Other Pooled Investments Flashcards
Annuitization of a variable annuity occurs when an investor:
A
Transfers ownership of the annuity to a spouse
B
Receives a lump sum payment at retirement
C
Invests and purchases accumulation units
D
Begins receiving an income stream, usually as a lifetime benefit
Good Job!
D
Begins receiving an income stream, usually as a lifetime benefit
Annuitization takes place when the annuitant is ready to receive income payments from the principal balance and earnings from the insurance company, usually for life.
How does the insurance company get compensated for the life expectancy risks it assumes under the annuity contract?
A
They assess a mortality expense charge
B
They cannot be compensated for assuming that risk
C
They charge back-end loads
D
They charge sales loads
A
They assess a mortality expense charge
The insurance company risks the possibility that the annuitant will outlive their life expectancy. This would put the insurance company at a disadvantage, because it provides the annuitant with lifetime payout options. The insurance company prices these risks as accurately as possible during accumulation and assesses a charge against the contract value, which is called a mortality expense charge. The amount of this charge is guaranteed as a percentage of the contract value. This charge compensates the insurance company for the life expectancy risks it assumes under the annuity contract.
A real estate investment trust could receive income from all the following, except:
A
Rental income
B
Interest income
C
The spread between its borrowing costs and its lending rates
D
Depreciation of property values
D
Depreciation of property values
An equity REIT could receive rental income and capital appreciation, while a mortgage REIT could profit from interest income and the difference (the spread) between its borrowing costs and its lending rates. Depreciation is not a form of income.
An individual has invested $50,000 into an annuity that will provide a fluctuating stream of income as well as an inflation hedge. The insurance company will place the investment amount into:
A
A mutual fund invested in real estate
B
Any individual security that they choose
C
The insurance company’s general account
D
A separate account
D
A separate account
This individual has purchased a variable annuity. Premiums paid by variable annuity purchasers are placed into an insurance company separate account. The assets in a separate account are invested in a wider range of securities than those in a fixed annuity. The separate account is often divided into a variety of subaccounts, each of which may have a different asset mix or risk profile. When a customer initiates the purchase of a variable annuity, they may allocate their money among the subaccounts in a way that reflects their investment goals.
All the following are types of annuities, except:
A
Periodic payment deferred contract
B
Periodic payment immediate contract
C
Single premium immediate contract
D
Single premium deferred contract
B
Periodic payment immediate contract
Premium payment options include single premium and periodic premium. An immediate annuity does not have an accumulation period and is used to generate immediate income within 1 year of the issue date. Immediate annuities can only be funded with a single premium (lump sum) and are often called single premium immediate annuities (SPIA). Deferred annuities may be funded with a single or periodic premium. Deferred annuities will begin to make payments starting at a specified time in the future, which must be longer than 1 year from the issue date.
Hedge funds are sold in what type of offering?
A
Institutional
B
Private placement
C
Rights
D
Public
B
Private placement
A hedge fund is a security structured as a limited partnership and typically only available to sophisticated investors. They are high-risk investments for investors who seek aggressive yield. They do not have to register with the SEC. They are private placement offerings, and they do not trade.
ABC insurance company has issued a variable annuity contract. The contract offers numerous investment options, including subaccounts, which hold bonds, domestic equities, and foreign securities. Which of the following risks does ABC incur when issuing this contract?
A
Currency and expense risk
B
Mortality and expense risk
C
Mortality and currency risk
D
Inflation and interest-rate risk
B
Mortality and expense risk
Annuity contracts offer similar guarantees to those offered by other insurance products. The expense guarantee assures that higher than anticipated administrative or operational expenses will not be passed on to the annuitant. The contract’s mortality guarantee works in the opposite direction of a life insurance contract. Annuity benefits must continue to be paid even if the annuitant outlives the account balance. The insurance company risks the possibility that the annuitant will outlive their life expectancy.
An annuity unit is:
A
A separate account
B
The unit of measure for determining a contract owner’s interest in a fixed annuity during the pay-in period of the annuity contract
C
The unit of measure for determining a contract owner’s interest in the annuity during the payout period of the contract
D
The unit of measure for determining a contract owner’s interest in a separate account during the accumulation period of a deferred annuity contract
C
The unit of measure for determining a contract owner’s interest in the annuity during the payout period of the contract
When the annuitant begins the payout phase, the insurance company converts the accumulation units into a fixed number of annuity units. Annuity units are the measurement used to determine the amount of each payment
All the following are registered with the SEC, except:
A
Funds of hedge funds
B
Publicly traded REITs
C
Non-traded REITs
D
Private REITs
D
Private REITs
Private REITs are not registered with the SEC, and investors should use a great deal of caution when considering these investments. They are normally offered as private placements through Regulation D and are only offered to qualified purchasers or accredited investors. There are no disclosure requirements for private REITs. REITs that are registered with the SEC may be publicly traded or non-traded. Publicly traded REITs are listed and trade on a stock exchange and are considered safer than non-traded. Non-traded REITs are still registered with the SEC but are unlisted and do not trade on an exchange. Funds of hedge funds are created by broker-dealers, and these funds must be registered.
