Unit 12: Variable Annuities Flashcards
Tax-deferred growth and lifetime payout options
Variable Annuities
_______ and mutual funds have many similarities and are both subject to many of the same regulations
Annuities
_______ ________ are most often used to accumulate funds for retirement
Variable Annuities
For variable annuities, taxes on income and capital gains are_______ until the funds are withdrawn
deferred until the funds are withdrawn
Although there are many similarities between mutual funds and variable annuities, there are two extremely significant features that differentiate these products:
1) The earnings on dollars invested into a variable annuity accumulate tax _______.
2) Variable annuities offer the advantage of ________ guaranteed to some extent depending on how the contract is set up.
Accumulate tax deferred;
Income guaranteed
In a variable annuity, the growth phase as its _______ phase.
accumulation
In a variable annuity, the_______ phase is its annuity phase.
payout
Depending on the contract phase, the contract owner’s interest in the separate account is known as either ________ units or _______ units
accumulation;
annuity
What are the 3 payout options of variable annuities
1) Life Income (aka life only or straight life)
2) Life with period certain
3) Join life with last survivor
Because annuities are designed to supplement retirement income and provide tax-deferred growth, withdrawals before age _______are subject to the 10% early withdrawal penalty and ordinary income tax on the earnings portion of the withdrawal.
59 1/2
Many contract owners choose random withdrawals over the annuity option; if this choice is made, ___________taxation applies. The IRA requires that all earnings are withdrawn first and are taxed at ordinary income rates.
last in, first out (LIFO)
__________income for retirement, not preservation of capital, should be the catalyst to consider a variable annuity.
Supplemental
Variable contracts are considered most suitable for someone who can fund the contract with ______.
cash
Variable contracts are ____ _______ for anyone who might need the lump sum of cash invested in the variable annuity at a later time for any reason.
not suitable
Earnings in a variable annuity are _____ ______, so there is no reason for placing a VA in a tax-favored account, like an IRA is
tax deferred
Max contributions to all other retirement savings vehicles available to an individual should be made before a _______ annuity is considered suitable.
variable annuity
If someone has a low risk tolerance or is wary of stock market, a ________ annuity is not likely suitable.
variable annuity
A life insurance company product designed to provide supplemental retirement income.
Annuity
Investors pay premiums to the insurance company that are invested in the company’s general account.
Significant risk: purchasing power (inflation)
Fixed annuity
Investor assumes investment risk and securities are put in a separate account. This product is considered a security. Must be sold with a prospectus.
Variable Annuity
Receives the advantages of both the fixed and variable annuities. Investor contributes to both the general and separate accounts. Guaranteed payments as well as inflation protection.
Combination Annuity
When the annuitant will begin taking income from the account.
Annuitization
A conservative projection of the performance of the separate account over the estimated life of the contract. It is only relevant during the annuity phase of the contract.
Assumed Interest Rate (AIR)
The insurance company will pay the annuitant for life. When the annuitant dies, there is no continuing payments to the beneficiary.
Life Income (life-only annuity) option
To guarantee that a minimum number of payments are made, even if the annuitant dies. Annuitant is guaranteed monthly income for life and a named beneficiary receives payment for the remainder.
Life with Period Certain option
Guarantees payments over two lives. It is often used for husbands and wives.
Join Life with Last Survivor option
There is no such thing as an immediate deferred annuity; deferred annuities have_______ payouts.
delayed
The value of both accumulation units and annuity units will vary based on the performance of the separate account. The number of accumulation units varies as additional investments purchase additional units. However, once the contact is________, the number of annuity units received is fixed.
annuitized
_____ _______generally, this option will give the annuitant the largest monthly payment because all calculations are based on the payments ceasing upon the
annuitant’s death.
Life income
When contributions are made with after-tax dollars, these already-taxed dollars are considered the investor’s _____ ______ and are not taxed when withdrawn.
cost basis
The earnings in excess of the cost basis are taxed as _______ _______ when withdrawn
ordinary income
Any answer choice that mentions capital gains taxation on annuities or retirement plans is wrong. There is only ordinary income tax on _________ from annuities and retirement plans.
distributions
The insurance company guarantees a regular periodic payment for the lifetime of the annuitant even if the account balance goes to zero. Cashing out the annuity contact is simply not possible. Not suitable for anyone who isn’t planning for or anticipating a lengthy retirement.
Lifetime Withdrawal Benefit (LWB) or Lifetime Income
