As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. A)II and III 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. A)each annuity unit's value and the number of annuity units vary with time. Her intent was to use the funds for the down payment on a house after graduation. In a fixed annuity, the insurance company guarantees the principal and a minimum rate of interest. C)It will be higher. C)annuity units. Once a variable annuity has been annuitized: Your answer, each annuity unit's value varies with time, but the number of annuity units is fixed., 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!. What Are the Distribution Options for an Inherited Annuity? Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. Changes in payments on a variable annuity correspond most closely to fluctuations in the: Once a customer annuitizes a variable annuity, which of the following statements are TRUE? The number of accumulation units is always fixed throughout the accumulation period. vote for the investment adviser. D)variable annuities offer the investor protection against capital loss. 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: 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)II and IV. Reference: 12.1.2 in the License Exam. D)money market funds. First, they are complicated, as insurers use different methods to calculate the index return. D)I and III. 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. B)part earnings and part cost basis A)II and IV. If the owner of a variable annuity dies during the accumulation period, any death benefit will: Your answer, be paid to a designated beneficiary., was correct!. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. This can be particularly valuable if they are using a strategy called rebalancing, which is recommended by many financial advisors. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. A) Two-thirds of the withdrawal is taxable as ordinary income. C)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. These contracts come with high surrender charges. Reference: 12.1.4.1 in the License Exam. 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. Reference: 12.2.1 in the License Exam. Fixed annuities typically earn at a lower, stable rate. B)I and III. C)not suitable because a lifetime income rider is only for someone who is already retired If they buy a variable annuity, their money can be invested in stocks, bonds or mutual funds. As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. D)Variable annuity contract with a discussion regarding legislative risk, A VA with its investments in the separate account subject to market risk would not align with the customer's objective. B)fixed in value until the holder retires. 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!. Your client has $50,000 to invest. The funds in an annuity are off-limits to creditors and other debt collectors. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. \hspace{5pt}\text{Capital}&\text{Credit}&&\\ a variable annuity does not guarantee an earnings rate of return. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. 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)II and IV. A)the yield is always higher than mortgage yields. If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? a life insurance holder lives longer than expected. When a variable annuity contract is annuitized, the number of annuity units is fixed. Reference: 12.1.2 in the License Exam. A)Corporate debt securities 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. Immediate annuities are also available in fixed or variable forms. 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. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. 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. A variable annuity's separate account is: The separate account is used for both variable life insurance and variable annuity investments. A registered person recommends the purchase of a variable annuity to one of his clients. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero Question #11 of 48Question ID: 606816 Question #45 of 48Question ID: 606795 When the second party dies, all payments cease. Nature of the underlying investment fixed or variable, Primary purpose accumulation or pay-out (deferred or immediate), Nature of payout commitment fixed period, fixed amount or lifetime, Premium payment arrangement single premium or flexible premium. Annuities are financial products intended to enhance retirement security. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both ins. This factor is used to establish the dollar amount of the first annuity payment. A)I and IV. Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? 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. B) the state insurance department. Which of the following are defined as securities? Options. In this case, the investor is taking a lump-sum distribution before reaching age 59- and must pay an additional 10% penalty on the taxable amount. A)the state banking commission. A)variable annuities will protect an investor against capital loss. 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%. D)II and III. "Variable Annuities: What You Should Know," Pages 67. B. separate account may consist of mutual funds. Variable annuity salespeople must be registered with FINRA and the state insurance department. C)with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually The fees on variable annuities can be quite hefty. However, if you take a withdrawal during the contractssurrender period, which can be as long as 15 years, youll generally have to pay a surrender fee. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. a. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. holder dies sooner than expected, the ins. C) The entire amount is taxed as ordinary income, because it is not life insurance. As with most retirement account options, withdrawals before the age of 59 will result in a 10% tax penalty. co., assumes the investment risk. Money in a variable annuity is invested in a fundlike a mutual fund but one open only to investors in the insurance companys variable life insurance and variable annuities. B)I and II C)the payout plans provide the client income for life. Some state statutes and court decisions also protect some or all of the payments from those annuities. B) the rate of return is determined by the underlying portfolio's value, C) such an annuity is designed to combat inflation risk, D) the number of annuity units becomes fixed when the contract is annuitized. CDs insured by the FDIC. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. Upon John's death during the accumulation period, Sue takes a lump-sum payment. For example, an individual might buy a nonqualified single premium deferred variable annuity. Reference: 12.2.1 in the License Exam. B)reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. This withdrawal flexibility is achieved by adjusting the annuitys value, up or down, to reflect the change in the general level of interest rates from the start of the selected time period to the time of withdrawal. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. In addition, an element of risk must be present. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. If you die before the payout phase, your beneficiaries may receive a. An investor owning which of the following variable annuity contracts would hold accumulation units? Once the contract is annuitized, monthly payments to the customer are: C)the invested money will be professionally managed according to the issuers' investment objectives. Many annuity companies offer a variety of investment options. In addition, insurer charges ten percent penalty if insured withdraw before he or she turns to fifty nigh and six month or become disabled, unless return wit Current assumption insurance is used to act like a bank; policy holders can put a good amount of money in an account to earn interest. 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. Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. This compensation may impact how and where listings appear. B)II and III. Question #19 of 48Question ID: 606826 You have created 2 folders. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. The growth portion is taxed as ordinary income. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. The # of VA accumulation units can rise during the accumulation period when additional units are being purchased. The growth portion is taxed as a capital gain. B)Life annuity with period certain. Your answer, The policyowner., was correct!. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. 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. The most suitable option and one considered effective for married couples is a single joint and last survivor contract. The # of annuity units rises once annuitization begins. He originally invested $29,000 4 years ago; it now has a value of $39,000. D)Variable annuity. D)II and IV. used to escrow late or otherwise delinquent premium payments. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? Which Earns More: Variable or Fixed Annuities? Nonqualified annuities A nonqualified annuity is one purchased separately from, or outside of, a taxfavored retirement plan. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? If this client is in the payout phase, how would his April payment compare to his March payment? must be filed with FINRA. a variable annuity does not guarantee payments for life. An annuity is an agreement for one person or organization to pay another a series of payments. Reference: 12.3.4 in the License Exam, Chapter 16: U.S. Government and State Rules a, Chapter 17: Other SEC and SRO Rules and Regul, Chapter 15: Ethics, Recommendations, and Taxa, Chapter 13: Direct Participation Programs, Fundamentals of Financial Management, Concise Edition, Joe B. Hoyle, Thomas F. Schaefer, Timothy S. Doupnik, Carl Warren, James M Reeve, Jonathan E. Duchac. A variable annuity is both an insurance and a securities product. Reference: 12.1.1 in the License Exam. The number of accumulation units can rise during the accumulation period. 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. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. Reference: 12.3.2.4 in the License Exam. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. The number of accumulation units is always fixed throughout the accumulation period. Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: The separate account is NOT likely to invest in: Your answer, municipal bonds., was correct!. [D]The portfolio may contain mutual fund shares. 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. B)IRAs. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. The value of accumulation and annuity units varies with the investment performance of the separate account. Find out how you can intelligently organize your Flashcards. The annuity unit's value represents a guaranteed return. The separate account performance compared to last month's performance. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. is required by the Securities Act of 1933. Question #18 of 48Question ID: 606827 Variable annuities must be registered with: A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. D)II and III. Question #40 of 48Question ID: 606800 For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. Distributions from nonqualified variable annuities are: Your 55-year-old client owns a nonqualified variable annuity. Reference: 12.3.3 in the License Exam. 3. For this potential advantage, the investor, rather than the ins. If you need to withdraw money from the account because of a financial emergency, you may face surrender fees. A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. But again, the need to designate beneficiaries is not an issue for this annuitant. Reference: 12.3.1 in the License Exam, Question #30 of 48Question ID: 606833 vote for the investment adviser.4. 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. A separate account will invest in a number of different securities. A)not suitable C)III and IV. \hspace{5pt}\text{Revenue}&\text{Credit}&(j)&\\ B)suitable regardless of funding sources 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. D) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59- years old. Typically, they allow one withdrawal each year during the accumulation phase. Before buying a variable annuity, investors should carefully read the prospectus to try to understand the expenses, risks, and formulas for calculating investment gains or losses. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. D)Dow Jones Industrial Average. Reference: 12.1.2.1.1 in the License Exam. Individuals are reducing their overall risk, because only part of the money is being put in each investment. 