VARIABLE PRODUCTS
George paid $3,000 annually in premium on a $150,000 variable life insurance policy, and then made a withdrawal of $15,000 after 10 years. The policy's cash value was $58,000 at the time of the withdrawal. How much of the withdrawal was taxable gain to George?
0 FIFO QUESTION
Which statements are true about retirement plans? I 100% of a distribution from a non-qualified plan represents "pre-tax" dollars II Part of a distribution from a non-qualified plan represents "pre-tax" dollars and part represents "post-tax" dollars III 100% of a distribution from a non-qualified plan is taxable IV Part of the distribution from a non-qualified plan is taxable and part is non-taxable
II and IV
Which of the following statements concerning variable life insurance is correct?
The policy guarantees a minimum death benefit, regardless of performance by investments in the separate accounts have level fixed premiums
VARIABLE ANNUITY -distributions during accumulation phase are taxed LIFO -death benefit paid to beneficiary is subject to income tax on the earnings component
VARIABLE LIFE -distributions are taxed FIFO -death benefit is income tax-free to beneficiary
Which of the following is TRUE about both variable life insurance and whole life insurance?
premiums are level The death benefit for a whole life policy is fixed and guaranteed, while the death benefit for variable life policy fluctuates, depending on the performance of the securities held in the separate account.
4 Payout options
1. Life Annuity or "Straight" Life Annuity 2.Life Annuity with Period Certain 3.Joint and Last Survivor Annuity 4.Unit Refund Life Annuity
Which of the following statements concerning exchanges that can be made with variable life insurance policies is correct?
An exchange of a variable annuity for a variable life insurance policy is a taxable exchange
Unit Refund Life Annuity
Available only with variable annuities. Insurer guarantees to pay a number of units calculated at the start of the pay out period. If the annuitant dies before receiving the calculated number of units, the insurance company pays any remaining value to the annuitant's estate or beneficiary.
FEATURES OF VA POLICIES------- -limits the amount of cash value they may borrow -policyowners are NOT subject to income tax upon taking a loan from a life insurance policy -the loan will reduce cash value -Loans against any life insurance policy will reduce the amount of death benefit paid -voting rights: can vote for the BOARD OF MANAGERS, independent CPA auditing firm, changes in investment policies
FREE LOOK----------- can return the policy up to the latest of -45 days after signing the application -10 days after receipt of contract -10 days after the insurer mails a notice of the withdrawal right -policyowner may change investment up to 4-5 times a year without paying a fee -Any time within the first two years from the issue date, federal law requires that a variable life policy be convertible to a whole life policy::must have same fave value premiums, and based on the insureds age at the time the insurance company issued the VLI policy -conversion requires no evidence of insurability
Which of the following reports must insurance companies send to policy owners? I Annual statement, indicating current death benefit, cash value, and policy loans II Annual statement, including income from operations, the balance sheet, and investments held in the separate account III Semi-annual statement, reporting current death benefit, cash value, and policy loans IV Semi-annual statement, reporting income from operations, the balance sheet, and investments held in the separate account
I and IV
Which of the following statements concerning the federal income tax treatment of fixed and variable annuities are correct? I Premiums for both fixed and variable annuities are deductible from the purchaser's income II Investment income for both fixed and variable annuities is income-tax deferred during the premium-paying period III An exchange of a variable annuity for a fixed annuity is a taxable event IV An exchange of separate accounts within a variable annuity is not a taxable event
II & IV only
Which of the following statements comparing fixed and variable annuities is correct? I Fixed annuities pay for the annuitant's lifetime; variable annuities pay for varying lengths of time II Fixed annuities pay the same amount each period; variable annuities pay the same number of annuity units each period III The insurance company guarantees a rate of return for fixed annuities but not for variable annuities IV The insurance company guarantees an increasing payout for variable annuities but not for fixed annuities
II and III only
Which of the following life insurance policies give the holder investment options? I Whole life II Universal life III Variable life IV Variable universal life
III and IV only
Which of the following statements concerning the death benefit and cash value of a variable life policy is correct?
If the AIR is set low, the death benefit will be likely to increase more rapidly
Which of the following statements best describes a Contingent Deferred Sales Charge for a variable annuity?
