SIE Chapter 12 Review Questions
A 68 year old client has made $12,000 in contributions over the last 10 years into a non-tax qualified variable annuity and is now retiring. The value of the annuity now is $20,000 and the client elects to take a lump-sum settlement. What amount of the payout will be subject to ordinary income tax?
$ 8,000
An investor buys a nonqualified deferred variable annuity and contributes $25,000. Ten years later, he surrenders it for $40,000. For federal income tax purposes, he should report
$15,000 ordinary income
A variable annuity contract holder originally invested $20,000 in the contract. The accumulation unit value was $10 per unit at the time of investment, but it is now worth $15 per unit. What is the present dollar value of the contract?
$20,000 invested divided by $10 per unit equals 2,000 units. 2,000 units times $15 per unit equals $30,000.
An investor has held a non-tax qualified Variable Annuity for 10 years. His contributions have been $26,000 and the current value of the account is $36,000. Prior to the annuitization period, the customer withdraws $15,000. What is the tax liability, assuming the customer's tax bracket is 28%?
2,800
Which of the following types of variable annuity offers the largest payout to annuity holders, but ends at the time of death of the annuitant with no additional payments?
A Life Annuity
Which of the following is CORRECT in relation to one-time withdrawals from a non-tax-qualified variable annuity by individuals over age 59 1/2?
A one-time withdrawal would be at least partially taxable, since earnings in the variable annuity are taxed on a last-in, first-out basis.
Which of the following is an example of a 1035 Exchange of Contracts?
A tax-free exchange of annuities and life insurance
A customer who is about to retire wants to buy a low risk product that will provide a predictable stream of income. Which of the following products is most suitable for his needs?
An immediate fixed annuity
An investor is considering the purchase of a variable annuity contract. What should be the RR's first suitability consideration?
Benefit payments may increase or decrease.
Retail Broker-Dealer ABC wants to sell a certain variable annuity contract to a customer. Principal underwriter Broker-Dealer DEF is the distributor of the contracts for the insurance company. What are the FINRA requirements for ABC to be able to buy the contract from DEF at a discount from the public offering price and sell the contract to its customer at the public offering price?
Both firms must be members of FINRA and there must be a written sales agreement between them.
With regard to mutual funds and variable annuities, all of the following are TRUE statements EXCEPT:
Both have tax deferred earnings
Which of the following is covered by the mortality risk charges taken from the separate account of a variable annuity?
Compensation to the insurance company for the risks associated with annuitants exceeding their life expectancy
All of the following are true about the taxation of non-qualifed variable annuities during the accumulation period EXCEPT:
Contributions are deductible in the year made
All of the following statements are correct concerning variable annuities and mutual funds EXCEPT:
Even though the variable annuity issuing company keeps all dividends, the contract holder must pay taxes on them in the current year.
Which of the following types of risk would apply most to an investor that purchased a Variable Annuity Contract?
Investment Risk
Mr. Smith is a 50 year old client of Bob, who is a registered representative. Bob is trying to get Mr. Smith to purchase a non-qualified Deferred Variable Annuity offered by his company. In making this recommendation to Mr. Smith, Bob should first be sure that:
Mr. Smith has already made his maximum contributions into his before-tax retirement plans.
Susan Smith purchased a Deferred Variable Annuity with surrender charges assessed if she withdraws within 10 years of purchase. Susan purchased this Variable Annuity in her Traditional IRA when she was 65 years old. Susan turned 72 last year. What is Susan's situation with regard to her IRA which contains the Variable Annuity?
Susan must begin to take distributions from her IRA which includes her Variable Annuity and will be subject to the surrender charges on her annuity.
What determines the tax liability to an individual who surrenders their holding of a variable annuity that is labeled as "non-qualified"?
Tax liability is determined by subtracting the amount which was invested in the annuity from the net proceeds upon surrender.
Under FINRA rules, which of the following statements is TRUE about the delivery requirements of the Statement of Additional Information (SAI)?
The SAI must be provided upon request.
One of your clients is an annuitant who recently retired. The individual's main source of income during retirement will be the variable annuity. It is important that this individual understands what aspect of her situation?
The fluctuations and performance of the separate account of the annuity will determine the payments received by the annuitant.
When the owner of a variable annuity contract elects to annuitize the contract, which of the following occurs?
The number of annuity units will be determined by multiplying the number of accumulation units by the net asset value per unit in the separate account
What is the tax treatment on the payout of a non-qualified Variable Annuity?
The payout which exceeds the cost basis is taxed as ordinary income.
Which of the following statements is FALSE regarding variable annuity contracts?
The principal is guaranteed by the insurance company
Which of the following is TRUE of an annuitized variable annuity contract?
The value of the accumulation units is used to determine the number of annuity units.
One of your customers is 65 years of age and purchased a variable annuity 10 years ago. Initially, the customer invested $100,000 into the account and the account is now worth over $130,000. A one-time withdrawal is made by the customer from the annuity in the amount of $10,000. For tax purposes, what are the consequences of this withdrawal?
The withdrawal is taxable because tax law requires the use of the LIFO (last-in, first-out) method.
For tax purposes, what is the difference between mutual fund withdrawal plan payments and variable annuity income payments?
The withdrawal plan payments of a mutual fund are subject to taxes that can be ordinary income and/or capital gains depending on the withdrawals whereas the tax treatment for the variable annuity income payments will be taxable, in part, as ordinary income.
Which of the following is a characteristic of an unregistered equity-indexed annuity?
There is a cap on the percentage of returns that may be collected by owners of such contracts.
Which of the following would probably provide the greatest protection of purchasing power?
Variable annuity
Several years ago, a client had a few investment options and the decision was made that the client would invest in a non-qualified variable annuity. How are contributions to this type of investment product treated for tax purposes?
When the contributions are withdrawn, the amount withdrawn will not be subject to taxation.
A variable annuity's separate account may be referred to as all of the following in sales literature EXCEPT:
a mutual fund
The purchase price of a deferred variable annuity is based on the value of an
accumulation unit at the time the insurance company receives funds.
A client wants a large sum of money invested for 6-8 months before he retires. Upon retirement, he will decide how he wants to reallocate his money. For the time being, all of the following would be appropriate investments EXCEPT
an immediate annuity which charges a single premium
A variable annuity contract is similar to a life insurance policy because it may contain all of the following EXCEPT
guaranteed cash values
The payment received on a non-qualified variable annuity contract would be treated as:
ordinary income in excess of cost basis
All of the following are ways to acquire a variable annuity except:
periodic payments with an immediate payout
Sales charge breakpoints for investments in a variable annuity are based on
the total amount invested in a variable annuity
Changes in the payout on a variable annuity will correspond most closely to changes in the
the value of the underlying separate account.
An annuitant receives payment under a variable annuity for a number of years. At his death, his widow receives a lump-sum payment. The annuity is a
variable unit refund annuity.
