Chater 2 Other Securities Products 13 questions
Universal variable life policies:
Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. Because they have a separate account, the investor assumes the investment risk. Unlike scheduled premium variable life, flexible premium (universal) variable life does not guarantee a minimum death benefit equal to the face amount of the policy.
In a limited partnership program, which partners manage the partnership's day-to-day operations and incur unlimited personal liability for the partnership's debts?
The general partners. In a limited partnership, the general partners manage the day-to-day operations and incur unlimited personal liability. Limited partners invest money in the partnership and are liable for the partnership's debts only up to the amount invested. They are denied a voice in the management of the partnership.
Which of the following best describes the death benefit provision of a variable annuity?
The principal amount at death is the greater of the total of premium payments or the current market value. The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income.
Last year, the bond market was profitable and ABC fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely:
an Asset allocation fund. A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund.
An investor who buys a stock and wishes to limit the potential downside risk should:
buy a put. The purchase of a put limits the downside risk to the difference between the stock price and the put's strike price.
Flow-through is one of the features of
direct participation plans Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program "flows through" to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses.
The type of security that gives the holder the right, but not the obligation, to sell a certain number of shares of stock for a specified price during a specified period is a:
put option. A put option gives the holder the right to sell a certain number of shares of stock for a certain price within a certain period. A call option gives the holder the right to buy shares of stock for a certain price during a certain period.
All of the following are advantages of universal life insurance EXCEPT:
the policy is guaranteed never to lapse. A universal life policy may lapse if the accumulation fund drops below a specified level and an additional premium is not paid.
Which of these features are common to both variable annuities and scheduled premium variable life insurance?
All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive one vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit, not to cash value.
Which of the following types of investment company securities is the most likely to have a NAV that is 90% of its offer price?
Closed-end company share. The market determines the offer price of closed-end company shares; the offer price may be either more or less than the NAV. Because the NAV in this situation is 90% of the offer price, this must be a closed-end share. An open-end share's NAV must be at least 91.5% of its offered price because the maximum sales charge on open-end shares is 8.5% of the POP.
Among the unique characteristics of a universal life insurance policy is
The correct answer was: the policy may be overfunded Only with universal life is the policyowner permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Many forms of life insurance have surrender charges for early termination.
Which of the following describe differences between variable and universal variable life insurance?
Variable life insurance provides a minimum guaranteed death benefit because some of the premium goes into the general account and some goes into a separate account. With universal variable life insurance, the entire premium goes into a separate account, so that no guaranteed death benefit is provided, beyond a very small amount designed to meet funeral expenses. Variable life has a scheduled premium payment for the life of the contract. Universal variable life is far more flexible, though there are minimum payments that must be made. Both provide inflation protection for the death benefit.
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE?
The fund will liquidate shares to meet the additional sales charge. An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.
An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to:
Buy an XYZ 35 call This client is temporarily bullish on the stock, but, in the long term, feels that it will continue to decline so the short stock position is to be maintained. If the client is correct, a near-term rise in the price of XYZ will cause the long 35 call to be in the money and the investor can sell the call at a profit. When it comes to hedging a short stock position, buying a call is always the best strategy
Investing in which of the following would maximize after-tax income and diversify the portfolio for a high tax bracket investor?
Tax-exempt unit investment trusts The key word here is "diversify". Tax-exempt unit investment trusts will own a number of different tax-exempt municipal issues. Short-term municipal notes, although paying tax-free interest, will not offer as high a return due to the short maturities and do not indicate that there is diversification as to issuers.
Which of the following statements about closed-end investment companies are TRUE?
Investors in closed-end investment companies may trade only in full shares. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand.
A 60-year-old man has invested $27,000 in his nonqualified variable annuity over a period of 5 years. The current value of the separate account is $36,000. He wishes to withdraw $16,000 to assist in his grandchild's college education. If he is in the 28% tax bracket, what will be his tax consequence on the withdrawal?
The correct answer was: $2,520.00 The client has a nonqualified annuity so payments to the annuity were on an after-tax basis. Therefore, only the amount representing earnings would ever be subject to taxation. Those earnings are taxed as ordinary income on a LIFO basis meaning that the earnings are considered the last money into the account and the first out. If the client withdraws $16,000, $9,000 of that amount (representing the earnings) is taxable at the client's tax rate of 28% (28% × $9,000 = $2,520). Because this individual is older than 59-½, the 10% penalty does not apply.