It is a declining percentage taken from withdrawals during the early years of the annuity
ANNUITY PERIOD 1.PERIODIC PAYMENTS
PART IS TAX-FREE RETURN OF INVESTMENT AND PART IS ORDINARY INCOME
Joint and Last Survivor Annuity
Payments are made as long as either of the two annuitants remains alive. At the death of one annuitant, payments continue to the surviving annuitant (often a spouse) for the survivor's life.
Life Annuity or "Straight" Life Annuity Provide largest payments
Payments are made to an annuitant for as long as that individual lives. Payments cease at the death of the annuitant, whenever it occurs. Insurer keeps any remaining balance.
INCOME TAX TREATMENT OF VA'S---------------- -annuities may be either qualified or non-qualified annuities qualified: this is what company retirement plans buy, have more tax advantages non-qualified:what individuals purchase
QUALIFIED ANNUITY----- -When a company's qualified plan pays the premiums for an annuity, the company can deduct the paymentS
INSURANCE COMPANY DEDUCTS THE FOLLOWING EXPENSES FROM SEPARATE ACCOUNT::: 1.mortality and expense risk 2. investment management fee(normally less than 1%) 3.administrative expenses 4.cost of insurance -cash surrender value of VLI policy fluctuates daily -contract holder may surrender policy within 2 years to receive the cash surrender value plus a return of sales charges
VALUATION OF VLI---- -insurance company computes policy cash value at least monthly -insurer guarantees minimum death benefit -never low but can increase -must be calculated annually Actual Net Investment Retun(ANIR) > AIR the excess earnings purchase additional death benefits -if reduction it cannot be below the original policy face amount
In connection with a variable life insurance policy, which of the following exchanges are tax-free? I Separate account for separate account II Variable life policy for variable life policy III Variable life policy for variable annuity IV Variable life policy for whole life policy
all of the above An exchange of a life insurance policy for a variable annuity is not taxable. However, the exchange of a variable annuity for a variable life policy is taxable.
All of the following statements concerning the valuation of accumulation and annuity units are correct EXCEPT the: A. value of the accumulation units will increase if the assets in the accumulation account yield only 1% B. value of the annuity units will increase any year in which the market prices of securities in the separate account increase C. value of annuity units will increase only if the yield on the separate account assets exceeds the AIR D. issuer determines the value of an accumulation unit independently of the value of an annuity unit
b
Stan is a 62-year-old annuity owner preparing to retire. He is a widower with a 28-year-old disabled son living at home. Upon retirement, Stan will receive Social Security and pension benefits. Which payout option would best satisfy Stan's need to provide continuing income for his disabled son?
joint and last survivor annuity
What is a characteristic of a Variable Life Policy?
minimum death benefit
All of the following statements about variable life insurance and variable annuity contracts are correct EXCEPT both products:
provide for decreased benefits if the investment return is less than the AIR, with no minimum death benefit guarantee VA's guarantee the minimum death benefit regardless of separate account performance
Which of the following expenses is deducted from the premium paid to purchase accumulation units in a variable annuity contract?
sales load Sales loads and premium taxes are taken out up-front from the premiums paid and the net amount is invested in the separate account.
Variable life policy holders must receive the financial statements of the separate account at least:
semiannually
Premiums deposited to purchase a variable annuity contract are invested by the insurance company in:
separate account
Susan Traiger was killed in an automobile accident and her son was partially paralyzed in the same accident. Her husband Roger was the beneficiary of her variable life insurance policy with a face amount of $250,000. Roger would like to have the life insurance money used to provide for the son for his lifetime. Roger has no other children and wants all of the money from the life insurance to provide the most benefit that can be obtained for his son to continue for as long as he lives. Which of the following settlement options is most appropriate for Roger?
straight life
Over a period of 5 years, Robert paid $15,000 in premiums on a variable life policy. The sales charges were $1,000. After the fifth year, Robert surrendered the policy for its cash value of $24,000. The costs and expenses charged for the year were $1,500, and the cash value increased by $2,000. What amount of gain will Robert report for federal income taxes in the year of surrender?
9,000 24000-15000=9000
2 installment options 1.fixed period 2.fixed payment
1. Fixed Period: Insurance company promises installments only for a fixed period of time and calculates payment to deplete account over this time frame. *Risk: The annuitant could outlive the period selected for payments. 2.Fixed Payment:Annuitant chooses amount that the insurance company will pay in each installment. Payments continue until assets run out. *Pay out can be specified in dollar amount (fixed) or specified in number of units (variable).
