Series 6: Chapter 5:3 Variable Annuities
how are income and gains on a variable annuities separate account used?
they are reinvested and used to buy additional units
All principals must go through
training
Can a contract owner of a variable annuity withdraw the cash surrender value of the contract?
yes
how often are annuity units calculated?
monthly
are variable annuities considered insurance?
no. they are a security
FORMULA to determine the current value of the contract
number of accumulation units x current value per unit
FORMULA to determine the number of annuity units
original dollar investment / accumulation value per unit
a variable annuity
pays a fluctuating dollar amount and it varies based on the value of the securities in the SEPARATE ACCOUNT. The policy holder bears the risk.
a fixed annuity
pays the same predetermined dollar amount each period. The insurance company bears the investment risk.
the delivery of a ___ is required and they are regulated under the securities act of ____. A ____ __ ____ ____ must be provided to investors upon request.
prospectus 1933 statement of additional information
payout methods how INSTALLMENTS work for a life annuity - period certain
regular payments for a designated period then payments are stopped regardless if investor is still living. If the investor dies before installments have been paid in in full, the beneficiary would receive the balance of the annuitants installments. * this is not considered a "payout"
payout methods joint and last survivor annuity
regular payments to the couple until death of both people
pay out methods: life annuity
regular payments to the investor until death the largest payment of all methods of payout
pay out methods: life annuity - period certain
regular payments to the investor until death upon death of the investor, payments continue to the beneficiary for the remainder of the pre determined period (example: 10 year period certain)
on equity indexed annuity's supervision of sales is ______.
required. but registration is not
the broker-dealer firm must have a ______ ______ with the issuer.
sales agreement
registered reps who sell variable annuities must hold both a life insurance license and a securities license. But branch office managers need only be _______ licensed if they do not participate directly in sales
securities
If a variable annuity owner chooses to withdraw the cash surrender value from their account what types of charges may be incurred?
surrender charges...and they can be very expensive
earnings on variable annuities are ____ _____ until annuity payments begin
tax deffered
what is the tax treatment of the insurance companies separate account
tax deffered
who is the separate account managed by?
the board of managers
who receives an annuity contracts surrender value?
the owner of the annuity.
who has to review and approve applications for clients who have applied for a deferred variable annutiy
the principal. and must do so PRIOR to being transmitted to the issuer.
RR's selling variable annuities must be registered with teh state insurance department, the SEC and FINRA, but do not have to be registered with
the state banking department
the maximum sales load/charge which can be imposed on a VARIABLE ANNUITY under FINRA rules is
there is no minimum, but it must be fair and reasonable
single premium IMMEDIATE or lump sum purchased annuity
* a lump sum purchase * immediately begin to receive payments * has NO surrender value
single payment DEFERRED annuity
* a lump sum purchase * payments are deferred to a later date * has a surrender value * has investment advisory fees * surrender charges apply * mortality and expense charges apply
periodic payment DEFERRED annuity
* choose your payment option over a period of time * fixed sales load * has a surrender value * has investment advisory fees * surrender charges apply * mortality and expense charges apply
What are the 3 allowable exchanges under 1035?
1. annuity contract for another annuity contract 2. life policy for an annuity contract 3. life policy for another life policy
Proxies are send to contract owners to vote on the following:
1. board of managers 2. to change investment objectives in the separate account.
qualified annuity upon retirement are taxed as ______.
1. contributions are pre tax dollars 2. usually an employer sponsored retirement plan 3. Upon retirement, the distributions are taxed as ordinary income.
non qualified annuity
1. pay tax on the income first (after tax dollars) 2. then invest the rest into the annuity 3. upon retirement, only EXCESS over the amount contributed is taxable. 4. party return of capital, party as ordinary income 5. the return on capital portion is the "cost basis" in the contract for taxable purposes.
what are some other names for the separate account?
1. sub account 2. investment account
AIR What will happen if the separate account earns less than the current AIR?
1. the cash value of the seprate account will go down 2. the death benefit will go to the guaranteed minimum
payout methods penalty tax for premature withdrawals on annuities
10% like IRA's, Keogs, and 401K plans
The maximum sales load under the Act f 1940 is
9%
deferred variable annuities are subject to advisory fees, surrender charges and mortality and expense risk charges, but ARE NOT subject to:
Direct Actuarial Fees - those fees are paid by the insurance company that employs the actuary.
on one time withdrawals from a variable annuity, the tax treatment is FIFO, LIFO, or no consequences.
LIFO, and is therefor subject or ordinary income tax on that withdrawal. and if the person is under age 591/2 the withdrawal would also be subject to the 10% penalty tax.
are contract holders of variable annuities taxed on dividends?
No...tax deferred
changes in the value of the annuity unit pay out period are related to
the value of securities in the separate account *not to the DJIA, and not to the cost of living index
variable annuities are considered to be ___ term investments
long
variable annuities would be suitable for an investor with an investment objective of
long term capital appreciation
if annuity units keep pace with inflation it can provide:
a hedge of protection against inflation
a fixed annuity is not technically
a security
new annuity contracts: equity indexed annuities are linked to ___. There is the possiblity of a gain which is _____. and the contract holder is guaranteed a minimum return of ___%
a stock index like the S & P 500. capped 3%
What privilege does the Tax Free 1035 exchange allow?
allows the contract holder of a variable annuity or life insurance policy to exchange their existing contract for a new variable annuity contract WITHOUT PAYING ANY TAX ON THE INCOME AND INVESTMENT GAINS on their current variable annuity. however SURRENDER CHARGES may still apply, and a new surrender period begins on the date of the new annuity. Allowed exchanges: * annuity contract for another annuity contract * Life insurance policy for an annuity contract * Life insurance policy for another life insurance policy
on an equity indexed annuity, which is linked to a specific stock index, if the index increases, the contract holder is credited with ______. There is a _____ on the percentage return. if an index declines, the contract holder will suffer a loss but is guaranteed a minimum return of ___% .
at least part of the gains cap 3%
the value of accumulation units is calculated
daily (so it changes daily)
which type of annuities build up cash surrender value
deferred annuities; immediate annuities do not
the annuity or contract holder is ___ to the cash surrender value of the contract.
entitled
When purchasing a variable annuity, all of the following should be considered: the ____ soundness of the issuer the ____ the _____ ______ and other fees
financial return sales charges
What are the two types of annuities
fixed and variable
sales contest rules do not apply to
fixed annuity or fixed insurance products
in a variable annuity the cash value will
fluctuate
variable annuities provide a possible ___against inflation
hedge
new annuity contracts: bonus annuities which pay an additional small monthly percentage bonus premium credit (3-5%), it typically comes with the drawback of
higher contract costs and longer surrender periods. and are subject to surrender charges.
what does the non forfeiture provision provide?
if the contract holder stops making payments/installments he will not lose claim to his previous installments/investments.
payout methods UNIT REFUND annuity
investor or beneficiary is guaranteed payment of a set number of units (not a fixed number of dollars) paid in lump sum.
payout methods how INSTALLMENTS work for a life annuity - fixed amount
investor receives a predetermined FIXED amount until the account/amount is extinguished. *this is not considered a 'payout"