Chapter 10: VARIABLE PRODUCTS Flashcards by Michael Sheen

______ are similar to IRAs, in that they incur a penalty on early withdraws and pay taxes on earnings within the account.

Annuities

How well did you know this?

Not at all

Perfectly

Although managed by a third party, __________ are not considered securities. This is due to the risk being incurred primarily by the issuer

Fixed annuities

How well did you know this?

Not at all

Perfectly

While mutual fund investors buy shares, customers investing in ________ buy accumulation units.

While mutual fund investors buy shares, customers investing in variable annuities buy accumulation units

Accumulation units are similar to Redemption shares. In that they are based on the net asset value of the annuity and our calculated at the end of every business day.

How well did you know this?

Not at all

Perfectly

Registered Representatives must clearly disclose that an annuity is a long-term investment since significant surrender fees may be incurred if assets are not held in the contract for a minimum prescribed.

Note

How well did you know this?

Not at all

Perfectly

True or False. Payments received by the annuitant of a fixed annuity keep pace with inflation

False. A significant disadvantage to a fixed annuity is that the fixed-dollar payments being received by annuitant tend to not keep with inflation

How well did you know this?

Not at all

Perfectly

True or False. Fixed annuities are subject to regulation by the SEC and FINRA

False. Since fixed annuities are not securities, these contracts are typically not subject to regulation by either the SEC or FINRA However, all annuities are governed by state insurance regulations.

Lastly, there’s no prospectus delivery requirement with fixed annuities and any person who sells them must have an insurance license

How well did you know this?

Not at all

Perfectly

True or False. Contributions to a variable annuity are invested in the insurance companies separate account with a rate of return that’s not guaranteed. Therefore is considered a security, and must be registered with the SEC as investment companies

True

How well did you know this?

Not at all

Perfectly

These annuities delay payments to the annuitant for an undetermined period after the date of purchase.

PREMIUMS: maybe deposited in the annuity monthly, quarterly, semi- annually, or annually

Deferred Annuities

How well did you know this?

Not at all

Perfectly

These annuities begin payments to the annuitant one payment. After a lump-some deposit has been made to fund the annuity

may only be funded with a single premium

Immediate annuities

Example: if the contract calls for monthly payments, these payments to the annuitant will begin one month after the date of purchase. If the contract calls for annual payments, these payments will begin one year after the date of purchase.

How well did you know this?

Not at all

Perfectly

What is the formula calculate net asset value per unit?

Total net assets / total units issued

How well did you know this?

Not at all

Perfectly

If the annuitant has the death benefit feature of an account

What does the beneficiary receive upon death of the decedent

The beneficiary receives the greater of either (1) the sum of all the contract owners payments to the annuity or (2) the value of the annuity on the day the annuitant dies.

How well did you know this?

Not at all

Perfectly

An annuitant receives monthly payments for as long as she lives, but this method makes no provision for a designated beneficiary. What method of payment are they receiving

Straight-life annuity

How well did you know this?

Not at all

Perfectly

Suppose Jane, a 65-year-old woman, purchases a life annuity with a 10-year period certain. She will receive a monthly payment (say, $1,000) for at least the next 10 years.

Jane passes away after 7 years: The remaining 3 years of payments (36 payments of $1,000 each) will go to a beneficiary named by Jane when she purchased the annuity. The beneficiary could be a spouse, child, friend, or even a charity.

What type of annuity payout option does Jane have?

Life annuity with period certain

How well did you know this?

Not at all

Perfectly

The concept of a “unit” in this type of annuity refers to the total amount of the initial investment. If the annuitant passes away before all “units” have been paid out (i.e., before the total payout equals the initial investment), the remaining “units” will be paid out to a designated beneficiary.

What payout option for an annuity is this?

Units Refund Life Annuity

How well did you know this?

Not at all

Perfectly

Is an option in which payments are made to two or more persons. If one person dies, the survivor continues to receive only her payments. However, upon the death of the last survivor, payments cease.

Joint and last survivor life annuity

How well did you know this?

Not at all

Perfectly

A customer has made total contributions of $50,000 to a non-qualified variable annuity. The account currently has a value of $150,000 and the customer chooses to take a random withdrawal of $20,000. Using the lifo method, the earnings come out first; therefore the __________ is taxable as ordinary income

Entire $20,000 withdrawal is taxable ordinary income

How well did you know this?

Not at all

Perfectly

If an investor in a non-qualified variable annuity chooses to take a lump hyphen some withdrawal the entire amount, the portion that represents earnings is taxable, while the amount equal to the Investor’s contribution is a non-taxable return of her cost basis.

Example.

A customer has made total contributions of $50,000 to a non-qualified variable annuity. The account currently has a value of $150,000 in the customer chooses to take a lump sum withdrawal of the entire amount. How would this be taxed?

The $100,000 which represents earnings is taxable ordinary income, while the remaining $50,000 is considered a non-taxable return of capital

How well did you know this?

Not at all

Perfectly

True or False. LIFO means earnings come out first.

True

Stands for Last-in-first-Out method.

How well did you know this?

Not at all

Perfectly

When a non-qualified contract is annuitized the annuitant begins to receive ________.

Periodic payments

For tax purposes, these periodic payments are divided into the following two parts:

An amount that represents the original investment in the annuity
The remainder which represents investment income

How well did you know this?

Not at all

Perfectly

Determine the payout option:

Periodic payments are made during the annuitant’s lifetime.
if the annuitant dies before an amount equal to the value of the annuity units is paid out, the remaining units will be paid to a designated beneficiary. This payment may be either in a lump-sum or a given period

Unit Refund Life Annuity

How well did you know this?