Martha paid premiums of $25,000 on a variable life policy. She surrendered the policy and the insurance company paid her $39,000. The gain in cash value during the last year was $2,000. What amount of gain will Martha report for federal income taxes in the year of surrender?
14,000 The best answer is C. The cost basis in the contract is the total amount of premiums paid of $25,000. The policy was surrendered for $39,000 paid by the insurance company. The taxable gain is $39,000 - $25,000 = $14,000.
Terry, age 62, purchased a non-qualified variable annuity contract for $10,000. Years later when the account is valued at $27,000, she elects to annuitize and receive life income. At that point, her life expectancy was 12.5 years. She receives her first payment in the amount of $3,000. How much of the payment is taxable?
2200 The best answer is C. Each year, the exclusion amount is calculated by taking the cost basis of $10,000 and dividing it by the client's life expectancy of 12.5 years = $800 of each annual payment is excluded from tax. Since the customer received a $3,000 annuity payment, only $2,200 will be taxable.
Many years ago, John used an inheritance to buy a single premium deferred variable annuity. The value of the annuity has increased from $50,000 to $200,000. What is John's cost basis?
50,000
Tony, a new client, brings in a check issued by the insurer with proceeds from a partial surrender of a variable annuity. He asks the registered representative to initiate a tax-free exchange into a new annuity funded by the check proceeds. What action should the registered representative take?
Decline the transaction because a Section 1035 exchange may not be funded with a check from the previous annuity
Variable annuities will most likely provide a hedge against inflation when invested in which of the following ways?
Equities in a separate account
Most variable annuity separate accounts are invested in:
GROWTH FUNDS
Which of the following statements are correct concerning advantages to policy owners of variable life policies? I Income tax is deferred on dividends, interest, and capital gains the separate account earns II The policy owner can choose investments to meet objectives III The policy owner can borrow all of the cash value
I & II only
John's policy statement from his insurance company lists his cash value as $1,480 and his loan value as the same. John most likely has: I Whole life II Variable life III Universal life IV Term life
I & III only
Which of the following ways do insurance companies invest the premiums paid for variable annuities? I Direct investment in stocks and bonds II Indirect investment in mutual funds III Direct investment in a general account IV Indirect investment in life insurance contrac
I and II only
Which of the following statements are TRUE regarding tax rules for payouts from non-qualified variable annuities? I Earnings are tax deferred until payout II Earnings are taxed at the capital gains rate III The cost basis for the annuity is the amount of premiums paid IV The cost basis for the annuity is zero
I and III
Insurers generally give a variable life insurance owner investment choices including which of the following investments? I Common stock funds II Bond funds III Money market funds
I, II, III
Features of variable life policies include: I Cash value II Current death benefit that equals or exceeds current cash value III Guaranteed minimum cash value IV Guaranteed minimum death benefit
I, II, and IV only
A customer has contributed $100,000 to a variable annuity contract that has a current account value of $200,000. The customer has a life expectancy of 20 years. The customer wishes to annuitize. Which statements are true? I The customer has a cost basis of "0" II The customer has a cost basis of $100,000 III $5,000 will be an annual return of principal IV All payments will be 100% taxable
II and III The best answer is C. Only distributions in excess of the customer's cost basis are taxable. The customer's basis is the total premiums contributed, or $100,000. The customer has a life expectancy of 20 years, so $100,000/20 = $5,000 of payments received each year are excluded from tax. Only annual amounts received in excess of the $5,000 are taxable.
A separate account that makes indirect investments: I is structured as a management company II is structured as a unit investment trust III invests in common stocks and fixed income securities IV invests in mutual fund shares
II and IV
ACCUMULATION PERIOD 1. INVESTMENT EARNINGS 2. PARTIAL WITHDRAWALS 3.LUMP SUM SURRENDER 4. DEATH BENEFIT
TAX RULES 1. INCOME IS TAX-DEFERRED 2.LIFO-FIRST IS TAXED NEXT IS'T 3.TAXABLE AMOUNT IS THE LUMP-SUM SURRENDER MINUS THE OWNERS COST BASIS 4.TOTAL DEATH BENEFIT,LESS THE DECREASED OWNERS COST BASIS, IS ORDINARY INCOME TO THE BENEFICIARY IN THE YEAR RECEIVED
All of the following statements concerning a variable life insurance policy are correct EXCEPT:
the death benefit is fixed and guaranteed for the insured's entire life payments are guaranteed just not death benefit
John, age 57, makes a withdrawal from his variable annuity. All of the following statements are true EXCEPT:
there is a 10% penalty tax applied against the entire amount withdrawn The 10% penalty applies because the customer is under age 59 1/2 and only applies against the part of the withdrawal subject to taxation - which is the portion attributable to the build-up in the account. It does not apply against the entire withdrawal.
