B)I and III. & securities licenses. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased. A)II and III. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities. D)Variable annuity. C)prime rate. C)suitable due to the death benefit features of a variable annuity. Some fixed annuities credit a higher interest rate than the minimum, via a policy dividend that may be declared by the companys board of directors, if the companys actual investment, expense and mortality experience is more favorable than was expected. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: a. the return to investors is dependent on the performance of the securities in the underlying portfolio b. the investment company act of 1940 is the regulating legislation c. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made d. the . For a retired person, which of the following investments would provide the greatest protection against inflation? D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: Your client owns a variable annuity contract with an AIR of 4%. B)cost of living. U.S. Securities and Exchange Commission. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: Premiums made into the annuity purchase accumulation units. A security is an investment for profit with management performed by a third party. Chapter 12: Variable Annuities. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. Registration with FINRA is de facto registration with the SEC; no registration is required by the state banking commission. A)equity funds. D)money market funds. Advantages And Disadvantages Of Adjustable Life, Case Study: Cimb-Principal Asset Management Berhad. The annuity has grown to value of $60,000. vote for the investment adviser.4. There is no clear answer to this. Variable annuity salespeople must be registered with FINRA and the state insurance department. If they buy a variable annuity, their money can be invested in stocks, bonds or mutual funds. For a retired person, which of the following investments would provide the greatest protection against inflation? The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. The amount that is paid depends on the age of the annuitant (or ages, if its a two-life annuity), the amount paid into the annuity, and (if its a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected payout period. variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic pay-ments to you, beginning either immediately or at some future date. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. Variable annuities offer the possibility of higher returns and greater income than fixed annuities, but theres also a risk that the account will fall in value. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. A)II and IV. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A)the client assumes the investment risk. C)3800. Question #27 of 48Question ID: 606818 A variable annuity's separate account is: He originally invested $50,000 four years ago. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. The amount that is paid doesnt depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if its a fixed annuity) an interest rate that the insurance company believes it can support for the length of the payout period. \hspace{5pt}\text{Capital}&\text{Credit}&&\\ An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. C)municipal bonds. You dont have to worry about it anymore. C)the payout plans provide the client income for life. A) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children, D) Age 56, available cash to invest, makes the max retirement plan contributions to an existing IRA & 401K plan. B)100% taxable. D)all return of cost basis and nontaxable, Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. A fixed annuity is an insurance contract that pays a guaranteed rate of interest on the owner's contributions and later provides a guaranteed income. C) The entire $10,000 is taxable as ordinary income. All of the following are characteristics of a variable annuity, except. Introducing Cram Folders! The growth of the annuitys value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. A)a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant Can I Borrow from My Annuity for a House Down Payment? As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. A) Two-thirds of the withdrawal is taxable as ordinary income. D) Mutual Fund portfolio consisting of blue chip stocks. Question #18 of 48Question ID: 606827 On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). B)II and III. The most suitable option and one considered effective for married couples is a single joint and last survivor contract. Annuities are complicated products, so that may be easier said than done. Single premium annuities A single premium annuity is an annuity funded by a single payment. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. Generally the most that creditors can access is the payments as they are made, since the money the annuity owner gave the insurance company now belongs to the company. For example, if the income is monthly, the first payment comes one month after the immediate annuity is bought. C)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. Your answer, It will be higher., was correct!. Question #45 of 48Question ID: 606795 Your answer, The entire $10,000 is taxable as ordinary income., was correct!. Your client has $50,000 to invest. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 1. a VA guarantees an earnings rate of return, 2. a VA does not guarantee an earnings rate of return, 4. a VA does not guarantee payments for life. C)number of accumulation units. Please select the correct language below. B)Two-thirds of the withdrawal is taxable as ordinary income. For a retired person, which of the following investments would provide the greatest protection against inflation? B. separate account may consist of mutual funds. Reference: 12.2.1 in the License Exam. C) a VA contract does not guarantee any type of return. \text{Income statements accounts:}&&&\\ D)the safety of the principal invested. Fixed annuities are regulated by state insurance departments. contract. A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of sub accounts. approve changes in the plan portfolio. "Variable Annuities: What You Should Know," Page 10. Reference: 12.3.2.1 in the License Exam. the SEC. If the owner of a VA dies during the accumulation period, any death benefit will: B) be paid to the issuing company to complete the plan, C) be paid to the designated beneficiary, D) be paid to any legal heirs as recognized by the annuitant's state of domicile. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased 2 years ago to fund the new contract and will forward the check as soon as he receives it. Copyright 2023, Insurance Information Institute, Inc. It is a variable annuity. The separate account performance compared to last month's performance. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: withdraw funds without any tax consequences. \hspace{5pt}\text{Liability}&\text{Credit}&&\\ A)unsuitable because the return on something as conservative as a variable annuity tends to be low. One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. This recommendation is: Mortality assumptions are based on life expectancy or mortality tables prepared by ins. That can adversely affect your returns over the long term, compared with other types of investments. Reference: 12.3.3 in the License Exam. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. A registered person recommends the purchase of a variable annuity to one of his clients. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. The value of the separate account is now $30,000. B)the investment portfolio is managed professionally. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. VA contracts must be sold by prospectus due to the characterization of the separate accounts as securities, which must be registered under the Securities Act of 1933 & the Investment Co. Act of 1940. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. Individuals are reducing their overall risk, because only part of the money is being put in each investment. Deferred annuities, also referred to as investment annuities, are available in fixed or variable forms. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. A)an accounting measure used to determine the contract owner's interest in the separate account. d. His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant. D)I and III. Sub accounts and mutual funds are conceptually. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. A variable annuity is both an insurance and a securities product. B)mutual fund units. vote on proposed changes in investment policy. VAs, blue chip mutual fund portfolios, ETFS & ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client. Her intent was to use the funds for the down payment on a house after graduation. There is no beneficiary in the event the annuitant dies. B)Life annuity with period certain. Qualified annuities A qualified annuity is one used to invest and disburse money in a tax-favored retirement plan, such as an IRA or Keogh plan or plans governed by Internal Revenue Code sections 401(k), 403(b) or 457. co. products that should be purchased primarily for the ins. The number of annuity units rises once annuitization begins. Question #40 of 48Question ID: 606800 A variable annuity's separate account is: The separate account is used for both variable life insurance and variable annuity investments. must precede every sales presentation. Reference: 12.3.3 in the License Exam, Question #34 of 48Question ID: 606834 All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: Your answer, variable annuities., was correct!. A) Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. withdraw funds without any tax consequences. A)IPO. Once the contract is annuitized, monthly payments to the customer are: A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of accumulation and annuity units varies with the investment performance of the separate account. B)each annuity unit's value varies with time, but the number of annuity units is fixed. In the case of deferred annuities, this is often referred to as the accumulation phase. A)III and IV. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. A)I and IV. Immediate annuities are also available in fixed or variable forms. D)II and III. D)with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed, With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. The growth portion is subject to a 10% penalty. 2003-2023 Chegg Inc. All rights reserved. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. C. variable annuities will protect an investor against capital loss. The growth of the annuitys value and/or the benefits paid may be fixed at a dollar amount or by an interest rate, or may grow by a specified formula. Variable Annuity Advantages and Disadvantages, Guide to Annuities: What They Are, Types, and How They Work. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. This recommendation is: A) suitable due to the relative safety of the investment. (The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). Question #31 of 48Question ID: 606836 With regard to a variable annuity, all of the following may vary EXCEPT: Reference: 12.1.2 in the License Exam. A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. In addition, an element of risk must be present. As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. A client has purchased a nonqualified variable annuity from a commercial insurance company. Guaranteed Lifetime Annuity: How They Work, When They Pay You, Life Annuity: Definition, How It Works, Types, This is also generally true of retirement plans. Generally, a life only contract pays the most per month because payments cease at the annuitant's death. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission. C)The entire $10,000 is taxable as ordinary income. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. This customer has no spouse or dependents, which negates the value of the death benefit. B)II and III. Immediate annuities An immediate annuity is designed to start paying an income one time period after the immediate annuity is bought. The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies. Single premium annuities are often funded by rollovers or from the sale of an appreciated asset. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. In addition, an element of risk must be present. D)accumulation units. Question #32 of 48Question ID: 606815 audio not yet available for this language, {"cdnAssetsUrl":"","site_dot_caption":"Cram.com","premium_user":false,"premium_set":false,"payreferer":"clone_set","payreferer_set_title":"Variable Annuities","payreferer_url":"\/flashcards\/copy\/variable-annuities-5097323","isGuest":true,"ga_id":"UA-272909-1","facebook":{"clientId":"363499237066029","version":"v12.0","language":"en_US"}}. Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. Immediate life annuity with 10-year period certain. Must provide full and fair disclosure, 2. \text{Owner's equity:}&&&\\ With regard to a variable annuity, all of the following may vary EXCEPT: Your answer, number of annuity units., was correct!. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. the state banking commission. A variable annuity is both an insurance and a securities product. C)annuity units. B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. In other words, the money in a fixed annuity will grow and will not drop in value. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A separate account will invest in a number of different securities. Many variable annuities invest the separate account in mutual funds. vote for the investment adviser. 6. For an insurance company, mortality risk turns out unfavorably if: A variable annuity's separate account is: 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? C)the yield is always higher than bond yields. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? regulated under both securities and insurance laws. The nature of the securities invested in - bonds and growth stocks - makes it necessary that sales reps and their principals be licensed in securities as well as insurance. Reference: 12.1.2 in the License Exam. co. will have to continue payments longer than expected. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. A)variable annuities may only be sold by registered representatives. Reference: 12.3.1 in the License Exam. Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. Once annuitized, the number of annuity units does not vary. Life Insurance vs. Annuity: What's the Difference? IncreaseDecreaseNormalBalanceBalancesheetaccounts:AssetCreditLiabilityCreditOwnersequity:CapitalCreditDrawingIncomestatementsaccounts:RevenueCredit(j)ExpenseCreditDebit\begin{array}{lccc} Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. First, they are complicated, as insurers use different methods to calculate the index return. A VA is a security & must be registered with the SEC, not FINRA. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock indexusually computed as a fraction of that indexs total return. The entire amount is taxed as ordinary income. C) Life annuity with 10 year period certain. This factor is used to establish the dollar amount of the first annuity payment. Explaining What have been the major population changes since the first census in 1790? An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., was correct!. B)variable annuities are classified as insurance products. A joint-and-last-survivor annuity is a payout option where: Your answer, two people are covered and payments continue until the second death., was correct!. Reference: 12.1.4.2 in the License Exam. Oct. 2014, Subjects: Annuity Contracts,Purchasing Annuities,Receiving Distribution from Annuities,Variable Life. In the first year, you decide to withdraw $50,000. Variable annuities must be registered with: A prospectus for a variable annuity contract: When may a variable annuity account be surrendered? C)II and IV. [B]The holders may vote to change investment objectives. For each of the items (a) The annuity unit's value represents a guaranteed return. To prevent this situation individuals can buy a guaranteed period with the immediate annuity. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? Your answer, waiver of premium, was correct!. "Variable Annuities: What You Should Know," Pages 67. Question #42 of 48Question ID: 606830 The correct answer is: Defines a securities product All of the following policy elements are not guaranteed in a variable whole life policy, EXCEPT: Select one: a. C)earnings only and taxable A)II and IV. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop. He must ensure that the client, in addition to meeting suitability requirements, is aware of all of the following EXCEPT: A) a VA contract will provide a fluctuating monthly check upon the annuitization of the contract. D) The fact that periodic payments into the contract may increase or decrease. A)Purchasing power risk. For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. B)corporate stock. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. D)suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract, Based on the information given in the question, the VA recommendation would not be suitable. U.S. Securities and Exchange Commission. These include white papers, government data, original reporting, and interviews with industry experts. Under the terms of the plan, money paid into the annuity is not included in taxable income for the year in which it is paid. Future annuity payments will vary according to the separate account's performance. Variable Annuities. A)Fixed annuities. Find out how you can intelligently organize your Flashcards. When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. Reference: 12.1.2 in the License Exam. Reference: 12.3.3 in the License Exam. The accumulation unit's value is used to calculate the total value of the account. C)Life annuity. He originally invested $29,000 4 years ago; it now has a value of $39,000. You should now have gotten the answer to your question All of the following are characteristics of a variable annuity, except:, which was part of Insurance MCQs & Answers. Please upgrade to Cram Premium to create hundreds of folders! Based only on these facts, the variable annuity recommendation is The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. Investment earnings of all annuities, qualified and nonqualified, are tax-deferred until they are withdrawn; at that point they are treated as taxable income (regardless of whether they came from selling capital at a gain or from dividends). Your 65-year-old client owns a nonqualified variable annuity. C)such an annuity is designed to combat inflation risk. In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. Once the contract is annuitized, monthly payments to the customer are: D)Dow Jones Industrial Average. This factor is used to establish the dollar amount of the first annuity payment. Deferred annuities A deferred annuity is designed to collect premiums and accrue investment income over an extended period for payout at a later timefor example, when an individual retires. As with all tax-deferred accounts, muni bonds are not appropriate investments because interest earned on munis is already tax exempt at the federal level.

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