A
529 plans have no income limits for eligibility
B
Account balances in 529 plans may be transferred to another relative
C
Contributions to 529 plans are nondeductible and limits on contributions are determined by individual plans or the state
D
529 plans are securities that are regulated by the SEC
D
529 plans are securities that are regulated by the SE
529 plans are considered municipal fund securities that are regulated by the MSRB, not the SEC. Maximum contributions are determined by the individual plan or state, contributions are nondeductible, and there are no income limits for eligibility. Account balances may be transferred to another relative. There is also no taxation on earnings when used for qualified education.
If an LGIP retains a broker-dealer to market their offerings in a state, which of the following statements is true?
A
The SEC will regulate sales of LGIP issues because the SEC has jurisdiction over the broker-dealer
B
The broker-dealer will only be subject to SEC oversight if they sell the LGIP to individual investors
C
The MSRB will regulate sales of LGIP issues sold by broker-dealers because LGIPs are municipal fund securities subject to MSRB rules
D
The LGIP is defined as a type of investment company subject to the Investment Company Act of 1940
C
The MSRB will regulate sales of LGIP issues sold by broker-dealers because LGIPs are municipal fund securities subject to MSRB rules
The MSRB regulates sales of LGIP issues when they are sold by broker-dealers. On the other hand, if the LGIP uses its own employees to market itself to local and state governmental entities, it is not subject to MSRB rules. LGIPs are modeled after mutual funds or UITs, but the pools are not subject to the Investment Company Act of 1940 registration requirement. LGIPs may only be offered to local municipal government entities in that state. Individual investors are not permitted to purchase LGIPs.
Which of the following statements about hedge funds is false?
A
They can only be liquidated on specific dates
B
They are structured like mutual funds and are regulated by the Investment Company Act of 1940
C
They are private placement offerings and do not trade
D
The maximum number of investors is limited to 99
B
They are structured like mutual funds and are regulated by the Investment Company Act of 1940
A hedge fund lacks transparency. Hedge funds are not registered investment companies and are not regulated by the Investment Company Act of 1940. They are private placement offerings, and they do not trade. The maximum number of investors is limited to 99, with a maximum of 35 investors being non-accredited or all investors being qualified purchasers. Hedge funds are structured like mutual funds because they pool investments to purchase a portfolio of securities, but they can only be liquidated on specific dates.
A parent has invested $100,000 into a 529 plan for their child. If the money is withdrawn and not used for higher education, what are the tax consequences?
A
A 10% penalty on the taxable portion plus capital gains on amounts exceeding the cost basis
B
There is no penalty, but the entire amount is taxable as ordinary income
C
No taxes are due if the child receives a scholarship
D
All earnings are taxed as ordinary income plus a 10% penalty on the taxable portion
D
All earnings are taxed as ordinary income plus a 10% penalty on the taxable portion
Withdrawals from a 529 plan that are not used for qualified education expenses are subject to ordinary income tax on the earnings, as well as a 10% penalty on those earnings. For states that offer additional tax benefits for contributions, a nonqualified distribution could require the recapture of those tax incentives taken on contributions. The child receiving a scholarship would be an exception to the 10% penalty, but earnings are still subject to ordinary income taxes.
Private REITs are all the following, except:
A
Registered with the SEC
B
Have no disclosure requirements
C
Only suitable for wealthy investors
D
Usually offered as private placements
A
Registered with the SEC
Private REITs are not registered with the SEC or registered at all. They are usually Regulation D private placements and are only offered to qualified purchasers or accredited investors. Since they are not registered, they have no disclosure requirements.
What type of an investor would be suitable for funds of hedge funds?
A
A younger investor who is a short-term trader
B
A seasoned investor who can afford to take risks and does not need liquidity for this portion of their investment portfolio
C
An elderly investor seeking income
D
A first time investor
B
A seasoned investor who can afford to take risks and does not need liquidity for this portion of their investment portfolio
Fund of hedge funds are still considered very aggressive investments since the underlying investments are hedge funds. They are also more expensive than traditional investment company securities since they have two sets of fees, one for the hedge fund managers and one for the investment manager of the fund. The composition of hedge funds also makes them more illiquid than traditional funds, and they cannot be redeemed any time. They usually have specific time frames where investors can liquidate all or a portion of their holdings.