Which type of insurance policy could disappoint the holder in a given year because it could provide a negative rate of return?
variable life
Which type of insurance requires a fixed annual premium, pays a variable death benefit, provides protection for the entire life of the insured, and gains cash value?
variable life
Which of the following insurance products is developed from the basic design of the whole life insurance policy?
variable life Variable life policies are similar to whole life in that they: are permanent insurance policies; have fixed annual premiums: have an investment component that builds cash value against which owners may take policy loan
A school teacher has a non-qualified variable annuity in which he has invested $8,000. The plan is currently worth $14,000. The teacher decides to surrender and take a partial withdrawal of $8,000. What is the tax treatment?
$2,000 of the withdrawal will be considered to be a return of capital; the balance will be taxed as ordinary income The best answer is C. All contributions to non-qualified variable annuities are not deductible and are made with "after-tax dollars." The customer has a cost basis of $8,000 in the account. The account is now worth $14,000, so there is $6,000 of never-taxed build-up in the account. Distributions are taxed on a LIFO basis. Of the $8,000 distributed, the first $6,000 is considered to be taxable build-up; and the remaining $2,000 is a non-taxable return of capital.
An owner of a variable annuity contract has paid in $20,000 in premiums. Due to an emergency cash need, she surrenders the contract prior to annuitization. At that time, the NAV is $16,000. There is a surrender charge of 4%. The tax consequence of this event is:
$4,640 ordinary loss If $20,000 is contributed and the contract is surrendered when it has a NAV of $16,000, then there is a loss on the contract. Because of the 4% surrender fee, the net amount received upon surrender is $15,360. Because the contract was purchased for $20,000, the loss amount is $4,640
NON-QUALIFIED----- hen an individual purchases an annuity, premium payments do not qualify for an income tax deduction-MAKES WITH AFTER TAX MONEY -
*PREMIUMS PAID INTO VA ARE NOT DEDUCTIBLE *EARNINGS BUILD TAX-DEFERRED *When distributions commence, the portion of the distribution that represents the tax-deferred buildup is now taxable as ordinary income, while the portion of the distribution that represents original premiums paid is returned tax-free *Only earnings above the cost basis are taxable.
TAXATION OF VLI'S----- -premiums are not tax deductible -investment income and capital gains the separate account earns are not currently taxable income -loans are tax-free but they will reduce the amount of insurance coverage -withdrawals are not taxable income as long as they do not exceed the policyowners cost basis -FIFO is used meaning first payments are tax-free and second are taxable -withdrawals in excess of cost basis for VLI are ordinary income for tax purposes
-upon full surrender of VLI policy the excess of any amount paid by the insurance company over cost basis is taxable income -with partial surrender of VLI policy the policyowner reduces the death benefit and receives the cash distribution -excess distribution over cost basis is taxable income -beneficiaries are not taxed on death proceeds -not income to beneficiary and is not subject to federal income taxes -full amount of policys death proceeds are includible in the insured policyowners gross estate for federal estate tax
Which statements are true about retirement plans? I Contributions to qualified plans are made with pre-tax dollars II Contributions to qualified plans are made with post-tax dollars III Distributions from qualified plans are 100% taxable as pre-tax dollars IV Distributions from qualified plans are partially taxable as pre-tax dollars and partially taxable as post-tax dollars
I and III
Which statements are true? I Separate accounts that make direct investments in common stocks and fixed income securities are structured as management companies II Separate accounts that make direct investments in common stocks and fixed income securities are structured as unit investment trusts III Separate accounts that make indirect investments in mutual fund shares are structured as management companies IV Separate accounts that make indirect investments in mutual fund shares are structured as unit investment trusts
I and IV
Which of the following features applies during both the variable annuity accumulation period and the annuity payout period? I Death benefit II Exchange privilege III Voting rights IV Surrender value
II and III only Thus, the death benefit and surrender value are available only during the accumulation phase.
Variable annuity sales charges are: I set by FINRA II not set by FINRA III cannot exceed 8 1/2% of investment dollars IV must be fair and reasonable
II and IV
Which of the following contracts offer the holder investment options? I Whole Life II Variable Life III Universal Life IV Variable Universal Life
II and IV
Which statements are TRUE? I Premium contributions to non-qualified variable annuity contracts are tax-deductible II Premium contributions to non-qualified variable annuity contracts are not tax-deductible III Premium contributions to variable life insurance contracts are tax-deductible IV Premium contributions to variable life insurance contracts are not tax-deductible
II and IV
Which statements are true? I Purchasers of fixed annuities buy accumulation units II Purchasers of variable annuities buy accumulation units III Purchasers of immediate annuities buy accumulation units IV Purchasers of deferred annuities buy accumulation units
II and IV
Which statements are true about the accumulation phase and annuity phase of a variable annuity contract? I Annuity payments can be made during the accumulation phase II Annuity payments cannot be made during the accumulation phase III Accumulation units can be purchased during the annuity phase IV Accumulation units cannot be purchased during the annuity phase
II and IV The best answer is D. The accumulation phase of a variable annuity contract is separate from the annuity phase. During the accumulation phase, premiums can be deposited to buy accumulation units, but annuity payments cannot occur. Once the account is annuitized, annuity payments begin, but additional deposits to buy accumulation units are prohibited.
SALES CHARGES AND EXPENSES------------ -when a person buys a VA the issuer deducts sales charges from the amount invested before any money goes into the separate account -FINRA does not set a specific max on sales charge like a mutual fund -most insurers impose Contingent Deferred Sales Charge (CDSC)-this will decline over time -insurance company will deduct up-front sales charges and state premium taxes before investing DEDUCTIONS FROM THE SEPARATE ACCOUNT (ANNUALLY)-------- 1. investment management fee(percentage of NAV) 2. mortality and expense risk charges 3. administrative expense(this is the cost for accounting,overhead, and recordkeeping)
INCOME TAX TREATMENT OF VA'S--------------- -
Which statement is true for BOTH non-qualified variable annuities and variable life insurance?
Premiums are invested in separate accounts
POLICY REPORTS GIVEN ANNUALLY SAYING----- 1 THE DEATH BENEFIT 2 CASH VALUE 3 ANY LOANS OR WITHDRAWALS 4 PREMIUMS PAID DURING THE YEAR 5 CHARGES DEDUCTED ***1940 Act requires semiannual report that includes financial statements for each separate account
VIATICAL SETTLEMENTS-- -permits one to invest in another persons life insurance policy - buyer=viatical settlement provider -original owner-viator -viator gives up rights of ownership in return for immediate cash payment that is less than the full amount of the death benefit
VARIABLE LIFE SETTLEMENTS---- - insured person sells his or her existing policy to a life settlement provider, which either holds the policy until maturity and collects the net death benefit, or sells the policy or its interests in multiple, bundled policies to hedge funds or other investors. *Since variable life insurance policies are securities, the sale of such products is subject to FINRA rules.
Which of the following statements describes a universal life insurance policy? The policy owner can change the schedule of premium payments very flexible
THE FIXED ANNUITY------------- -annuitant: person who receives payments from the insurance company -annuity: insurance company promises to make PERIODIC payments to owner -fixed annuity: insurance company promises to pay a FIXED amount each month or each year *insurance company assumes risk of investing the premiums to earn the amount needed for these payments ***SINCE fixed annuities are insurance products rather than securities the SEC DOES NOT regulate and DOES NOT supervise the sales of annuities ***STATE insurance departments provide any regulation and supervision since insurance products are regulated at the State level *insurance company assumes both mortality and expense risk
Mortality Risk- insurer sets the level of annuity payments based on the mortality tables that predict life expectancy, the risk the insurer will have to make these extra payments is the mortality risk Expense Risk- if insurance company's expenses are higher than anticipated it cannot reduce the required payments to the annuitant **payments are not protected from erosion of purchasing power due to inflation
For the owner or beneficiary of a variable life insurance policy, which of the following may be a taxable event?
