Annuities and Variable Products

Question 1

What is the tax implication of the death benefit on a variable annuity?

Answer 1

Any amount above the contract’s basis is taxable to the beneficiary.

Question 2

In an non-qualified annuity, how is a single distribution taxed?

Answer 2

Earnings first (LIFO)

Question 3

What payout option requires the insurance company to provide payments for as long as one of two people remain alive?

Answer 3

Joint and Last Survivor

Question 4

What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years?

Answer 4

Straight-Life with Period Certain

Question 5

Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?

Answer 5

Non-Qualified

Question 6

What is the benefit of the Straight-Life payout option to the annuitant?

Answer 6

This option provides the highest monthly income.

Question 7

What annuity does not protect an investor against inflation?

Answer 7

Fixed (guaranteed) contracts are not a good hedge against inflation.

Question 8

In a non-qualified annuity, how is a return of capital taxed?

Answer 8

Tax-free, since it is part of the client’s basis

Question 9

What will not affect the rate of return on a variable annuity during the accumulation period?

Answer 9

The beneficiary designation

Question 10

Can a variable life policy’s death benefit grow over time?

Answer 10

Yes. If the account performance is positive, the benefit will increase.

Question 11

What technique can be used to roll assets from one annuity into another without taxation?

Answer 11

A 1035 Exchange

Question 12

Is the death benefit of an annuity included in the estate of a deceased client?

Answer 12

Yes. Additionally, any amount over the cost basis may be taxable to the beneficiary.

Question 13

True or False: Performance must be negative for a variable annuity’s payment to fall.

Answer 13

False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.

Question 14

What is a 1035 Exchange?

Answer 14

A tax-free exchange of one annuity for another. These exchanges are allowed under Section 1035 of the Tax Code.

Question 15

In a qualified annuity, how is the payout taxed?

Answer 15

The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.

Question 16

If performance in a given period is greater than the AIR, the next payment will ___________.

Answer 16

If performance in a given period is greater than the AIR, the next payment will increase.

Question 17

At annuitization (payout), accumulation units are exchanged for __________ units.

Answer 17

At annuitization (payout), accumulation units are exchanged for annuity units.

Question 18

The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.

Answer 18

The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity.

Question 19

What two types of securities registrations would allow an individual to offer variable annuities?

Answer 19

Series 6 or Series 7

Question 20

If performance in a given period is below the AIR, the next payment will ___________.

Answer 20

If performance in a given period is below the AIR, the next payment will decrease.

Question 21

Is switching between annuity sub-accounts taxable?

Answer 21

No

Question 22

Is a fixed annuity a security?

Answer 22

No, but variable contracts (e.g., variable annuities or variable life insurance) are considered securities.

Question 23

Who assumes the investment risk in a variable insurance contract?

Answer 23

The client

Question 24

True or False: Firms may NOT use proprietary names when selling variable contracts.

Answer 24

False. Proprietary names are permitted as long as the policy is described as either variable life or variable annuity.

Question 25

A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.

Answer 25

A variable annuity would be most suitable for a client who is seeking capital appreciation over a long period.

Question 26

_________________ is the payout option that provides payments for the annuitant's whole life and will cease at death.

Answer 26

Straight-Life is the payout option that provides payments for the annuitant's whole life and will cease at death.

Question 27

Are variable life policies subject to IRS early withdrawal penalties?

Answer 27

No, but variable annuities would be subject to the penalty.

Question 28

True or False: The AIR is a guaranteed minimum rate of return.

Answer 28

False. The AIR is a benchmark rate that is not guaranteed.

Question 29

Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?

Answer 29

Qualified

Question 30

Ann invests $15,000 in a non-qualified annuity. At age 64, she withdraws all $22,000. What's Ann's basis; what's taxed?

Answer 30

Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

Question 31

At annuitization (payout), what will determine the annuitant's payment?

Answer 31

A fixed number of annuity units with a fluctuating value per unit

Question 32

Which type of annuity is considered a security, fixed or variable?

Answer 32

Variable

Question 33

True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.

Answer 33

True

Question 34

Prospectus delivery is required for all ___________ insurance contracts.

Answer 34

Prospectus delivery is required for all variable insurance contracts.

Question 35

What licenses are required for an agent to sell variable annuities or variable life?

Answer 35

Both a life insurance license and FINRA Series 6 or 7 license is required

Question 36

Which is more expensive to own, a variable annuity or a mutual fund?

Answer 36

A variable annuity, since it typically has greater expenses due to the death benefit and mortality expenses

Question 37

Which annuity provides a fixed, guaranteed minimum rate of return?

Answer 37

A fixed annuity

Question 38

An annuity client contributed $100,000 which has grown to $200,000. If the client dies, what is her death benefit?

Answer 38

$200,000. The death benefit on an annuity is the greater of the contribution or the account value.

Question 39

If performance in a given period equals the AIR, the next payment will __________________.

Answer 39

If performance in a given period equals the AIR, the next payment will remain constant.

Question 40

Are life insurance death benefits taxable?

Answer 40

No. Death benefits are received tax-free.

Question 41

Identify the acronym: AIR

Answer 41

Assumed Interest Rate

Question 42

In a Non-Qualified Annuity, how is the payout taxed?

Answer 42

Only the earnings portion is subject to tax as ordinary income

Question 43

The money invested in a variable annuity is used to buy _____________ _____.

Answer 43

The money invested in a variable annuity is used to buy accumulation units (similar to mutual fund shares).

Question 44

In a non-qualified annuity, how is the payout taxed?

Answer 44

Only the earnings portion is subject to tax as ordinary income

Question 45

May loans be taken against variable life policies?

Answer 45

Yes, for a portion of the contract's cash value (often 85%)

Question 46

What written documentation is required when recommending a 1035 exchange of a variable annuity?

Answer 46

Whether the client has completed a 1035 exchange in the past 36 months

Question 47

Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What's Joan's basis; what's taxed?

Answer 47

Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.

Question 48

What is the effect of an outstanding loan at the death of the insured?

Answer 48

The death benefit will be reduced by the loan amount.

Question 49

True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.

Answer 49

True

Question 50

Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?

Answer 50

Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market

Question 51

Does a variable life policy have a guaranteed minimum death benefit?

Answer 51

Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy's face).