STC Chp 10 Q
Which of the following calculations describes the payout on a variable annuity? A fixed number of annuity units multiplied by a fixed dollar amount A fixed number of annuity units multiplied by a variable dollar amount A variable number of annuity units multiplied by a fixed dollar amount A variable number of annuity units multiplied by a variable dollar amount
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.
The growth in the value of a variable annuity is: Taxable to the investor in the year it's declared Allowed to accumulate on a tax-deferred basis Used to reduce the cost basis of the investment Tax-deferred only if the investor has retired
Allowed to accumulate on a tax-deferred basis The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.
An accumulation unit in a variable annuity contract is: An accounting measure that's used to determine the contract owner's interest in the separate account An accounting measure that's used to determine payments to the owner of the variable annuity The same as a shareholder's ownership interest in a mutual fund The same as the insurance company's profit from the separate account
An accounting measure that's used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure that's 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 that each have different objectives and portfolios.
According to FINRA, the maximum sales charge on a variable annuity contract is: 0% 5% 8.5% An amount that is fair and reasonable
An amount that is fair and reasonable
Suitability in variable annuity transactions does not apply in which of the following situations? A purchase of a new variable annuity An employee's contribution to his 403(b) plan A 1035 exchange from one variable annuity to another The allocation of funds to the subaccount products within a variable annuity
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.
A customer owns a variable annuity that has a life annuity payout option with a 20-year period certain. If the customer dies after 14 years of payments: Future payments will continue for life to a named beneficiary Future payments will continue for 20 years to a named beneficiary Future payments will continue for six years to a named beneficiary No additional payments will be made
Future payments will continue for six years to a named beneficiary If the owner of an annuity with a 20-year period certain dies, the annuity company will pay a named beneficiary for the time remaining on the 20-year period. Since the customer died after 14 years, the remaining six years will be paid to a beneficiary and then payments cease. If the customer lives beyond the 20-year period certain, she continues to receive payments for the remainder of her life, with no payment made to a beneficiary at death.
Which TWO of the following statements are TRUE regarding a variable life policy? Death benefits are calculated monthly Death benefits are calculated annually Policy loans are taxable Policy loans are charged interest I and III I and IV II and III II and IV
II and IV The death benefits, which vary with the performance of the separate account, are calculated annually. Should an investor choose to take a loan against the accumulated value, interest would be charged.
An investor has been making payments into 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? The investment risk is assumed by the insurance company The investment risk is assumed by the customer The amount of the payment to the customer is guaranteed by the insurance company The amount of the payment to the customer is not guaranteed I and III I and IV II and III II and IV
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 could increase, decrease, or remain the same since the amount is not guaranteed.
A 57-year old father was in the accumulation phase of his variable annuity when he passed away. What are the tax implications if the annuity is inherited by his son? If liquidated, the entire amount is taxed as ordinary income to the son. If liquidated, any amount above the cost basis is taxed as ordinary income to the son. If liquidated, any amount above the cost basis is taxed as a capital gain. If liquidated, the amount is received tax-free by the son.
If liquidated, any amount above the cost basis is taxed as ordinary income to the son. When inheriting a variable annuity that's still in its accumulation phase, any amount above the decedent's cost basis is considered ordinary income to the recipient. Unlike inheriting other securities, there's no stepped-up basis. In addition, unlike death benefits that are paid on insurance policies, the appreciation is taxable to the beneficiary as ordinary income. (17052)
An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that: She may make this change without restriction Once annuitized, she may no longer make a change Once annuitized, she may change only the settlement option She is limitied to a 1035 exchange
Once annuitized, she may no longer make a change Once a variable annuity has been annuitized, changes are not permitted. A 1035 exchange is switching from one annuity to another during the accumulation period.
A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis? Zero, since her purchases and reinvested distributions were in pretax dollars Only the amount she paid when accumulating units, since reinvestments of distributions were in pretax dollars Only the amount of reinvested distributions, since her purchases were in pretax dollars The total amount, since the purchases from her payments and reinvested distributions were in after-tax dollars
Only the amount she paid when accumulating units, since reinvestments of distributions were in pretax dollar When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the cost basis. Reinvestment of distributions is automatic and done in pretax dollars.
An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be: Ordinary income on the entire amount Ordinary income on the amount in excess of the original investment Ordinary income on the amount in excess of the original investment and a capital gain on the original investment A capital gain on the entire amount
Ordinary income on the amount in excess of the original investment A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original amount invested is treated as a return of capital and the earnings in the account (amount above the original investment) is treated as ordinary income.