Surrendering the policy
Tim Black, a customer seeking life insurance, is unmarried and is 25 years of age. The customer wants coverage that meets his current needs but does not want to lock into a low death benefit if he should later get married and have children. In addition, the customer would like a policy that includes a tax-deferred investment with investment options. To meet the customer's requirements of an increasing death benefit and tax-deferred investment with investment options, you would recommend:
variable universal life insurance Universal life policies allow the holder to increase premium payments to fund a higher death benefit. The universal life policy meets the customer's requirement of an increasing death benefit. The customer's second requirement is to have a tax-deferred investment with investment options. With a regular universal life policy, the insurance company makes the investment selection. Under a variable universal life policy, the policyholder makes the investment selection from one of the insurance company's separate accounts. Thus, the best choice for this customer is variable universal life.
A customer owns 3,250 accumulation units in a separate account, with a value of $7.70 each. She wishes to retire and begin taking a life annuity. The annuity units are currently valued at $2.28 each. Which statement is true?
She will receive 10,975 annuity units in exchange for the accumulation units The best answer is C. The customer has 3,250 accumulation units valued at $7.70 each. The total account value is $25,025. The customer annuitizes this account value into annuity units valued at $2.28 each. Divide the $25,025 by the $2.28 to get the number of annuity units this transaction produces (10,975). These annuity units fund the monthly annuity payments from this date forward.
*during annuity (pay out) period annuitants must report a portion of each periodic payment as taxable income *each payment includes a portion of nontaxable return of cost basis and a portion that represents taxable 'buildup'
*if annuitant lives beyond expectancy the remaining payments are entirely ordinary income *when a customer exchanges one annuity contract for another the customer does not report any gain or loss=exchange is tax free under Section 1035 of the Tax Code
TYPES OF LI CONT.............. -UNIVERSAL LIFE INSURANCE: flexible life insurance policy that allows the policyowner to change both the premiums and death benefit -After the first year, the ULI policyowner need only pay enough premiums to cover the mortality cost for the insured's age group and the policy's expense charge -if paid the minimum amont the ULI policy will not accumulate cash value and will effectively operate as a term insurance policy -any premium in excess is invested by the insurer to earn interest income -insurer guarantees low minimum return only -After the interest income has accumulated for a few years, the policyowner can use the excess money to buy additional insurance or to discontinue premium payments -premiums are deposited in the general account VARIABLE LIFE INSURANCE---------- -provides investment of the policy's cash value in separate accounts -death benefit and cash surrender value will vary depending on the performance of the investments in the separate account -guarantees that death benefit will be at least the original face amount of the policy -require fixed payment of premiums VARIABLE UNIVERSAL LIFE----- -combines flexible premium payment of universal life with investment feature of variable life -policyowner can decide the amount of premiums to pay and can thereby increase or decrease the death benefit -invest in separate account
TAXATION-------- -all cash value insurance(whole life,universal life, and variable life policies) offer tax-deferred growth of cash values -increase in cash values will not be included in the policyowners gross income -death benefit is not subject to federal income tax
Neither variable life insurance nor variable annuities offer a minimum rate of returns. Both require a prospectus when being presented to customers because both are defined as securities, since they place premium payments into separate accounts where the performance of the securities held affects the amount of the annuity or insurance payment. Thus, the purchaser bears the investment risk.
Cash value is generally available for loans without tax consequences from all of the following insurance products EXCEPT: Variable Annuity There is no "cash" value associated with variable annuities - meaning that one cannot borrow against the value of assets held in the separate account. Any amount withdrawn from a variable annuity contract is taxable under LIFO accounting rules and is not considered to be a "loan."
PARTIAL WITHDRAWALS DURING ACCUMULATION PERIOD------------- -federal income tax rules require withdrawals be taxed on a LIFO basis -first money withdrawn is taxable income to owners -next: only after all earnings have been withdrawn are payments considered to be nontaxable return of original investment -The return of the principal sum is a nontaxable return of cost basis. -if the owner surrenders an annuity contract for a lump-sum payment during the accumulation period, the owner must report taxable income if the amount received is more than the amount invested. -If the lump-sum amount is less than the total amount of premium payments, the loss is deductible from the investor's ordinary income.
