Annuities Flashcards
How are variable annuities priced?
Priced like a mutual fund
NAV + SC = POP
Is there a maximum sales charge for variable annuities?
No
Unlike open end investment companies that have sales max charge of 8.5%
What happens to earnings (dividends and capital gains) from a variable annuity
They are reinvested
All earnings in variable annuities are reinvested
Do earnings in a variable annuity grow tax deferred?
Yes, grow tax deferred
[Variable annuity taxes] - Lump sum withdrawal
- Cost-basis returned tax free
* All earnings above cost basis are taxed
[Variable annuity taxes] - Random withdrawals
- Earnings are withdrawn first and are taxable
- After all earnings are withdrawn, cost basis is returned tax free
(Uses LIFO accounting method)
[Variable annuity taxes] - Annuitized withdrawals
- Lifetime monthly payments
- Each payment is part earnings, part cost basis
- Earnings portion is taxed but cost basis is tax free
Life only annuity
Monthly payments
Payments end with life of annuitant
Period certain annuity
- Payments continue for a specified period, even if annuitant dies (protects heirs)
- If the annuitant outlives the period certain length, payments still continue till he dies
Joint life with last survivor annuity
- Annuity on more than one life (usually spouses)
* Payments continue until the last annuitant dies
[Variable annuities] Assumed interest rate
- Consecutive estimate of rate of return for investments in the separate account
- Each period, actual earnings of the account are compared with the AIR
(If performance in separate account is greater than AIR, payment for that month will be greater than last month)
[Variable annuities] If the separate account’s performance is greater than the AIR, how will this months payments compare to last month
If separate account does better than AIR, payment will be greater than last month
T/F: If performance in the separate account is greater than AIR, payments for that month will be greater than the previous month
True, if separate account outperforms AIR, payments will be greater than last
month
(If performance is the same as AIR, payments same as last month)
What is the surrender period for annuities?
surrender period is the amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty.
> B share mutual funds and whole life insurance policies also have a surrender period
T/F: The surrender period for annuities can run several years, and annuitants can incur significant penalties if invested funds are withdrawn before that period has expired.
True
> can be several years
can get bad penalties if withdraw b4 surrender period
T/F: If you make additional investments or premium payments to the annuity, there could be a separate surrender period for each investment
True
Could be seperate surrender period for each investment
Surrendering a single premium deferred variable annuity will subject the deferred growth (account value - cost basis) to the investor’s marginal income tax rate plus a penalty of __%
10%
Marginal income rate plus 10% penalty
T/F: In a deferred variable annuity, the deferrred growth is taxable at the capital gains rate
False
Deferred growth taxable at marginal income tax rate
> plus 10% fee if before 59.5
T/F: If someone surrenders a deferred variable annuity before age 59.5, the growth will be taxed at the marginal income tax rate plus an additional 15% fee
False
Growth taxed at income rate + 10% penalty
Single premium deferred annuity
“A single-premium deferred annuity (SPDA) is an annuity established with a single payment featuring investment growth solely during the accumulation phase. That growth occurs on a tax-deferred basis until annuitization, at which time regular payments will begin.”
T/F: If client takes all his money out of a qualified deferred variable annuity before 59.5, total liability is income tax + 10% penalty on the deferrred growth
False
Because qualified annuity, entire withdrawl is taxable/subject to fee
If withdrawing money from qualified deferred variable annuity, what portion of the withdrawl is taxable?
The entire portion
since it’s qualified
> Entire withdrawl is taxble for qualified annuities
T/F: When withrawing money from a single premium qualified deferred variable annuity, the entire portion is taxable at withdrawl.
True, entitre portion taxable
