Series 65 - Unit 24 Quiz #1
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 A) $116,000. B) $116,600. C) $110,000. D) $118,720.
B. $116,600. Initial Premium with Bonus: The investor receives a 6% bonus on the $100,000 premium. Bonus amount = $100,000 × 6% = $6,000. Initial account value = $100,000 + $6,000 = $106,000. Growth from the Index Increase: The index increased by 15%, but the participation rate is 80%. Participated index gain = 15% × 80% = 12%. However, there is a 10% cap on the gains, so the gain applied to the account is 10% (not 12%). Account Value After Growth: Gain on the initial account value = $106,000 × 10% = $10,600. Final account value = $106,000 + $10,600 = $116,600.
You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A) Universal life B) Annual renewable term C) Whole life D) Variable life
B. Annual renewable term
John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments? A) His annuity payments are tax free. B) His annuity payments are partly taxable and partly tax-free return of capital. C) His annuity payments are partly taxable as capital gain and partly taxable as ordinary income. D) His annuity payments are all taxable as ordinary income.
B. His annuity payments are partly taxable and partly tax-free return of capital.
Which of the following is guaranteed by a variable life policy? A) Policy loans after the policy has been in effect for at least 24 months B) Minimum death benefit C) Minimum separate account performance D) Cash value
B. Minimum death benefit
When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that A) you will receive a statement of your death benefit no less frequently than semiannually B) chat C) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing D) premiums will vary based upon performance of the separate account
B. by surrendering the policy, its cash value may be obtained
Among the reasons to consider investing in a variable annuity would be all of the following except A) a guaranteed death benefit for death before annuitization B) capital gains treatment on any realized gains upon withdrawal C) avoiding probate upon the death of the investor D) basically, no limit on the amount that can be contributed
B. capital gains treatment on any realized gains upon withdrawal
A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be A) partly ordinary income and partly capital gains depending on the length of time the variable annuity was in force. B) ordinary income tax on $125,000. C) ordinary income tax on $125,000 with a 10% tax penalty. D) capital gains tax on $125,000.
B. ordinary income tax on $125,000.
In a scheduled premium variable life insurance policy, which of the following are guaranteed? A) The right to exchange the policy for a permanent form of insurance with comparable benefits within the first 24 months of issue, as long as the insured passes a new physical examination B) The ability to borrow a maximum of 75% of the cash value once the policy has been in force at least 3 years C) A minimum death benefit D) A minimum cash value
C. A minimum death benefit Explanation In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed.
The difference between a fixed annuity and a variable annuity is that the variable annuity I. offers a guaranteed return II. offers a payment that may vary in amount III. will always pay out more money than the fixed annuity IV. attempts to offer protection to the annuitant from inflation A) II and III B) I and III C) I and IV D) II and IV
D. II and IV
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? A) 10% penalty plus payment of ordinary income tax on all funds withdrawn B) Capital gains tax on earnings exceeding basis C) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis D) Ordinary income tax on earnings exceeding basis
D. Ordinary income tax on earnings exceeding basis Explanation The IRS taxes distributions from a nonqualified annuity using LIFO. That is, the last money in (the earnings) is the first money withdrawn. The income was deferred from tax, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59½. LO 24.e
Which of the following types of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup? A) Universal life B) Variable life C) Ordinary whole life D) Term
D. Term
Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A) Cost of the insurance B) Amount of insurance that can be issued C) Tax treatment of the death proceeds D) The way in which the cash values are invested
D. The way in which the cash values are invested
A 35 year-old client indicates that he needs $500,000 of life insurance coverage for the next 20 years. The lowest out-of-pocket cost would be if he purchased A) a whole life policy B) a 20-pay life policy C) variable annuity with an extended death benefit D) a 20-year level term policy
D. a 20-year level term policy
A popular vehicle for saving for retirement is the variable annuity. An agent explaining the benefits of this product would probably be in violation of the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by claiming that variable annuities offer A) the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035 B) tax deferral on earnings until withdrawn from the account C) the choice of a large number of different subaccounts with varying objectives D) lower overall expenses than a mutual fund with similar investment objectives
D. lower overall expenses than a mutual fund with similar investment objectives Explanation In general, and always on the exam, variable annuity expenses are higher than those of a mutual fund with similar objectives.
An investor purchases a single premium deferred index annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement from the insurance company showing an initial balance of $210,000. The most likely reason for the $10,000 increase is A) the insurance company paid a dividend. B) the insurance agent's commission was added to the account. C) the underlying index has had outstanding performance. D) this is a bonus annuity.
D. this is a bonus annuity.
A 35-year-old client purchased a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is A) 9% of premium per year, computed over a 20-year period. B) 8.5% per premium payment. C) 8.5% of total premiums over the life of the plan. D) 9% per premium payment.
A. 9% of premium per year, computed over a 20-year period.
In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) a minimum cash value B) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months D) a minimum death benefit
A. a minimum cash value
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is A) an annuity. B) an index fund. C) whole life insurance. D) a 30-year term policy.
A. an annuity. Explanation One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees. LO 24.b
A variable annuity has A) different investment options known as subaccounts. B) a high degree of liquidity. C) fixed payments once it has been annuitized. D) a guaranteed rate of return.
A. different investment options known as subaccounts.
A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A) renewable level term B) decreasing term C) increasing term D) variable universal
A. renewable level term
An investor purchased a single payment, deferred non-qualified variable annuity. Each of the following statements is true except A) taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract B) upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income C) random withdrawals are handled under LIFO tax rules D) money invested in this annuity represents the investor's cost basis
A. taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract
