Unit 15 series 65
The death benefit of a variable life policy must be calculated at least A) weekly B) semiannually C) annually D) monthly
C
Flexible premium payments are a feature of A) term life B) whole life C) variable life D) universal variable life
D
In a scheduled premium variable life contract, which of the following has a guaranteed minimum? A) The expense ratio B) The maturity value C) The cash value D) The death benefit
D
which of the following information about the applicant is NOT included in the general information section of of the application for insurance occupation marital status medical background gender
medical background
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) $118,720. C) $116,600. D) $110,000.
C The 6% bonus means that the client's initial payment is increased by 6%. That means the account shows a starting balance of $106,000. Although the index increased by 15% and the participation rate of 80% would be a 12% growth rate, the cap of 10% comes into play. That makes the calculation: $106,000 x 110% or $116,600.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% tax deferred B) 100% tax free C) 100% taxable D) partially a tax-free return of capital and partially taxable
D
which of the following statements concerning buy-sell agreements is true? premiums paid are deductible as business expense benefits received are considered income taxable buy-sell agreements pay in the event of a medical emergency buy-sell agreements are normally funded with a life insurance policy
buy-sell agreements are normally funded with a life insurance policy
Which of the following is considered an advantage of annuitization? A) It guarantees income that will last for the client's lifetime. B) Payments under a variable annuity could be reduced if there is a declining market. C) A fixed, level periodic payment tends to lose buying power over time due to inflation. D) Once annuitized, the client's draw from the annuity is limited to the annuity payment.
A
If an index annuity has a participation rate of 80%, it means A) the investor's account will be credited with 80% of the growth of the index. B) the investor's account will be charged with 80% of the amount lost by the index. C) the investor's account will never be less than 80% of the initial investment. D) the investor's account will participate in 80% of the gains and losses of the index.
A
Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed monthly and cash values are computed weekly. B) Unit values are computed daily and cash values are computed monthly. C) Unit values are computed monthly and cash values are computed daily. D) Unit values are computed weekly and cash values are computed monthly.
B
Current IRS regulations permit an unlimited contribution to which of the following tax-deferred plans? A) 401(k) B) Roth IRA C) SEP IRA D) Annuity
D
A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A) increasing term B) variable universal C) decreasing term D) renewable level term
D Level term insurance offers a fixed face amount over the life of the policy. If the policy is renewable, the owner has the ability to renew it for that same face amount and the new term, but at new, higher premiums as the insured's age increases
All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) better than anticipated results in the separate account could lead to a reduction in annual premium B) once selected, the policyowner may change payment modes C) premiums are determined based on age and sex of the insured D) the policyowner has the right to change the selection of subaccounts
A
Among the special characteristics of a universal life insurance policy is A) the policy may be overfunded B) that policyowners may borrow against the cash value C) death benefits may increase above the initial face amount D) early termination could lead to surrender charges
A
When J. applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by
A paramedic or examining physician at the insurer's expense.
Which of the following is guaranteed by a variable life policy? A) Minimum separate account performance B) Minimum death benefit C) Cash value D) Policy loans after the policy has been in effect for at least 24 months
B
Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is NOT true? A) A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. B) A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. C) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity. D) An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days).
C
A client of an IAR mentions that he has received a prospectus for a variable annuity, but does not really understand the product. It would be reasonable for the IAR to explain that a variable annuity offers an investor A) a product very similar to a mutual fund, but with lower costs and expenses B) lifetime income guaranteed never to drop below the initial rate C) the insurance company's backing of the annuity' performance D) the opportunity to invest in equity securities on a tax-deferred basis
D
When a client purchased an annuity with a 5% bonus, it means A) the bonus is added to the death benefit B) the bonus is included every payment period C) the bonus is added at the last payment D) the bonus is added to the initial payment
D
A client purchases a fixed annuity that will immediately begin paying $2,000 a month for life. What is the annuitant's greatest risk? A) Capital risk B) Market risk C) Interest rate risk D) Inflation risk
D Also known as purchasing power risk, inflation risk is the effect of continually rising prices on investments. A client who annuitizes a fixed annuity, receiving $2,000 per month, will likely find the monthly check has less purchasing power as time goes on.
A variable annuity annuitant bears all of the following risks EXCEPT A) mortality risk B) market risk C) interest rate risk D) inflationary risk
A
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 underlying index has had outstanding performance. B) this is a bonus annuity. C) the insurance agent's commission was added to the account. D) the insurance company paid a dividend.
B
Surrender charges may cause a reduction to all of the following EXCEPT A) the cash value of a variable life insurance policy B) the death benefit of a variable life insurance policy C) the liquidation value of a variable annuity D) the redemption value of Class B mutual fund shares
B
Which of the following statements are TRUE of a variable annuity? The number of annuity units is fixed when payout begins. The value of accumulation units is fixed at purchase. The monthly annuity payment is a variable amount. The annuity payments are not subject to income taxes. A) II and III B) I and III C) III and IV D) I and II
B
A client purchased an index annuity from you 3 years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of +20% in the 1st year, -5% the 2nd year, and +10% the 3rd year. The investor's current value is approximately A) $117,829 B) $125,350 C) $126,500 D) $128,620
B In the 1st year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after 1 year, the value was $115,000. In the 2nd year, the index lost money. However, with an index annuity there are never any reductions in a down market, so the account remained at $115,000. In the 3rd year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year.
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty. A) III and IV B) II and III C) II and IV D) I and IV
C
All of the following are advantages of universal life insurance EXCEPT A) when the cash value is sufficient, no premium payment is required B) ability to change death benefit amount C) the policy is guaranteed never to lapse D) ability to adjust the amount of premium payments
C
All of the following statements regarding universal life insurance are correct EXCEPT A) there are two death benefit options B) offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit C) premiums are fixed for the life of the policy D) may include a minimum guaranteed interest rate
C
An investor in a variable annuity will be purchasing A) annuity units B) participation units C) accumulation units D) shares of the underlying sub-account
C
One way in which universal life and variable life are similar is that both A) have a fixed minimum cash value B) have flexible premiums C) permit loans against the cash value D) are considered securities
C
Larry purchased a deferred annuity and, at age 65, annuitized the product under a life with 15-year certain option. His spouse, Linda, is the beneficiary. Which of the following statements is CORRECT? A) Payments would be made to Larry until he is 80, then to Linda for the remainder of her life. B) Payments would be made to Larry until he is 80, then cease. C) Payments would be made to Larry until his death, then to Linda for another 15 years. D) Payments would be made to Larry as long as he lives, and then to Linda, should Larry die prior to reaching age 80.
D
Flexible premium payments are a feature of A) universal variable life B) whole life C) variable life D) term life
A
In a scheduled premium variable life insurance policy, which of the following are guaranteed? A) The ability to borrow a maximum of 75% of the cash value once the policy has been in force at least 3 years B) 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 C) A minimum cash value D) A minimum death benefit
D In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required. The 75% cash value loan is a minimum, not a maximum, and applies after the 3rd year of coverage.
An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount B) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value C) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative D) the scheduled premium policy because earnings do not affect the contract's face amount
A
Which of the following would be a difference between a universal life insurance policy and a scheduled premium variable life insurance policy? A) Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are flexible. B) There is a greater choice of separate account subaccounts in the universal life policy. C) There is a minimum guaranteed return on the variable life, while there is no guaranteed return on the universal. D) The universal life policy will generally outperform the variable life policy during a period of falling interest rates and rising stock prices.
A
A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It ceases B) It increases because the client's mortality risk is higher at the older age C) It continues D) It continues but at a reduced rate
A The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account. There may be an internally computed charge, but unlike the accumulation period, the charge is not broken out separately.
In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT A) only the EIA has a minimum guaranteed return B) both are issued by life insurance companies C) only the variable annuity is considered a security D) both offer an opportunity for unlimited gain
D EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.
A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) There is no tax because the withdrawal is considered return of capital. B) Any tax due is deferred. C) Two-thirds of the withdrawal is taxable as ordinary income. D) The entire $10,000 is taxable as ordinary income.
D The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be a tax penalty of an additional 10%
Which of the following statements concerning universal life insurance are CORRECT? Universal life has flexible premiums. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. The death benefit can fluctuate, but never below the guaranteed minimum face amount. Cash values can fluctuate and may even fall to zero. A) I and II B) III and IV C) II and III D) I and IV
D Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies.
Concerning index annuities and their method of crediting interest, which of the following is TRUE? A) High-water mark with look back offers the best return during periods of high volatility. B) Annual reset offers the best return regardless of market fluctuations. C) Point to point offers the best return when the market has had a single drastic decline during the period. D) On average, annual reset has a higher participation rate than point to point.
A
Which of the following is NOT considered to be an annuity purchase option? A) Periodic payment immediate annuity B) Single-premium deferred annuity C) Periodic payment deferred annuity D) Single-premium immediate annuity
A
A 57 year-old client has $100,000 in a non-qualified variable annuity and $100,000 in a mutual fund with a dividend reinvestment plan. Coincidently, each was purchased 10 years ago with a deposit of $50,000. If the client needs $50,000 to use as a down payment for a vacation home, which would have the most severe tax consequences? A) The mutual fund B) The tax consequences would be the same C) Not enough information to tell D) The variable annuity
D There are several differences involved here. First of all, withdrawals from a variable annuity are treated on a LIFO basis. That is, the earnings are considered to be withdrawn first. In that case, all $50,000 taken from the VA are taxed as ordinary income. In addition, because the client is not yet 59 ½, there is the 10% tax penalty tacked on. The mutual funds are part of a dividend reinvestment program which means that a good portion of the $50,000 in gain has already been taxed and, in any event, there is no early withdrawal tax penalty. Finally, profits from the sale of mutual fund shares held this long would be taxed at the long-term gains rate, always lower than ordinary income.
In the past 20 years, 55-year-old James has put $27,000 into accumulation units in his nonqualified variable annuity. The current value of his units is $36,000. He wishes to withdraw $16,000 to assist with his grandchild's college education. If he is in the 28% tax bracket, what is his tax consequence on the withdrawal? A) $0.00 B) $4,480.00 C) $3,420.00 D) $2,520.00
C Because this is nonqualified, the investments are in after-tax dollars. Therefore, any value of the account over the investment is growth. Withdrawals from tax-deferred plans treat the growth as ordinary income for tax purposes. The portion attributable to growth is considered to be withdrawn first under the Tax Code. Here, we have $9,000 worth of growth taxable at 38% (28% + 10% penalty) because James is younger than 59½. Yes, the earnings on a non-qualified annuity are subject to the 10% penalty; it is only the principal that escapes the tax and penalty. The remaining $7,000 withdrawn is considered a withdrawal of principal and is therefore nontaxable.
A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is A) ordinary income tax on $20,000 plus a 10% penalty. B) no tax until the withdrawal exceeds $25,000. C) ordinary income tax on $15,000. D) ordinary income tax on $20,000.
D Withdrawals from nonqualified annuities (all annuities on the exam are nonqualified unless otherwise specified) are taxed on a LIFO basis. That is, the last money in (the earnings) is considered the first money withdrawn. The investor's cost is $25,000. The 1035 exchange doesn't affect the cost basis because it is nontaxable. Therefore, with the account currently valued at $50,000, the first $25,000 withdrawn is from the earnings. That makes all of the $20,000 in this question taxable as ordinary income. What about the 10% tax penalty for early withdrawal? If you add the years together (47 + 6 + 7), the investor is 60 and, once reaching 59½, there no longer is the tax penalty.
