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Series 7 > Chapter 20 > Flashcards

Chapter 20 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

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

A

variable

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2
Q

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

A

variable

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3
Q

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

A

Series 6 or 7

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4
Q

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

A

True

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5
Q

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

A

qualified

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6
Q

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

A

non-qualified

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7
Q

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

A

Only the earnings portion is subject to tax as ordinary income

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8
Q

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

A

annuity units

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9
Q

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

A

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

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10
Q

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

A

straight-life

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11
Q

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

A

This option provides the highest monthly income.

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12
Q

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

A

Straight-Life with Period Certain

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13
Q

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

A

Joint and Last Survivor

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14
Q

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

A

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

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15
Q

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?

A

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

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16
Q

Is a fixed annuity a security?

A

no

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17
Q

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

A

Earnings first (LIFO) last in, first out

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18
Q

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

A

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

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19
Q

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

A

increase

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20
Q

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

A

decrease

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21
Q

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

A

remain constant

22
Q

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

A

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

23
Q

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

A

a 1035 exchange

24
Q

Is switching between annuity sub-accounts taxable?

A

no

25
Q

Prospectus delivery is required for all ___________ insurance contracts.

A

variable

26
Q

Who assumes the investment risk in a variable insurance contract?

A

the client

27
Q

May loans be taken against variable life policies?

A

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

28
Q

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

A

it’s not taxed, since it was part of the basis

29
Q

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

A

The beneficiary designation

30
Q

Are variable life policies subject to IRS early withdrawal penalties?

A

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

31
Q

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

A

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

32
Q

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

A

$200,000

33
Q

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

A

The death benefit will be reduced by the loan amount.

34
Q

Identify the acronym: AIR

A

Assumed Interest Rate

35
Q

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

A

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

36
Q

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

A

variable annuity

37
Q

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

A

yes

38
Q

What annuity does not protect an investor against inflation?

A

fixed annuity

39
Q

What is a 1035 Exchange?

A

A tax-free exchange of one annuity for another, allowed under Section 1035 of the Tax Code

40
Q

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

A

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

41
Q

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

A

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

42
Q

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

A

True

43
Q

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

A

capital appreciation

44
Q

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

A

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

45
Q

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

A

accumulation units (similar to mutual fund shares).

46
Q

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

A

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

47
Q

In a qualified annuity, how is the payout taxed?

A

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

48
Q

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

A

Only the earnings portion is subject to tax as ordinary income

49
Q

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

A

a fixed annuity

50
Q

Are life insurance death benefits taxable?

A

no

51
Q

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

A

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

Series 7 (25 decks)

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