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Series 66 > Chapter 5 > Flashcards

Chapter 5 Flashcards

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Series 66 flashcards
1
Q

REITs

A 
Organized as Trusts
Subchapter M (receive 75% from real estate and distribute 90% or more of its taxable income to its shareholders. 
Owners hold undivided interest
Trade on exchanges and OTC
Not investment companies
Pass through of gains only
Negative correlation to stock market
Dividends are taxed as ordinary income
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2
Q

Long term debt

A

Capital Debt, funded debt at least 5 years.

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3
Q

Secured Bonds

A

Asset has been pledged as security (collateral) for the loan, the bond is said do be secured. Mortgage bonds, equipment trust certificates, collateral trust certificates (stock market).

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4
Q

High Yield Bonds

A

BB or Ba and lower. Subject to more price volatility than BBB, Baa or higher (investment grade).

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5
Q

Exchange Traded Funds

A

Invests in specific indexes such as the S&P 500. Any class of asset that has a published index around can be made into an ETF so there are some for real estate and commodities as well. Trades like stock on exchanges, can be purchased on margin, and sold short. Expenses are typically lower than Mutual Funds, but due to commissions, they may not be competitive with a no-load index fund for the small investor making periodic dollar cost averaging.

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6
Q

Annuity

A

A contract between an individiual and a life insurance company, usually for the retirement income. It may be established by individuals looking for tax-deferred income or by corporations to serve as an employee retirement plan.
Fixed
Variable
Combination

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7
Q

Fixed Annuity

A

Guarantees a Minimum rate of return. When individuals elect to begin receiving income, the payout is determined by the account’s value and annuitant’s life expactancy. A fixed annuity payment remains constant throughout the annuitant’s life. It’s an insurance product, risk is purchasing power because inflation.

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8
Q

Variable Annuities

A

Reduce inflation risk, money deposited is placed in a separate account. Frequently invested in stock portfolios, which has a better chance of keeping with inflation than fixed-income investments. Payouts vary considerably. Investor bears the risk this is the security. Salespeople must be registered with FINRA and SEC.

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9
Q

Combination Annuities

A

Guaranteed Payments as well as payments that keep pace with inflation.

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10
Q

Fixed Annuities

A 
Guaranteed Fixed Payments
Guaranteed Interest Rate
Investment risk by insurance company
Portfolio of fixed-income securities
General Account
Vulnerable to inflation
Insurance Regulation
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11
Q

Variable Annuities

A 
Variable Payments
Variable Rate of Return
Investment Risk by annuitant
portfolio of equities, debt, money market instruments.
Separate Account
Resistant to Inflation
Insurance and Securities Regulation
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12
Q

Accumulation Stage

A

Pay in period
Contract terms are flexible. Investor who misses periodic payment is in no danger. Contract holder can terminate at any time during the accumulation stage, although the contract holder is likely to incur surrender charges on amounts withdrawn in the first 5-10 years after issuance of the contract. To discourage this, they allow loans. Accumulation Units

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13
Q

Annuitizing

A

Converts to accumulation to payout. Accumulation units become annuity units. It’s a measure of value. The number of annuity units does not change, but it’s value does fluctuate. Individual’s age sex, and assumed interest risk. Accumulated value.

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14
Q

Variable Annuity Payments

A

Life Annuity/Straight Life/ Pure Life
Life Annuity with Period Certain
Joint Life with last survivor.
Determined initially by mortality tables and the value of an annuitant’s account. Variable Annuity plans do not guarantee a payment amount because the insurance company cannot guarantee. Future values are determined by the annuity unit’s fluctuating value. Annuity Units *Current Value.

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15
Q

Taxation of Annuities

A

Contributions that are not part of an employer-sponsored retirement plan are made with after tax dollars. Anything above cost basis is taxed as ordinary income.
Random withdrawals are taxed as LIFO method. Earnings in this case. Subject to 10% early penalty if withdrawn before 59 1//2 except for disability or death, or life income option plan with fixed payments.

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16
Q

Advantages to Variable Annuities

A

Tax Deferred Growth
Guaranteed Death Benefit - the beneficiary will receive the greater of the current market value or total invested during accumulation phase. At least original investment.
Guaranteed Life time income. Protects against longevity risk.
IRS section 1035 Transfers. You can transfer to another annuity without tax consequences. But they may be a surrender charge. Unlike mutual funds that exchanges constitute a taxable event.
No age 70 1/2 Restrictions. Investor can delay withdrawals like in ROTH IRA’s.
Choice of separate account objectives - some companies offer 25-300 different subaccounts or more.
No probate
Fees are substantially higher than that of a mutual fund. All earnings taxed as ordinary income. Withdrawals before age 59 1/2 will incur a 10% penalty. Surrender charges ( deferred sales charges)
Carry same risks than mutual funds.

17
Q

Equity Indexed Annuities

A

Credits based on performance of a particular stock index such as the S&P 500. Credited with 80-90% with a cap. Otherwise may receive a minimum 3%. Issuer also levies margin, spread, administrative fees, also a minimum perio that must elapse before the guarantee goes into effect. Early withdrawal penalties up to 15 years. Not regulated as securities.

