutual fund? a. Mortality expenses b. A management fee c. A sales charge d. Administrative expenses
A. mortality expenses Mortality expenses are charged against the account to provide the death benefit found in annuities, as well as to cover the cost of potentially providing the annuitant with payments for life. All other expenses or fees can be found in both mutual funds and annuities.
A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company: a. Must reject the application b. Can process the application c. Must notify FINRA before processing d. Can only process the application after contacting the client
A. must reject the application Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected.
Section 1035 of the Internal Revenue Code: a. Permits the tax-free exchange of one annuity contract for another b. Forbids the tax-free exchange of an insurance policy for a new life insurance policy c. Forbids the tax-free exchange of an insurance policy for a new annuity contract d. Permits the tax-free exchange of an annuity contract for a life insurance policy
A. permits the tax-free exchange of one annuity contract for another 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.
Which of the following factors is NOT used in determining the value of an annuity unit? a. The assumed interest rate b. The value of the separate account c. Income distributions from securities held in the separate account that are reinvested d. Capital gain distributions from securities held in the separate account that are reinvested
A. the assumed interest rate The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.
Which of the following statements is TRUE concerning periodic payment variable annuities? a. The number of a client's annuity units never changes b. The number of a client's accumulation units never changes c. They never have a beneficiary d. The monthly payout is fixed by the inflation index
A. the number of a client's annuity units never changes 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 first monthly payout is determined actuarially and thereafter is based on the performance of the separate account.
A registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client? a. A fixed annuity b. An equity-indexed annuity c. A variable annuity d. A variable life insurance policy
B. an equity-indexed annuity An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity—guaranteed rate of growth—as well as those of a variable annuity—growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market.
An individual considering moving to the payout phase of a variable annuity should understand the payments will: a. Never be less than the cost basis in the separate account b. Be based on the performance of the subaccount products in the separate account c. Be based on the performance of the subaccount products in the separate account plus the AIR d. Be based on the performance of the subaccount products in the separate account minus the AIR
B. be based on the performance of the subaccount products in the separate account The investor assumes the risk when purchasing a variable annuity. Once annuitized, the number of annuity units remains the same and payments are based on the performance of the subaccount products in the separate account, and the chosen settlement option. Should the value of the separate account fall below the investor's cost basis, the payments may amount to less than the cost basis.
The payout on a variable annuity is based on a: a. Fixed number of accumulation units with a fluctuating value per unit b. Fixed number of annuity units with a fluctuating value per unit c. Fixed value per unit with a fluctuating number of annuity units d. Fixed number of annuity units with a fixed value per unit
B. fixed number of annuity units with a fluctuating value per unit When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units.
Which of the following annuity settlement options would provide the longest stream of income over the lives of two individuals? a. Life annuity with a 20-year period certain b. Joint and last survivor annuity c. Unit refund life annuity d. Straight-life annuity
B. joint and last survivor annuity The joint and last survivor settlement option would provide the longest stream of income as it guarantees payments until the last annuitant dies. The life annuity with 20-year certain would result in payments ending after 20 years even if the survivor was still alive. The unit refund life annuity will only refund the balance of what is left over after the annuitant dies. Payments cease after the annuitant dies in a straight-life annuity.
A person purchases a non-qualified variable annuity and dies at the age of 57. The tax implication is: a. No penalty and the entire amount is taxable b. No penalty and the difference between the amount invested and the death benefit is taxable c. A 10% penalty and entire amount is taxable d. A 10% penalty and the difference between the amount invested and the death benefit is taxable
B. no penalty and the difference between the amount invested and the death benefit is taxable As a general rule, if an annuitant withdraws the proceeds of his non-qualified variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable as ordinary income.
Ted Wilson, a registered representative with Ralston Financial, has recommended to his client the purchase of a mutual fund as well as a variable annuity contract underwritten by the same sponsor, Slipstream Growth Fund and Slipstream Variable Annuity. The client has decided to purchase both investments, filling out the applications and forwarding them with one payment for both. Which of the following statements is TRUE regarding the purchases? a. The mutual fund and variable annuity may be purchased without a principal's approval, if suitable b. The growth fund may be purchased immediately but the variable annuity purchase must first be approved by a principal c. The variable annuity may be purchased immediately but the mutual fund must first be approved by a principal d. Both the mutual fund and the variable annuity purchases must be approved by a principal prior to initiating the purchases
B. the growth fund may be purchased immediately but the variable annuity purchase must first be approved by a principal A lump-sum payment may be received for both purchases. The money for the variable annuity may be allocated only after a principal has approved the purchase in writing. The money for the mutual fund may be allocated immediately and does not require a principal's approval.
