Ch.10 S7

Question 1

T/F: The AIR is a guaranteed minimum rate of return.

Answer 1

F; the AIR is a benchmark rate that is not guaranteed

Question 2

The money invested in a variable annuity is used to buy ____________ _________.

Answer 2

Accumulation units

Question 3

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

Answer 3

Variable

Question 4

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

Answer 4

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

Question 5

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

Answer 5

Variable

Question 6

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

Answer 6

The death benefit will be reduced by the loan amount

Question 7

What is a 1035 exchange?

Answer 7

A tax free exchange of one annuity for another. These exchanges are allowed under section 1035 of the tax code

Question 8

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

Answer 8

Joint and last survivor

Question 9

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

Answer 9

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

Question 10

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

Answer 10

Increase

Question 11

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

Answer 11

A fixed annuity

Question 12

In a qualified annuity, how is the payout taxed?

Answer 12

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

Question 13

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

Answer 13

Earnings first (LIFO)

Question 14

_____________ is the payout option that provides payments for the annuitants whole life and will cease at death.

Answer 14

Straight life

Question 15

What is the benefit of the straight life payout option to the annuitant?

Answer 15

This option provides the highest monthly income.

Question 16

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

Answer 16

Stay the same

Question 17

Identify the acronym: AIR

Answer 17

Assumed Interest Rate

Question 18

May loans be taken against variable life policies?

Answer 18

Yes, for a portion of the contracts cash value

Question 19

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

Answer 19

Qualified

Question 20

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

Answer 20

Non-Qualified

Question 21

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

Answer 21

Annuity

Question 22

At annuitization(payout), what will determine the annuitants payment?

Answer 22

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

Question 23

T/F: If client suitability for a variable annuity is determined, an RR signed and documents the recommendation

Answer 23

T

Question 24

What modification is made to the straight life payout option to guarantee payments for a minimum number of years?

Answer 24

Straight life with period certain

Question 25

If performance in a give period is below the AIR, the next payment will _________.

Answer 25

Decrease

Question 26

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

Answer 26

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

Question 27

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

Answer 27

Only the earnings portion is subject to tax as ordinary income

Question 28

Who assumes the investment risk in a variable insurance contract?

Answer 28

The client

Question 29

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

Answer 29

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

Question 30

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

Answer 30

Any amount above the contracts basis is taxable to the beneficiary.

Question 31

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

Answer 31

Yes, if the account performance is positive, the benefit will increase

Question 32

Is a fixed annuity a security?

Answer 32

No

Question 33

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

Answer 33

Yes, regardless of account performance the minimum death benefit is paid

Question 34

T/F: Performance must be negative for a variable annuity’s payment to fall.

Answer 34

F; performant below the AIR will cause the payment to fall event if the investment result was positive

Question 35

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

Answer 35

Tax free, since it is part of the clients basis

Question 36

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 36

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 37

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 37

The full $22,000 is taxed as ordinary income and her basis is zero since the annuity is qualified

Question 38

Are life insurance death benefits taxable?

Answer 38

No. Death benefits are received tax free

Question 39

Is switching between annuity sub accounts taxable?

Answer 39

No

Question 40

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

Answer 40

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

Question 41

Prospectus delivery is required for all __________ insurance contracts.

Answer 41

Variable

Question 42

T/F: variable annuities are subject to registration requirements of the Act of 19 and sold by prospectus.

Answer 42

T

Question 43

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

Answer 43

1035 exchange