\hspace{5pt}\text{Asset}&&\text{Credit}&\\ Which of the following recommendations would best meet the customer profile? 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. Question #16 of 48Question ID: 606807 The separate account performance compared to an assumed interest rate. Your client owns a variable annuity contract with an AIR of 4%. What is her total tax liability? The payment might be invested for growth for a long period of timea single premium deferred annuityor invested for a short time, after which the payout beginsa single premium immediate annuity. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. B)fixed in value until the holder retires. The payout compared to last month's payout. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. Reference: 12.1.2.1.1 in the License Exam. The remainder of the premium is invested in the separate account. Question #14 of 48Question ID: 606823 His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? the SEC. A variable annuity's separate account is: The separate account is used for both variable life insurance and variable annuity investments. But again, the need to designate beneficiaries is not an issue for this annuitant. a. c. The separate account provides for a guaranteed minimum return. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. B)value of annuity units. C. variable annuities will protect an investor against capital loss. Variable Annuitization is an annuity option where income payments received by the policyholder vary based on the investment performance of the annuity. A prospectus for a variable annuity contract: The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. C) suitable due to the death benefit features of a variable annuity. D)II and IV. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. \text{Income statements accounts:}&&&\\ holder dies sooner than expected. 2. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: Your answer, the payout plans provide the client income for life., was correct!. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. How to Rollover a Variable Annuity Into an IRA. Please sign in to share these flashcards. C)Money market fund. For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. approve changes in the plan portfolio.3. When the annuitization option is selected, each payment represents both capital and earnings. a variable annuity guarantees an earnings rate of return. B)variable annuities are classified as insurance products. Variable annuities must be registered with: A prospectus for a variable annuity contract: When may a variable annuity account be surrendered? is required by the Securities Act of 1933. In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. Variable annuities are designed to combat inflation risk. B)each annuity unit's value varies with time, but the number of annuity units is fixed. used to escrow late or otherwise delinquent premium payments. Please upgrade to Cram Premium to create hundreds of folders! Variable annuities are riskier than fixed annuities because the underlying investments may lose value. The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. D)Any tax due is deferred. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. A)II and IV. A)Purchasing power risk. Typically, they allow one withdrawal each year during the accumulation phase. Which of the following are defined as securities? Thanks for choosing us. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. The number of annuity units is fixed at the time of annuitization. In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: Your answer, mortality guarantee., was correct!. Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example, Present Value of an Annuity: Meaning, Formula, and Example, Future Value of an Annuity: What Is It, Formula, and Calculation, Calculating Present and Future Value of Annuities, Annuity Table: Overview, Examples, and Formulas, Present Value Interest Factor of Annuity (PVIFA) Formula, Tables. A customer is receiving annuitized payments from a variable annuity. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: Fixed annuities. Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain period of time designated in the contract should the annuitant die within that period. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. The fees on variable annuities can be quite hefty. The value of a variable annuity is based on the performance of an underlying portfolio of sub accounts selected by the annuity owner. However, it does guarantee payments for life (mortality). The growth portion is taxed as a capital gain. Question #17 of 48Question ID: 606802 When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. Question #1 of 48Question ID: 606828. C)I and IV. If this client is in the payout phase, how would his April payment compare to his March payment? C)suitable due to the death benefit features of a variable annuity. do not have a separate account Flexible premium annuities are only deferred annuities; that is, they are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from them. How Are Nonqualified Variable Annuities Taxed? The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. CDs insured by the FDIC. In these regards, the low interest rate environment in the US market, in spite of the slight interest rate rise in 2017, has eroded the investment income of Use LEFT and RIGHT arrow keys to navigate between flashcards; Use UP and DOWN arrow keys to flip the card; An investor who has purchased a nonqualified variable annuity has the right to: 1. vote on proposed changes in investment policy.2. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. What is the taxable consequence of this withdrawal to your client? "Variable Annuities: What You Should Know," Pages 67. A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. A guaranteed period commits the insurance company to continue payments after the owner dies to one or more designated beneficiaries; the payments continue to the end of the stated guaranteed periodusually 10 or 20 years (measured from when the owner started receiving the annuity payments). A)100% tax free. have investment risk that is assumed by the investor. The offers that appear in this table are from partnerships from which Investopedia receives compensation. If they buy a variable annuity, their money can be invested in stocks, bonds or mutual funds. [B]The holders may vote to change investment objectives. D)I and II. C)the number of annuity units is fixed, and their value remains fixed. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. D)II and III. Reference: 12.1.2 in the License Exam, Question #21 of 48Question ID: 606812 Question #32 of 48Question ID: 606815 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. 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. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero D)I and III. Question #31 of 48Question ID: 606836 Reference: 12.1.4.1 in the License Exam. Must provide full and fair disclosure, 2. Must precede every sales presentation. Your answer, Variable annuities., was correct!. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: Your answer, changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices., was correct!. You can learn more about the standards we follow in producing accurate, unbiased content in our. C)Mortality risk. There is no beneficiary in the event the annuitant dies. Variable Annuities. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. What Are the Biggest Disadvantages of Annuities? B)a majority vote from the shareholders is required to change the investment objectives. This customer has no spouse or dependents, which negates the value of the death benefit. In addition, an element of risk must be present. There are also immediate annuities, which begin paying income right away. When the first party dies, the annuity payment is made to the survivor. A)value of underlying securities held in the separate account. We'll bring you back here when you are done. Your answer, The policyowner., was correct!. 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. Reference: 12.1.4.1 in the License Exam. A) The fact that the annuity payment may increase or decrease. D. a majority vote from the shareholders is required to change the investment objectives. This compensation may impact how and where listings appear. Weight the criteria. a variable annuity guarantees payments for life. D) The fact that periodic payments into the contract may increase or decrease. Reference: 12.2.1 in the License Exam. He makes the following four statements, all of which are true EXCEPT The most important consideration in purchasing a VA is to be aware that benefit payments will fluctuate with the investment performance of the separate account. 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. Options. they have all the same characteristics as life insurance An Immediate Annuity is designed to provide each of the following features, EXCEPT: The creation of an estate Your client has a large sum of money to invest from the proceeds of the sale of his home. A variable annuity is both an insurance and a securities product. 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. "Variable Annuities: What You Should Know," Page 10. can be sold by someone with only an insurance license Question #27 of 48Question ID: 606818 Azanswer team is here with the correct answer to your question. In recent years, annuity companies have created various types of floors that limit the extent of investment decline from an increasing reference point. A variable annuity is both an insurance and a securities product. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. B)FINRA. 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. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. The value of the separate account is now $30,000. What Are the Distribution Options for an Inherited Annuity? In concept, the payments come from three pockets: The original investment, investment earnings and money from a pool of people in the investors group who do not live as long as actuarial tables forecast. a variable annuity does not guarantee an earnings rate of return. Who assumes the investment risk in a variable annuity contract? A) Two-thirds of the withdrawal is taxable as ordinary income. B)II and III. In a variable life annuity with 10-year period certain, a contract holder receives: All of the following statements about variable annuities are true EXCEPT: Your answer, a minimum rate of return is guaranteed., was correct!. B)II and III. Which of the following recommendations would BEST meet the customer profile? 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. In March, the actual net return to the separate account was 8%. Variable Annuities. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison to the assumed interest rate. This would not align with the couple's criteria for coverage as long as they both live. used for the investment of funds paid by contract holders. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. There is a common apprehension that if an individual starts an immediate lifetime annuity and dies soon after that, the insurance company keeps all of the investment in the annuity. Reference: 12.3.3 in the License Exam, Question #34 of 48Question ID: 606834 An annuity is an insurance product that promises to pay out income at a future date based on invested funds. D)value of accumulation units. Any withdrawals you make prior to the age of 59 may also be subject to a 10% tax penalty. C)Life annuity. Which of the following recommendations would best meet the customer profile? Your 65-year-old client owns a nonqualified variable 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 The # of accumulation units can rise during the accumulation period, 3. Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short period of time is not suitable. 6. It is a variable annuity. How is the distribution taxed? Reference: 12.1.2.1.1. in the License Exam. B)IRAs. All of the following are characteristics of Variable Annuity contracts EXCEPT The possibility of higher returns and greater income than fixed annuities, but there's also a risk that the account will fall in value A universal variable life policy should be purchased primarily for its insurance features, not its investment features. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. Distribution can take place before or during any solicitation for sale. For example, an individual might buy a nonqualified single premium deferred variable annuity. D)variable annuities offer the investor protection against capital loss. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. The value of the separate account is now $30,000. Question #41 of 48Question ID: 606801 D)the state insurance department. A registered representative recommends a variable annuity with an income rider to a client. Once a variable annuity has been annuitized: \text{Owner's equity:}&&&\\ Question #20 of 48Question ID: 606808 Reference: 12.1.4.1 in the License Exam. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. a variable annuity does not guarantee payments for life. People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. The growth portion is subject to a 10% penalty. Often used for retirement planning purposes, it is meant to provide a regular (monthly, quarterly, annual) income stream, starting at some point in the future. Lifetime annuities A lifetime annuity provides income for the remaining life of a person (called the annuitant). The number of annuity units is fixed at the time of annuitization. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: She will receive the annuity's entire value in a lump-sum payment. B)Variable annuities. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. B)I and IV. This recommendation is: Many variable annuities invest the separate account in mutual funds. A separate account will invest in a number of different securities. Her agent recommended she choose a variable annuity as a safe haven for the funds. Single premium annuities A single premium annuity is an annuity funded by a single payment. co. products that should be purchased primarily for the ins. A)exempt from taxes Carefully look at your options when choosing an annuity. A)II and IV. Under rebalancing, investors shift their investments periodically to return them to the proportions that represent the risk/return combination most appropriate for the investors situation. C)II and III. An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses. approve changes in the plan portfolio. D)I and III. B)II and III. \hspace{5pt}\text{Drawing}&&&\\ Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. If this client is in the payout phase, how would his April payment compare to his March payment? C)prime rate. Reference: 12.3.4 in the License Exam. All of the following are traits of a Fixed Annuity, except:AThe purchasing power of a fixed dollar benefit amount decreases as the cost of living increasesBThe insurer's general account assets guarantee the fixed annuity contractCThe insurer bears any investment riskDThe actual rate of interest credited will be based on the state-published Question #22 of 48Question ID: 606803 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. required to be located off of the company's premises. These contracts come with high surrender charges. The separate account is NOT likely to invest in: vote for the investment adviser.4. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. How Good of a Deal Is an Indexed Annuity? An investor who has purchased a nonqualified variable annuity has the right to: D)accumulation units. 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. 1. have investment risk that is assumed by the investor, 3. can be sold by someone with only an insurance license, 4. are purchased primarily for their insurance features. D)It cannot be determined until the April return is calculated. 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. 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. Your customer, still working, informs you that she will be funding a variable annuity you have recommended from 2 sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another variable annuity that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. If he wants to purchase an annuity and start receiving payments now, what would you suggest? D)0. A)II and III Universal variable life policies are ins. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. D)Municipal bonds. Variable annuities should be considered long-term investments due to the limitations on withdrawals. B)Fixed annuity contract with a discussion regarding timing risk C)complete all paper work to purchase the annuity contract and obtain the clients signature immediately. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. First, they are complicated, as insurers use different methods to calculate the index return. Question #24 of 48Question ID: 606806 Introducing Cram Folders! This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. D)each annuity unit's value is fixed, but the number of annuity units varies with time. As with most retirement account options, withdrawals before the age of 59 will result in a 10% tax penalty. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. From an insurance company, mortality risk turns out unfavorably if: 1. an annuitant lives longer than expected, 2. an annuitant dies sooner than expected, 3. a life ins. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? Chapter 12: Variable Annuities. C)III and IV. D) There is no tax as the withdrawal is considered return of capital. D) Mutual Fund portfolio consisting of blue chip stocks. D)the rate of return is determined by the underlying portfolio's value. C)such an annuity is designed to combat inflation risk. 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. Question #35 of 48Question ID: 606810 Reference: 12.1.4.2 in the License Exam. \hspace{5pt}\text{Expense}&&\text{Credit}&\text{Debit}\\ Your email address will not be published. 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. C)II and IV. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. withdraw funds without any tax consequences. B)Two-thirds of the withdrawal is taxable as ordinary income. 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. 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