DEATH BENEFIT----------- -the insurance company will pay the higher of cost basis or current account balance -The beneficiary will be in receipt of taxable income if the death benefit is greater than the deceased owner's cost basis -beneficiary will pay the income tax to the same extent as the annuity owner would have paid upon surrender -death benefit may also be subject to federal estate tax in the deceased owner's estate.
Which of the following rights does the holder of a variable life or variable universal life policy have? I The policyholder may vote for the board of managers overseeing the separate account II The policyholder has the right to select which separate account will receive premiums III The policyholder has the right of a full policy loan and, therefore, can borrow 100% of cash value IV The policyholder has the right to surrender the policy at any time and be refunded current NAV plus 100% of sales charges
I and II
Which of the following statements are true regarding payouts from variable annuity contracts? I The payout is determined by the number of annuity units II The payout is determined by the number of accumulation units III When payout commences, unit value is fixed while the number of units varies IV When payout commences, unit value varies while the number of units is fixed
I and IV
Which statements are true? I Prior to annuitization, a separate account investment is most similar to a mutual fund investment II Prior to annuitization, a separate account investment is most similar to pension payments III After annuitization, a separate account investment is most similar to a mutual fund investment IV After annuitization, a separate account investment is most similar to pension payments
I and IV
Life Annuity with Period Certain
Payments are made to the annuitant for life, but if annuitant dies early, payments continue for a certain number of years (typically, 10 years). Continued payments for the period certain go to the named beneficiary. If annuitant lives beyond the guarantee period, annuity becomes a Life Annuity.
Which of the following statements concerning features of variable annuity contracts is correct?
Premiums are not deductible for federal income tax purposes
VARIABLE LIFE INSURANCE- -this is both an insurance product and a 'security' subject to regulation under the federal securities laws -invest net premiums in separate account -must be registered under the Investment Company Act of 1940 -assets of the separate accounts provide the funds to pay any benefits -must deliver prospectus to customer
TYPES OF LIFE INSURANCE--TERM: promise to pay named beneficiary a specified amount of money if the insured dies within the term of the policy -after year is over the insured can renew the policy by paying a new premium for another years coverage -if insured does not pay the premium the policy ends or lapses -pure protection against loss from death, no investment feature WHOLE LIFE INSURANCE: protection for the entire life of insured -amount insured pays is the same each year -annual premium and death benefit are the same of the insureds whole life -has cash value which is invested in the general account and increases at a fixed rate -cash value increases to equal the face amount of the policy when the insured reached age 100
If a variable life policyholder borrows against cash value, which statement is TRUE?
The amount borrowed is not taxable reduces the death benefit
A customer, age 53, purchases a single payment deferred variable annuity to provide additional retirement income, for which he pays $70,000. If the customer dies a few months later when the NAV of the account is $75,000, which of the following statements is correct?
The beneficiary will receive the death benefit of $75,000
Which of the following statements describes a variable life insurance policy?
The cash value increases based on equity investments
Which statement is TRUE regarding a variable annuity offering a GMIB?
The contract guarantees a minimum growth rate for the separate account at the time of annuitization
An exchange of a life insurance policy for a variable annuity is not taxable. However, the exchange of a variable annuity for a variable life policy is taxable.
The customer may change the variable life contract to a whole life contract within the first 24 months
What is the result if the performance of the separate account for a variable life policy is greater than the assumed interest rate (AIR)?
The death benefit increases
EQUITY INDEXED ANNUITY---------------- -this is a type of fixed annuity - this calculates payments based on the stock index -guranteed minimum rate of return so investor never takes a loss, even when the stock market declines -investor does accept a limit on the amount of annual gain that can be earned -investor get return that is reduced in bull market years but that is protected from loss in the bear market years -have higher expenses than both fixed and variable annuities -they have large surrender fees that can be steep in the early years
VARIABLE ANNUITY------------------------------- -Insurance company promises to pay a fixed number of annuity units not a fixed amount of money -insurer does not guarantee investment return only the number of annuity units -since the purchaser assumes investment risk SEC requires that a variable annuity be registered as a security and sold with a PROSPECTUS -premiums that are invested in separate account usually purchase mutual fund shares -purchasers can invest in equity funds to achieve long term returns that generally exceed the returns of fixed-income investments held in the insurers general account -Historically, investments in equity securities have produced returns exceeding the rate of inflation, so the variable annuity investments in mutual funds can provide a hedge against inflation -inflation risk, credit risk is lower with variable annuities -the insurer assumes mortality and expense risk for both fixed and variable annuities
Variable Universal Life Insurance (VULI) policies provide policy owners with:
flexibility with respect to premium payments, investment options, and death benefits
What is the owner's right to obtain the account balance during the accumulation period of a variable annuity?