18
Q

Life Insurance

A 
A life insurance Policy is a contract between an insurance company and an individiual that is designed to provide financial compensation to the named beneficiaries in the event of the insured's death. 
Term Insurance
Whole Life Insurance
Universal life
Variable life
19
Q

Term Insurance

A

Pure Protection
Least Expensive. Pay benefit only if insured dies during the term of coverage.
Do not accumulate cash value.

20
Q

Whole Life Insurance

A

Permanent Cash Value Insurance provides protection for a whole life. Coverage begins on date of issue and continues to the date of the insured’s death, provided premiums are paid. Benefit Payable is the face amount of the policy set at issuance. Premium and benefit are fixed.
Cash Values - increases each year the policy is kept in force. Low risk of investments such as real estate, mortgage loans, bonds. Guaranteed cash value of general account. It cannot be forfeited. Can cash in for this benefit at any time. Policy loan - paid with interest. If death before, any indebtness will reduce the amount of the policy accordingly-it will be substracted from death benefit.
WLI - guaranteed death benefit, guaranteed cash value.

21
Q

Universal Life

A

Pay higher interest rates than Cash Value of WLI, 8, 10, 12. Also provide greater flexibility because they allow policy owners to adjust the death benefits and/or premium payments.
Premium payments are separated first being paid towards insurance protection, with the remaining balance being used to build the cash value. Policyowner may increase or decrease death benefit (insurability requirements)
Premium payments changed
Interest earned by the cash account will vary, subject to a guaranteed minimum.

22
Q

Universal Life Interest Rates

A

Current Annual Rate - varies with market

Contract rate - minimum guaranteed interest rate, and policy never pays less than this amount.

23
Q

Universal Life Death Benefits

A

Option 1 - Death benefit equal to face value, as policy cash value increases, net death decreases. WLI.
Option 2 - increasing death benefit equal to the policy’s face amount plus the cash account. LTI and Cash Value.

24
Q

Universal Life Policy Loans

A

If a loan is taken, it is subject to interest, and if unpaid, both the interest and the loan amount will reduce the face amount of the policy. Some permit a cash withdrawal . This is not treated as a loan and will only reduce the cash value not the death benefit. Payment of it is treated as a premium payment. Flexible payments, guaranteed return. lapse could occur if no payments.

25
Q

Variable Life Insurance

A

Investments in a separate account. Allows customer to assume some investment risk. Cash value fluctuates with the performance of the separate account and is not guaranteed. Variable life policies do provide owners with a guaratneed minimum death benefit. Benefit may increase but never fall below.

1) Scheduled (Fixed) Premium Variable Life
2) Flexible Premium Variable Life (Universal)

26
Q

Scheduled Premium VLI

A

Scheduled premium is issued with a minimum guaranteed death benefit. Insurability is rquired. Premium is calculated according to the age and sex and policy face amount. Once the premium has been determined and the expenses have been deducted. the net premium is invested in a separate account the policyowner selects.

27
Q

Universal Variable Life Insurance UVL or VUL

A

Flexible premiums and flexible death benefit. Nothing is guaranteed. like VLI premium whose guaranteed death benefit and fluctuating account.

28
Q

Whole Life

A

Scheduled Premium
Fixed Death Benefit
Premium to General Account
Guaranteed Cash Value

29
Q

Variable Life Insurance

A

Scheduled premium (net proceeds) first to general account then saparate account. Guaranteed Death benefit, no guaranteed cash value

30
Q

Universal Variable Life

A

Flexible Premium
Variable Death Benefit
Separate aCCount only
No guaranteed cash value.

31
Q

Deductions from premium

A 
Deductions from teh gross premium normally reduce the amount of money invested in the separate account.  The greater the reductions, the less money available for the investment base. 
1) Administrative Fees (one time fee)
2) Sales Loads
3) State premium Taxes
Variable life insurance 9%
32
Q

Deductions from the Separate Account

A

Deductions from the separate account reduce the investment return payable to the policy owner.

1) Mortality Risk
2) Expense Risk Fee
3) Investment Management Fee

33
Q

Variable Life Insurance Death Benefit

A

Guaranteed Benefit does not change, but total benefitincluding the variable portion of the death benefit must be recalculated at least annually. Anything above required is placed into separate account. Calculated Annually

34
Q

Variable Life Policy Loans

A

Insurted may borrow a percentage such as 75% after 3 years. Interest is charged, outstanding, deducted from death benefit. Full cash value obtained by surrendering the contract
Option of changing a VLI for a WLI within 24 months. Allowed without insurability. WLI has the same contract date and death benefit as the minimum guaranteed in the VLI. REtroactive.

35
Q

Variable Life Insurance Voting Rights

A

Receive one vote per $100 of cash value funded by the separate account. Changes in investment objectives by majority vote outstanding shares.

Series 66 (6 decks)

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