Not at all

Perfectly

Determine the payout option

annuitant’s receive payments for life
payments end upon the last person’s death

Joint and last survivor life annuity

How well did you know this?

Not at all

Perfectly

The Assumed interest rate is not a minimum or guarantee - it simply used as part of the actuarial calculation.

The AIR is the rate of interest that stated in the contract and used to determine the first annuity payment. Going forward, it then becomes The Benchmark for determining subsequent payments

Note

if separate account performance is equal to the AIR, the annuities payment will remain the same as the previous payment.
If separate account performance exceeds the AIR, then the payment will be higher than the previous payment.
If separate account performance is less than the AIR, the payment will be lower than the previous payment.

How well did you know this?

Not at all

Perfectly

In a non-qualified variable annuity, the investors cost-basis represents the total amount of the contributions.

Remember contributions are made on an after-tax basis, this means only earnings upon withdrawal we taxed

Note

How well did you know this?

Not at all

Perfectly

If an annuitant dies during the accumulation., the annuities value will be included in his estate for purposes of calculating federal estate taxes. The beneficiary, his wife, will also be required to pay ordinary income taxes on anything she receives in excess of the cost basis (earnings).

The death benefit of a variable annuity skips the probate process which is a lengthy legal process that involves settling an estate according to the terms of a will.

Note

How well did you know this?

Not at all

Perfectly

True or False. Persons who market annuity products must hold a valid Series 6 or Series 7 registration as well as a state insurance license.

True

True or Flase. The separate accounts of variable products are generally required to be registered as investment companies under the Investment Company Act of 1940.

True

True or False. Senior investors are suitable generally speaking for variable annuities

False. Generally, variable annuities are not suitable for senior investors. Instead, they're appropriate only for people with long-term investment goals who don't anticipate needing access to their money for at least five to seven years

Created after IRS Section 1035, this provision permits the exchange of annuity contracts ______ creating a taxable event

Without creating a taxable event

___ shares have deferred sales charges that declined to zero in three to four years and are designed for customers who may be considering in exchange in the future

L-shares

In exchange is often viewed as inappropriate if the client has made another 10:35 deferred variable annuity transfer within the previous ____ months

36 (3 years)

Remember, although not specifically prohibited, recommending the purchase of annuity contracts within a tax-deferred account (e.g. an IRA), deserves special scrutiny since variable annuity contracts already grow tax-deferred. Additionally, annuities generally have higher expenses than similar mutual funds that could instead be placed within a retirement account.

Note

True or False. Variable life insurance policies are a form of permanent insurance which requires fixed premiums, but have death benefits and cash values that may vary based on the performance of the investment options. Our regulated by state and federal Securities laws and must be registered with the SEC under the Securities Act of 1933. Lastly these policies must be accompanied by or preceded by a prospectus

True

True or False. In a variable life insurance policy, the policy owner, not the insurance company, decides how the premium payments will be invested.

True. However, and important feature of this type of insurance is that the death benefit generally may not decrease below a certain guaranteed minimum

This type of annuity: - the insurance company assumes all the risk - not a security - payments tend not to keep pace with inflation - not subject to regulation by the SEC or FINRA but are governed by state insurance regulations - prospectus delivery is not required.

Fixed Annuity

These annuities: - begin payment after one payment period after a lump-sum deposit has been made to fund the annuity - if the contract calls for monthly payments, these payments to the annuitant begin one month after the date of purchase. - if the contract calls for annual payments, these payments will begin one year after the date of purchase. - may only be funded with a single premium.

Immediate Annuities

True or False. Transferring money from one subaccount to another is allowed, but is subject to tax and additional sales charges.

False. Transfers are allowed but are neither subject to tax nor additional sales charges. Contract owners often move between different subaccounts as their goals change over time.

True or false. At annuitization, the number of annuity units on which each payment is based is fixed, but the value of the units will fluctuate.

True. The first payment considerd the following details: - Age and gender - Life expectancy - selected settlement (payout) option - projected growth rate, referred to as the ***assumed interest rate (AIR)***

A contract in which an annuitant receives monthly payments for as long as she lives. - make no provision for a designated beneficiary - no payments are made after the annuitants' death, even if only payment has been maid prior to that persons death - this payment option carries the most risk but provides the highest payout

Straight-Life Annuity

An option that will provide monthly or other periodic payments to the annuitant for life. - if the annuitant dies prior to the end of the specified period, payments will continue in either a lump-sum or in installments to a designated beneficiary until the end of the period

Life Annuity with Period Certain

- Annuitant receives payments for life - certain amount of payments is guaranteed - if the annuitant dies before receiving all of the payments, a beneficiary receives the balance of the payments

Unit Refund Life Annuity

Is a length legal process that involves settling an estate according to the terms of a will

Probate.

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.

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

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

A 1035 Exchange

_________________ 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.

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.

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

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.

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.

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.

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

True

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.

Prospectus delivery is required for all ___________ insurance contracts.

Prospectus delivery is required for all variable insurance contracts.

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

Who assumes the investment risk in a variable insurance contract?

The client

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

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

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.

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

Earnings first (LIFO)

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.

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

True

Are life insurance death benefits taxable?

No. Death benefits are received tax-free.

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

Joint and Last Survivor

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

Qualified

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

Only the earnings portion is subject to tax 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

The death benefit will be reduced by the loan amount.

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

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

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.

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 qualified annuity, how is the payout taxed?

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

Is switching between annuity sub-accounts taxable?

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

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

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.

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

Straight-Life with Period Certain

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

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).

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.

Brainscape's Knowledge GenomeTM

Chapter 10: VARIABLE PRODUCTS Flashcards

Brainscape's Knowledge Genome^TM