Unit 12 - Variable Annuities

Question 1

define a fixed annuity

Answer 1

investors pay premiums to insurance company & insurance company pays guaranteed payout to the annuity owner

Question 2

what is the significant risk associated with fixed annuities?

Answer 2

purchasing power risk

Question 3

define purchasing power risk

Answer 3

fixed pymt that investor receives loses buying power overtime due to inflation

Question 4

who assumes the risk in a variable annuity? investor or insurance company?

Answer 4

investor because product is considered a security

Question 5

is a fixed annuity considered a security?

Answer 5

no & therefore, to sell one you need an insurance license, not a securities registration

Question 6

what securities are found in a fixed vs variable annuity?

Answer 6

fixed = fixed income/real estate, variable = equity, debt, or mutual funds

Question 7

who assumes the risk in a fixed annuity? investor or insurer?

Answer 7

insurer

Question 8

where are funds (aka premiums) deposited in a fixed vs. variable annuity?

Answer 8

fixed = general account, variable = separate account with stocks/bonds

Question 9

What are the two significant difference btwn mutual funds & variable annuities?

Answer 9

1. earnings on dollars invested into variable annuity accumulate tax-deferred 2. Variable annuities offer advantage of income guaranteed to some extent depending on how contract is set up

Question 10

what are the voting rights for a variable annuity?

Answer 10

investors may vote for changes in the investment policy & the investment advisor

Question 11

what are the names for the growth phase versus the payout phrase of variable annuities?

Answer 11

accumulation = growth phase & annuity phase = payout phase

Question 12

what is the assumed interest rate (AIR) and when is it relevant for var. annuities?

Answer 12

AIR is the conservative projection of the performance of the separate account over the estimated life of the contract. only relevant during the annuity phase of the contract.

Question 13

What are the three payout options of annuities if annuitization is selected?

Answer 13

life income, life with period certain & joint life with last survivor

Question 14

define life income payment for annuities

Answer 14

insurance company pays the annuitant for life

Question 15

is life income payment option usually a larger or smaller payout compared to the other choices?

Answer 15

usually larger to make sure to meet min. payments before death of annuitant

Question 16

define joint life with last survivor payment for annuities

Answer 16

guarantees payments over 2 lives

Question 17

Are contributions to annuities pre-tax or after-tax dollars?

Answer 17

after-tax dollars, excluding employer-sponsored plans (qualified) retirement account or if IRA

Question 18

how are earnings in excess of the cost basis taxed?

Answer 18

taxed as ordinary income when withdrawn

Question 19

Define variable life insurance

Answer 19

form of permanent life insurance that provides protection for the beneficiary in the event of the policy holders’ death.