Annuities and Variable Products Flashcards
What is the tax implication of the death benefit on a variable annuity?
Any amount above the contract’s basis is taxable to the beneficiary.
In an non-qualified annuity, how is a single distribution taxed?
Earnings first (LIFO)
What payout option requires the insurance company to provide payments for as long as one of two people remain alive?
Joint and Last Survivor
What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years?
Straight-Life with Period Certain
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
What is the benefit of the Straight-Life payout option to the annuitant?
This option provides the highest monthly income.
What annuity does not protect an investor against inflation?
Fixed (guaranteed) contracts are not a good hedge against inflation.
In a non-qualified annuity, how is a return of capital taxed?
Tax-free, since it is part of the client’s basis
What will not affect the rate of return on a variable annuity during the accumulation period?
The beneficiary designation
Can a variable life policy’s death benefit grow over time?
Yes. If the account performance is positive, the benefit will increase.
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
Is the death benefit of an annuity included in the estate of a deceased client?
Yes. Additionally, any amount over the cost basis may be taxable to the beneficiary.
True or False: Performance must be negative for a variable annuity’s payment to fall.
False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.
What is a 1035 Exchange?
A tax-free exchange of one annuity for another. These exchanges are allowed under Section 1035 of the Tax Code.
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
If performance in a given period is greater than the AIR, the next payment will ___________.
If performance in a given period is greater than the AIR, the next payment will increase.
At annuitization (payout), accumulation units are exchanged for __________ units.
At annuitization (payout), accumulation units are exchanged for annuity units.
The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.
The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity.
What two types of securities registrations would allow an individual to offer variable annuities?
Series 6 or Series 7
If performance in a given period is below the AIR, the next payment will ___________.
If performance in a given period is below the AIR, the next payment will decrease.
Is switching between annuity sub-accounts taxable?
No
Is a fixed annuity a security?
No, but variable contracts (e.g., variable annuities or variable life insurance) are considered securities.
Who assumes the investment risk in a variable insurance contract?
The client
True or False: Firms may NOT use proprietary names when selling variable contracts.
False. Proprietary names are permitted as long as the policy is described as either variable life or variable annuity.
A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.
A variable annuity would be most suitable for a client who is seeking capital appreciation over a long period.
_________________ is the payout option that provides payments for the annuitant’s whole life and will cease at death.
Straight-Life is the payout option that provides payments for the annuitant’s whole life and will cease at death.
Are variable life policies subject to IRS early withdrawal penalties?
No, but variable annuities would be subject to the penalty.
True or False: The AIR is a guaranteed minimum rate of return.
False. The AIR is a benchmark rate that is not guaranteed.
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
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?
Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.
At annuitization (payout), what will determine the annuitant’s payment?
A fixed number of annuity units with a fluctuating value per unit
Which type of annuity is considered a security, fixed or variable?
Variable
True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
True
Prospectus delivery is required for all ___________ insurance contracts.
Prospectus delivery is required for all variable insurance contracts.
What licenses are required for an agent to sell variable annuities or variable life?
Both a life insurance license and FINRA Series 6 or 7 license is required
Which is more expensive to own, a variable annuity or a mutual fund?
A variable annuity, since it typically has greater expenses due to the death benefit and mortality expenses
Which annuity provides a fixed, guaranteed minimum rate of return?
A fixed annuity
An annuity client contributed $100,000 which has grown to $200,000. If the client dies, what is her death benefit?
$200,000. The death benefit on an annuity is the greater of the contribution or the account value.
If performance in a given period equals the AIR, the next payment will __________________.
If performance in a given period equals the AIR, the next payment will remain constant.
Are life insurance death benefits taxable?
No. Death benefits are received tax-free.
Identify the acronym: AIR
Assumed Interest Rate
In a Non-Qualified Annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
The money invested in a variable annuity is used to buy _____________ _____.
The money invested in a variable annuity is used to buy accumulation units (similar to mutual fund shares).
In a non-qualified annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
May loans be taken against variable life policies?
Yes, for a portion of the contract’s cash value (often 85%)
What written documentation is required when recommending a 1035 exchange of a variable annuity?
Whether the client has completed a 1035 exchange in the past 36 months
Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis; what’s taxed?
Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.
What is the effect of an outstanding loan at the death of the insured?
The death benefit will be reduced by the loan amount.
True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?
Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market
Does a variable life policy have a guaranteed minimum death benefit?
Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy’s face).
