unit 15 Flashcards
variable annuities purchase
units
tax deferred
expenses usually higher than mutual fund
index annuity
performance tied to index
usually caps on performance gains but not losses
not security
determine amount to be credited with participation rate
take participation rate and multiply times actual return and compare to cap.
funding of annuties
single premum deffered (accumulation units)
periodic payment deffered( accumulation units)
single premium immediate(annuity units)
bonus annuity
distribution
random withdrawals
annuitize
- straight life(income for an entire lifetime)
- life with period certain
- joint life last survivor
taxation on annuity
non qualified
aftertax
earnings tax deffered
anything above cost basis taxed at ordinary income
penalty if not 59 1/2 10% plus ordinary income
not penalty on CB for this case
withdrawls taxed lifo
if contract is annutized(exclusion ratio applies) every payment is considered part earnings and part cost basis
benefits of annuity contracts
lifetime retirement income
tax deffered
inflation head possibly
1035 exchange
disadvantage to annuity contracts
market risk
higher expenses than mutual funds
possible surrender charges
tax penalty for early withdrawal
Term Life
fixed term
no cash value
renewable with the same face but preimum higher
whole life
fixed premium
gaurenteed death benefit and cash value
universal life
flex premium
no guarantee on cash value
may be overfunded
variable life
fixed premium
guarenteed min death benefit
cash value not guarenteed
based on performance of separate account
variable life policy loans
can borrow 75% of cash value after the third year
variable life policy exchange
24 month right to exchange for permanent policy
based on original age
no physical required
a variable life insurance plan may charge a maximum sales charge of
9% over a period not to exceed 20 years
annual reset
interest to be credited to the account is computed by comparing index value at end of the year to value at the beginning. generally has a lower participation rate than point to point.
in short- comparing abeginning value against end, lower part rate than ptp.
high watermark
the highest value reached by index between anniversary dates of an annuity is compared to the value at the beginning of the year. the option can provide the highest gains with look back.
in short- highest val between aniversary is compared to begining of year. can provide highest gains with look back during high volatility
point to point
interest computed based on the value of the index at the end of the contract compared to the begining. variation is annual point to point
averaging
most common is monthly averaging and can be the best options when markets are expected to be highly volatile
variable annuity has different investment options known as
subaccounts
Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance?
Variable life insurance allows the policyowner to decide how the cash value is invested through a number of subaccounts.
Any increase in the value of a variable annuity is taxed
Any increase in the value of a variable annuity is taxed as ordinary income, never capital gain.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are taxed how
The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
