Chapter 20 Flashcards
The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.
variable
Which type of annuity is considered a security, fixed or variable?
variable
What two types of securities registrations would allow an individual to offer variable annuities?
Series 6 or 7
True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
True
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
qualified
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
non-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), accumulation units are exchanged for __________ units.
annuity units
At annuitization (payout), what will determine the annuitant’s payment?
A fixed number of annuity units with a fluctuating value per unit
_________________ is the payout option that provides payments for the annuitant’s whole life and will cease at death.
straight-life
What is the benefit of the Straight-Life payout option to the annuitant?
This option provides the highest monthly income.
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 payout option requires the insurance company to provide payments for as long as one of two people remain alive?
Joint and Last Survivor
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.
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.
Is a fixed annuity a security?
no
In an non-qualified annuity, how is a single distribution taxed?
Earnings first (LIFO) last in, first out
True or False: The AIR is a guaranteed minimum rate of return.
False. The AIR is a benchmark rate that is not guaranteed.
If performance in a given period is greater than the AIR, the next payment will ___________.
increase
If performance in a given period is below the AIR, the next payment will ___________.
decrease
If performance in a given period equals the AIR, the next payment will __________________.
remain constant
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 technique can be used to roll assets from one annuity into another without taxation?
a 1035 exchange
Is switching between annuity sub-accounts taxable?
no
Prospectus delivery is required for all ___________ insurance contracts.
variable
Who assumes the investment risk in a variable insurance contract?
the client
May loans be taken against variable life policies?
Yes, for a portion of the contract’s cash value (often 85%)
In a non-qualified annuity, how is a return of capital taxed?
it’s not taxed, since it was part of the basis
What will not affect the rate of return on a variable annuity during the accumulation period?
The beneficiary designation
Are variable life policies subject to IRS early withdrawal penalties?
No, but variable annuities would be subject to the penalty.
Can a variable life policy’s death benefit grow over time?
Yes. If the account performance is positive, the benefit will increase.
An annuity client contributed $100,000 which has grown to $200,000. If the client dies, what is her death benefit?
$200,000
What is the effect of an outstanding loan at the death of the insured?
The death benefit will be reduced by the loan amount.
Identify the acronym: AIR
Assumed Interest Rate
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.
Which is more expensive to own, a variable annuity or a mutual fund?
variable annuity
Is the death benefit of an annuity included in the estate of a deceased client?
yes
What annuity does not protect an investor against inflation?
fixed annuity
What is a 1035 Exchange?
A tax-free exchange of one annuity for another, allowed under Section 1035 of the Tax Code
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
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.
True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
A variable annuity would be most suitable for a client who is seeking ____________________ over a long period.
capital appreciation
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
The money invested in a variable annuity is used to buy ________________________.
accumulation units (similar to mutual fund shares).
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
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.
In a Non‐Qualified Annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
Which annuity provides a fixed, guaranteed minimum rate of return?
a fixed annuity
Are life insurance death benefits taxable?
no
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).
