Unit 12: Variable Annuities

Question 1

Tax-deferred growth and lifetime payout options

Answer 1

Variable Annuities

Question 2

_______ and mutual funds have many similarities and are both subject to many of the same regulations

Answer 2

Annuities

Question 3

_______ ________ are most often used to accumulate funds for retirement

Answer 3

Variable Annuities

Question 4

For variable annuities, taxes on income and capital gains are_______ until the funds are withdrawn

Answer 4

deferred until the funds are withdrawn

Question 5

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.

Answer 5

Accumulate tax deferred;

Income guaranteed

Question 6

In a variable annuity, the growth phase as its _______ phase.

Answer 6

accumulation

Question 7

In a variable annuity, the_______ phase is its annuity phase.

Answer 7

payout

Question 8

Depending on the contract phase, the contract owner’s interest in the separate account is known as either ________ units or _______ units

Answer 8

accumulation;

annuity

Question 9

What are the 3 payout options of variable annuities

Answer 9

1) Life Income (aka life only or straight life)
2) Life with period certain
3) Join life with last survivor

Question 10

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.

Answer 10

59 1/2

Question 11

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 The IRA requires that all earnings are withdrawn first and are taxed at ordinary income rates.

Answer 11

last in, first out (LIFO)

Question 12

__________income for retirement, not preservation of capital, should be the catalyst to consider a variable annuity.

Answer 12

Supplemental

Question 13

Variable contracts are considered most suitable for someone who can fund the contract with ______.

Answer 13

cash

Question 14

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.

Answer 14

not suitable

Question 15

Earnings in a variable annuity are _____ ______, so there is no reason for placing a VA in a tax-favored account, like an IRA is

Answer 15

tax deferred

Question 16

Max contributions to all other retirement savings vehicles available to an individual should be made before a _______ annuity is considered suitable.

Answer 16

variable annuity

Question 17

If someone has a low risk tolerance or is wary of stock market, a ________ annuity is not likely suitable.

Answer 17

variable annuity

Question 18

A life insurance company product designed to provide supplemental retirement income.

Answer 18

Annuity

Question 19

Investors pay premiums to the insurance company that are invested in the company’s general account.

Significant risk: purchasing power (inflation)

Answer 19

Fixed annuity

Question 20

Investor assumes investment risk and securities are put in a separate account. This product is considered a security. Must be sold with a prospectus.

Answer 20

Variable Annuity

Question 21

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.

Answer 21

Combination Annuity

Question 22

When the annuitant will begin taking income from the account.

Answer 22

Annuitization

Question 23

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.

Answer 23

Assumed Interest Rate (AIR)

Question 24

The insurance company will pay the annuitant for life. When the annuitant dies, there is no continuing payments to the beneficiary.

Answer 24

Life Income (life-only annuity) option

Question 25

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.

Answer 25

Life with Period Certain option

Question 26

Guarantees payments over two lives. It is often used for husbands and wives.

Answer 26

Join Life with Last Survivor option

Question 27

There is no such thing as an immediate deferred annuity; deferred annuities have_______ payouts.

Answer 27

delayed

Question 28

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.

Answer 28

annuitized

Question 29

_____ _______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.

Answer 29

Life income

Question 30

When contributions are made with after-tax dollars, these already-taxed dollars are considered the investor’s _____ ______ and are not taxed when withdrawn.

Answer 30

cost basis

Question 31

The earnings in excess of the cost basis are taxed as _______ _______ when withdrawn

Answer 31

ordinary income

Question 32

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.

Answer 32

distributions

Question 33

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.

Answer 33

Lifetime Withdrawal Benefit (LWB) or Lifetime Income