A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? All proceeds pass to the beneficiary tax-free Proceeds in excess of cost are taxable as capital gains to the beneficiary Proceeds in excess of cost are taxable as ordinary income to the beneficiary Proceeds are not taxable if the beneficiary rolls them over into an IRA
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 is an expense or charge NOT normally associated with a variable annuity? Investment management fees Expense charges Redemption fees Administrative expenses
Redemption fees Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.
A 65-year old individual invested $240,000 into a variable annuity, which has since grown to $400,000. If she wants to withdraw $150,000, what's the tax implication of taking the withdrawal? She will be taxed on $60,000 as a capital gain. She will be taxed on $60,000 as ordinary income. She will be taxed on $150,000 as a capital gain. She will be taxed on $150,000 as ordinary income
She will be taxed on $150,000 as ordinary income Since the individual is taking a withdrawal, not annuitizing, the first money that comes out of the annuity is considered earnings. In this question, the annuity had generated tax-deferred earnings of $160,000 (from $240,000 to $400,000). Therefore, the full $150,000 being withdrawn is taxed as ordinary income. Any amount withdrawn beyond the first $160,000 is considered a return of the individual's basis and not taxed.
When a beneficiary receives the death benefit from a variable annuity, the amount received is: Tax-free to the beneficiary Fully taxable to the beneficiary Taxable above the cost basis to the annuitant Taxable above the cost basis to the beneficiary
Taxable above the cost basis to the beneficiary When a beneficiary receives the death benefit from a variable annuity, the amount above the cost basis is taxable as ordinary income to the beneficiary.
Which of the following factors is NOT used in determining the value of an annuity unit? The assumed interest rate The value of the separate account Income distributions from securities held in the separate account that are reinvested Capital gain distributions from securities held in the separate account that are reinvested
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 is a benefit of purchasing variable life insurance? The death benefit can exceed the guaranteed minimum based on the value of the subaccount products. The minimum death benefit is based on the value of the subaccount products. The entire premium paid is invested in subaccount products. The premiums paid to purchase a variable life insurance policy are tax deductible.
The death benefit can exceed the guaranteed minimum based on the value of the subaccount products Variable life insurance policies provide a guaranteed minimum death benefit. However, the death benefit may be increased based on the performance of the subaccount products into which the owner directs the excess premiums. When an individual purchases a variable life insurance policy, a portion of the premium is used to pay for the minimum death benefit, with much of the balance directed to purchasing subaccount products. The premiums payments are not tax-deductible.
An individual annuitizes his variable annuity contract and begins receiving payments using a straight life settlement option; however, she later decides that a joint and last survivor life annuity settlement option is more appropriate. Which of the following is TRUE concerning this situation? The individual is permitted to change the settlement option without restriction. The individual is not permitted to change the settlement option. The individual could change the settlement option with an additional fee. The individual is limited to changing to a settlement option with a fixed period payout.
The individual is not permitted to change the settlement option. Once an individual has annuitized her contract, no changes can be made to the settlement option. The accumulated value of the contract is converted into a stream of income and no additional withdrawals are permitted from the annuity outside of the chosen the settlement option.
Which of the following statements is TRUE concerning periodic payment variable annuities? The number of a client's annuity units never changes The number of a client's accumulation units never changes They never have a beneficiary The monthly payout is fixed by the inflation index
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.
Which of the following statements is TRUE regarding separate accounts and general accounts? Both types of accounts are registered under the Investment Company Act of 1940. Both types of accounts pay a guaranteed minimum return. The subaccounts of a variable annuity may include both types of accounts. General accounts hold bonds, while separate accounts hold equities.
The subaccounts of a variable annuity may include both types of accounts. A variable annuity may allow an investor to allocate funds between several subaccounts. One of these accounts may be the general account of the insurance company, which offers a minimum guaranteed rate of return. The other subaccounts may consist of various accounts, each with a different portfolio and investment objective. Some subaccounts hold equities, some hold bonds, and some actually may hold both. The return on a subaccount is not guaranteed; therefore, the purchaser assumes the investment risk. Only separate accounts are registered under the Investment Company Act of 1940.
An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is: Straight life annuity Joint and last survivor life annuity Unit refund life annuity Straight life annuity with period certain
Unit refund life annuity The annuity payout option that provides the beneficiary with a lump-sum payment at the time of the annuitant's death (which reflects the value of the remaining annuity units) is referred to as a unit refund life annuity.
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: Variable annuity contract plan Insurance sector based index fund Spread load contractual plan Variable life insurance contract
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.