A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations? a. The initial purchase of a variable annuity b. The reallocation of assets among subaccounts after the initial purchase c. The exchange of one variable annuity for another d. The initial subaccount allocations
B. the reallocation of assets among subaccounts after the initial purchase According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to: • New purchases • Exchanges • Initial subaccount allocations These rules do not apply to the reallocation of subaccount assets after the initial purchase, nor do they apply to purchases of employer-sponsored qualified plans unless a recommendation is made regarding the allocation of subaccount assets in the initial purchase. Many states and brokerage firms require documentation of a customer's acknowledgment of a replacement transaction. These switch acknowledgement forms are typically signed by the annuity contract owner and the salesperson. The acknowledgement form provides a comparison of the features and costs of an existing contract to a proposed contract, and points out the relevant factors to be considered when contemplating an exchange.
According to suitability rules, 1035 exchanges should occur not more frequently than once every: a. 12 months b. 24 months c. 36 months d. 48 months
C. 36 months 1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include: • Age • Annual income • Financial situation and needs • Investment experience and objectives • Intended use of the deferred variable annuity • Investment time horizon (not intended for senior citizens) • Existing assets • Liquidity needs • Liquid net worth • Risk tolerance • Tax status
Ms. Brown owns a variable annuity that has a life annuity payout option with a 20-year period certain. If Ms. Brown dies after 14 years of payments: a. Future payments will continue for life to a named beneficiary b. Future payments will continue for 20 years to a named beneficiary c. Future payments will continue for 6 years to a named beneficiary d. No additional payments will be made
C. future payments will continue for 6 years to a named beneficiary If the owner of a 20-year period certain annuity dies, the annuity company will pay a named beneficiary for the time remaining on the 20-year period. Since Ms. Brown died after 14 years, the remaining 6 years will be paid to a beneficiary and then payments cease. If Ms. Brown had survived the 20-year period, payments would continue for her life, but there is no beneficiary.
Which of the following statements concerning a tax-qualified annuity is TRUE? a. It has a zero cost basis and grows tax-free b. It is not subject to contribution limits c. It has a zero cost basis and grows tax-deferred d. It may be subject to tax-free distributions, if qualified
C. it has a zero cost basis and grows tax-deferred 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.
For variable annuities, which of the following payout options provide the highest payout? a. Joint and last survivor life annuity b. Life annuity with period certain c. Life annuity d. Unit refund life annuity
C. life annuity 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 is TRUE about variable annuities? a. The dollar amount of payments is guaranteed b. Participants may not vote to change objectives c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period d. Annuity payments are of a constant dollar amount throughout the payout period
C. payout is based on a number of annuity units, which remains fixed for the duration of the payout period 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.
A registered representative is taking over the business of another RR who is leaving the firm. Upon examining the accounts, the RR notices that the variable annuities owned by many of the clients have high expenses, mediocre performance, and few investment options. The RR decides that her first action will be to recommend that these customers redeem the old annuities and invest in the new Platinum One variable annuity that has substantially lower expenses, higher long-term performance, and many more subaccounts with varying investment strategies. This activity is: a. Known as churning and is strictly prohibited b. Called switching and is permitted only in those accounts that will not incur a deferred sales charge c. Potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client might incur d. Permitted only if the customer signs a switch waiver form
C. potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client may incur The practice of recommending that a client redeem one annuity or mutual fund and invest the proceeds in another annuity (or fund) is called switching. When redeeming the first annuity, the investor might incur deferred sales charges and a tax liability. (The tax liability can be avoided if the switch is eligible to be treated as a Section 1035 exchange.) The reinvestment in another annuity might also involve sales charges or might subject the investor to an additional period when surrender charges could be imposed on redemptions. These disadvantages mean that switching is frowned on by regulators, who suspect the RR involved is often motivated by the prospect of additional commissions rather than the client's best interests. However, when the new annuity is clearly superior to the old product, the additional benefits might outweigh the disadvantages.
A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? a. All proceeds pass to the beneficiary tax-free b. Proceeds in excess of cost are taxable as capital gains to the beneficiary c. Proceeds in excess of cost are taxable as ordinary income to the beneficiary d. Proceeds are not taxable if the beneficiary rolls them over into an IRA
C. proceeds in excess of cost are taxable as ordinary income to the beneficiary 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.
Which of the following statements is NOT considered misleading regarding a variable annuity communication? a. Telling a client that a variable annuity is a mutual fund b. Representing that a variable annuity will meet short-term liquidity needs c. Telling a client about the negative impact of an early redemption d. Making a representation that a death benefit guarantee applies to the investment return of the annuity
C. telling a client about the negative impact of an early redemption FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption.