surrender value
ACCUMULATION AND ANNUITY PERIOD---------- -accumulation: when customer pays premiums to the insurer -annuity period- when insurer makes payments to the annuitant the annuity this is the annuity payout -separate account acts like mutual fund shares where they fluctuate -insurer must calculate the value of these units daily at the close of the NYSE -insurer determines the value of the units by adding up the market value of all assets in the separate account and dividing by the number of outstanding accumulation units -additional premium payments buy additional accumulation units -dividends capital gains and investment income are all reinvested and do NOT buy additional units rather they INCREASE the value of the existing accumulation units -during accumulation period premiums paid are NOT TAX DEDUCTIBLE -Build tax-deferred which means where income tax is not payable until distributions commence -dollar amount of the payments will vary depending upon the value of the annuity units
ASSUMED INTEREST RATE------------------(AIR) -this is the estimated future earnings rate -this is not a guarantee of the projected rate of return -once set this rate does not change for the lifetime of the annuitant -earnings will vary depending upon the dividends, capital gains, interest income, and appreciation earned by the separate account assets -this only applies to the annuity units -any amount of separate account return will increase the value of the accumulation units Performance > AIR= payments go up(annuity units) Performance < AIR= payments go down (annuity units)
How often must the insurer calculate the cash value and death benefit for a variable life insurance policy?
Cash value monthly; death benefit annually NAV is daily
Which of the following statements correctly describe the AIR used by companies marketing variable annuities? I AIR is the insurer's best estimate of the future performance for accumulation units in the separate account II AIR is applicable during both the accumulation and annuity periods III AIR is a return to which the company compares current return in the separate account to determine the next annuity payment IV AIR is applicable only during the annuity period
III and IV
DIRECT INVESTMENT-------------(MANAGEMENT COMPANY) -insurance company can set up the account to invest directly in portfolio securities -if the insurance company invests directly in the securities the separate account is a pool of investment assets just like an investment company and the separate account operates like a mutual fund with an investment adviser managing the portfolio of investments -separate account is a management investment company under the Investment Company Act of 1940
INDIRECT INVESTMENT--------------------(UNIT INVESTMENT TRUST) -when the separate account invests in mutual fund shares is operates as a UNIT INVESTMENT TRUST -by buying mutual fund shares the separate account invests indirectly in securities -the separate account will hold mutual fund shares in trust but does NOT actively manage the portfolio -separate account must register as investment company under Investment Company Act 1940 NOT THE INSURANCE COMPANY *Insurance company must register a variable contract as a security under the Securities Act of 1933 *Investment Adviser must register under the Investment Advisers Act of 1940 *Anyone offering variable annuities or variable life insurance policies must be a registered representative under the Securities Exchange Act of 1934
FEATURES OF VARIABLE ANNUITY CONTRACTS------ -can vote on BOD or any proposal to change the investment objective of the separate account -can vote on the investment adviser and independent auditor -can vote on any changes in investment policies -death benefit will be paid during the accumulation period ***If an investor buys a fixed deferred annuity and dies before the pay out period begins, the insurer will pay a named beneficiary the annuity's cash value. The cash value will include the premiums paid plus interest earnings, minus an allowance for expenses. ***If an investor buys a variable deferred annuity and dies before the pay out period begins, the insurer will pay a death benefit equal to the greater of the value of the account at the date of death or the total premium payments.
Surrender value-during the accumulation period the insurance company permits the annuity owner to surrender the annuity for the value of the account *annuity owner may also discontinue making premium payments and exercise certain Non-Forfeiture Options -Exchange Privileges: can change from one separate account to another and is not taxable/no cost to the owner -Bonus Annuity: the insurance company will contribute additional 3-6% to the purchasers initial premium payment, great marketing tool, high expenses and surrender fee -Combination Annuity: comprised of both fixed and variable annuity -Guaranteed Minimum Income Benefit (GMIB): insurance company guarantees minimum income earned regardless of how poorly the separate account performs, this is not a feature of a basic variable contract, holder is assuming investment risk