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. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? Therefore, ordinary income taxes will apply to the entire $10,000. It is a variable annuity. For a retired person, which of the following investments would provide the greatest protection against inflation? Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. You can buy an annuity with either a lump sum or a series of payments, and the accounts value will grow accordingly. d. While variable annuities have greater potential for earnings, since their interest rate rises and falls with their underlying investments, they can lose money. The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: Your answer, mortality guarantee., was correct!. 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. D)an accounting measure used to determine payments to the owner of the variable annuity. 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. 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. C)II and III. Cram has partnered with the National Tutoring Association. She will receive the annuity's entire value in a lump-sum payment. For each of the items (a) A)accumulation shares. 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. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. Her agent recommended she choose a variable annuity as a safe haven for the funds. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment. 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. In March, the actual net return to the separate account was 8%. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. The separate account performance compared to an assumed interest rate. (The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). "Variable Annuities: What You Should Know," Page 3. Which of the following are defined as securities? Required fields are marked *. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. We'll bring you back here when you are done. A fixed annuity is a contract between the policyholder and an insurance company. A)equity funds. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. The # of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. contract. 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. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Reference: 12.3.3 in the License Exam. 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. C) suitable due to the death benefit features of a variable annuity. Variable annuities grow tax-deferred, so you dont have to pay taxes on any investment gains until you begin receiving income or make a withdrawal. 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). The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Fixed annuities are regulated by state insurance departments. 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. The separate account is NOT likely to invest in: B)I and III. C)prime rate. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. the state banking commission. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. 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. The investor purchased accumulation units. However, they are protected by state guaranty associations in the event that the insurance company providing the product goes out of business. These contracts cover both lives and will continue to make payments until the last spouse dies. 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. D) The investment risk is shared between the insurance company and the policyowner. Question #29 of 48Question ID: 606831 C)Life annuity. Reference: 12.2.1 in the License Exam. D)Investment risk. D)each annuity unit's value is fixed, but the number of annuity units varies with time. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: have investment risk that is assumed by the investor Your answer, Variable annuity., was correct!. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. The holder of a VA receives the largest monthly payments under which of the following payout options? Fixed annuities. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Variable Annuities. B)corporate stock. If one purchases an annuity for a set price, the issuing company would invest the funds and hold them until they are supposed to be disbursed, generally based on the owner's age. Because this is not guaranteed, the policyowner bears the investment risk. . Immediate life annuity with 10-year period certain. Carefully look at your options when choosing an annuity. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. 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). C. variable annuities will protect an investor against capital loss. D) Mutual Fund portfolio consisting of blue chip stocks. Question #20 of 48Question ID: 606808 If the customer takes a withdrawal of $10,000, what are the tax consequences? B)Fixed annuity contract with a discussion regarding timing risk A prospectus for a variable annuity contract: The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. a variable annuity guarantees an earnings rate of return. Question #14 of 48Question ID: 606823 C)I and III. John is the annuitant in a variable plan, and Sue is the beneficiary. C)I and IV. A VA is a security & must be registered with the SEC, not FINRA. C) a VA contract does not guarantee any type of return. Reference: 12.3.3 in the License Exam. [C]The portfolio is professionally managed. B)II and III. All of the following are characteristics of a variable annuity, except. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. Question #16 of 48Question ID: 606807 Distribution can take place before or during any solicitation for sale. Once a variable annuity has been annuitized: When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Most variable annuities are structured to offer investors many different fund alternatives. A)II and IV. Please upgrade to Cram Premium to create hundreds of folders! Distributions from such an annuity are computed on a LIFO basis with the income taxed first. the producer is responsible for providing the applicant a summary of coverage that includes all of the following EXCEPT. People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors.
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