A variable life insurance policy has an AIR of 5%. The separate account recently performed at a 4% rate of return. Which of the following statements BEST describes the effect of this rate of return on the death benefit of the policy? a. The death benefit will increase as long as the rate of return is positive b. The death benefit will decrease to a determined level c. The death benefit will decrease, but not below the guaranteed minimum d. The rate of return of the separate account affects only the cash value, not the death benefit
C. the death benefit will decrease, but not below the guaranteed minimum If the return of the separate account exceeds the AIR, the death benefit will increase. If the return of the separate account is less than the AIR, the death benefit will decrease. However, the death benefit may not decrease below the initial face value of the policy.
Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons? a. Whole life insurance b. Variable life insurance c. Universal life insurance d. Variable universal life insurance
D. variable universal life insurance Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.
A 65-year-old individual is in need of immediate cash to pay for repairs on his house and takes a lump-sum distribution from a nonqualified variable annuity. This withdrawal will be: I. Partially treated as ordinary income II. Partially treated as capital gain III. Taxed at the investor's tax bracket IV. Taxed at a reduced tax rate
I and III A nonqualified variable annuity is purchased independently by individuals and is not related to their employment. Any contribution into a nonqualified contract is made with after-tax dollars. Therefore, only the appreciated value portion of withdrawals would be taxed as ordinary income and the remainder would be considered as return of capital (amount invested), which is not taxed. If a withdrawal is made prior to age 59 1/2, the ordinary income portion of the withdrawal is assessed a 10% penalty.
When comparing variable annuities to fixed annuities, investment risk is assumed by the: I. Investor in a variable annuity II. Annuity company in a variable annuity III. Investor in a fixed annuity IV. Annuity company in a fixed annuity
I and IV In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.
An individual is in the third year of accumulating an interest in a variable annuity with a deferred sales charge. A registered representative recommends a switch to a newly created variable annuity with a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements are TRUE of this switch? I. FINRA will probably consider the switch unsuitable II. FINRA will probably not consider the switch unsuitable, since both annuities are offered with a deferred sales charge III. The switch is taxable if it qualifies as a 1035 exchange IV. The switch is not taxable if it qualifies as a 1035 exchange
I and IV Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to the highest deferred sales charge, thus making the switch unsuitable. If a registered representative recommends that a client switch from one annuity to another within a three-year period, the representative may be considered to be churning. An exchange of annuities that qualifies for IRS Section 1035 treatment is not a taxable event.
Which TWO of the following statements are TRUE concerning the death benefit on a variable annuity? I. The benefit skips the probate process II. The benefit must go through probate prior to distribution III. The beneficiary receives the proceeds tax-free IV. The beneficiary may have a tax liability when receiving the proceeds
I and IV The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a nonspouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions.
A registered representative has recommended the purchase of a variable annuity to a customer who subsequently completes the application. Which TWO of the following statements are TRUE concerning the application? I. The contract is forwarded directly to the insurance company II. The contract is forwarded to the representative's Office of Supervisory Jurisdiction (OSJ) III. A principal need not approve the transaction IV. A principal must approve the transaction within 7 business days
II and IV Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company.
One of your clients who makes a comfortable living, has set aside funds in a money-market account in case of emergency and has contributed the maximum amount to her company's 401(k) and her IRA. She is looking to set aside additional funds for retirement and would like a vehicle that does not subject her to taxation on any growth until she begins taking distributions. Which of the following choices would be most suitable for your client? a. A variable annuity b. Variable Life Insurance c. A Roth IRA d. A 529 Plan
A. a variable annuity Since your client has already contributed the maximum to her retirement plans, contributing to a variable annuity would be her remaining retirement option. While the contributions would be after-tax, the account will grow tax-deferred and will not be taxed until she begins taking distributions. She would not be eligible to contribute to a Roth IRA. While variable life insurance has investment characteristics, it is used to provide death benefits and not for retirement purposes. 529 plans are used to satisfy the need to cover higher education expenses.
Many investors prefer to receive variable annuity payments under the straight-life payout option because this option: a. Is the most conservative method for receiving payments b. Allows for a beneficiary for the entire payout period c. Provides the maximum cash flow of all payout options d. Provides an equal payment each month for the investor's lifetime
C. provides the maximum cash flow of all payout options Annuitants will receive the greatest cash flow from the straight-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.
A variable annuity has an AIR of 4%. This past year, the separate account grew at a rate of 12%. The appreciation in the separate account: a. Will be taxed to the investor during the accumulation period as ordinary income b. Is taxable only to the separate account c. Will increase an annuitant's monthly payment from the annuity d. Will have no effect on the investor because the investor is guaranteed only a 4% payment increase during the year
C. will increase an annuitant's monthly payment from the annuity If the separate account of a variable annuity grows at a greater rate than the AIR, monthly payments from the annuity will increase.
The MOST appropriate buyer(s) for a variable life insurance policy is/are: a. A person who requires the discipline of forced savings b. Parents with a modest income who have young children c. A person who wants the assurance of a guaranteed cash value d. A person with an understanding of investments who can tolerate market risk
D. a person with an understanding of investments who can tolerate market risk Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.
An individual considering the purchase of an equity-indexed annuity should understand that: a. The return over long periods of time will equal the underlying index b. These products tend to outperform the stock market over long periods of time c. These products do not have sales charges or surrender fees like mutual funds and should only be purchased by seniors who want a death benefit and life payout d. The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum
D. the return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return or the guaranteed minimum) Equity indexed annuities (EIAs) are a hybrid product that combines the elements of fixed and variable annuities. They provide a guaranteed minimum rate of return, but their performance is linked to a securities stock market index. Participation in the return found in the index is usually less than 100% and the calculation excludes dividends, which are normally based solely on appreciation. These products typically have surrender charges, fees based upon the riders selected, generally making these unsuitable for senior citizens or those needing access to their money.
Which of the following calculations describes the payout on a variable annuity? a. A fixed number of annuity units multiplied by a fixed dollar amount b. A fixed number of annuity units multiplied by a variable dollar amount c. A variable number of annuity units multiplied by a fixed dollar amount d. A variable number of annuity units multiplied by a variable dollar amount
B. a fixed number of annuity units multiplied by a variable dollar amount 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.
An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed
II and IV Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.
A variable annuity would be MOST suitable for which of the following customers? a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs b. A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs c. A client who is purchasing the annuity in a 401(k) for his retirement needs d. A client who is purchasing the annuity in order to have the funds available by the age of 50
A. a client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies.
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: a. Variable annuity contract plan b. Closed-end investment company c. Mutual fund with plan completion life insurance d. Variable life insurance contract
D. variable life insurance contract A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.
An accumulation unit in a variable annuity contract is: a. An accounting measure used to determine the contract owner's interest in the separate account b. An accounting measure used to determine payments to the owner of the variable annuity c. The same as a shareholder's ownership interest in a mutual fund d. The same as the insurance company's profit from the separate account
A. an accounting measure used to determine the contract owner's interest in the separate account 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.
Which annuity settlement option would provide the greatest monthly return for an individual? a. Life annuity with a 5-year certain b. Life annuity with a 10-year certain c. Life annuity with a 20-year certain d. Unit refund life annuity
A. life annuity with a 5-year certain A life annuity with a short period certain settlement option would have a greater monthly payout than a unit refund life annuity settlement option since choice (a) only guarantees payments for five years whereas choice (d) guarantees payout of all accumulated value less expenses. The shorter the period certain the greater the risk the annuitant's beneficiary will not receive any payments, which will be rewarded with a higher payment to the annuitant.
The purchaser of a variable life insurance policy bears which of the following risks? a. The death benefit may fall to zero due to poor market performance b. The policy may have no cash value if the separate account performance is negative c. The insurance company may increase the premiums if the investment performance of the separate account is poor d. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account
B. the policy may have no cash value if the separate account performance if negative The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.
Fred Brick recently requested annuitization after contributing to a variable annuity for 12 years. The actuary applied an assumed interest rate of 3% and determined his first payment. The performance of the separate account on an annualized basis for the three months following annuitization is: 5%, 3%, and 4%, respectively. Which of the following statements can be made about Mr. Brick's payments? a. Payments rose in each of the three months b. Payments remained the same in each month c. The third payment was higher than the previous month's payment d. His total payments have increased by 12%
C. the third payment was higher than the previous month's payment If the performance in the separate account is greater than the assumed interest rate (AIR), payments will increase. If performance is less than the AIR, payments will decline, and if performance equals the AIR, payments will remain the same. Comparisons are made to the previous month and not to the original month. In the third month, the performance of 4% was higher than the AIR, resulting in a payment that was greater than the previous month's payment.
If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact? a.There is a 10% penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital b. There is no penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital c. There is a 10% penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates d. There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates
D. there is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates As a general rule, if an annuitant withdraws the proceeds of his variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable at ordinary income tax rates.
