Unit 24 Flashcards
Insurance-Based Products
Principal differences of variable annuities from mutual funds (3)
- Insurance company product
- Units instead of shares
- Some guarantees
Longevity risk
The uncertainty that one will outlive their money
Why IRS Section 1035 exchanges allow for
One annuity to be exchanged into another with tax consequences
3 advantages of variable annuities over mutual funds
- No age 73 restrictions
- No contribution limits
- No probate (Assets pass directly to beneficiary)
Main disadvantages of variable annuities as compared to mutual funds (3)
- Earnings taxed as ordinary income
- Withdrawals prior to 591/2 equal 10% penalty
- Most variable annuities carry a conditional deferred (surrender) sales charge
When comparing mutual funds and variable annuities, what is true of expense ratio?
Higher for variable annunities
The purchaser can be offered the following choices as to how growth in the underlying index will be credited in the form of interest to the account (4)
- Annual reset
- High-water mark
- Point-to-point
- Averaging
Annual reset crediting method
The interest to be credited to the account is computed by comparing the index value at the end of the year to the value at the beginning of the year
High-water mark crediting method
The highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year (provides greatest gain)
Point-to-point crediting method
Interest is computed based on the value of the index at the end of the contract compared to the beginning.
Single-premium deferred annuity
When annuity is purchased with a single lump-sum investment
If an investor misses a periodic payment in the accumulation stage of an annuity, what happens?
Nothing, he is no danger of forfeiting previous contributions
Immediate annuity
Contract where investor deposits lump sum and receives payout benefits immediately
When annuitizing occurs
When investment converts from accumulation stage to distribution stage
Straight life payout option
Annuitant receives periodic payments (usually monthly) until death, gives largest payment
Life annuity with period certain
Annuitant receives payments for life, with a certain minimum period guaranteed. If the annuitant dies before the period certain expires, payments continue to the annuitant’s named beneficiaries for the period certain.
Joint Life with Last Survivor Annuity
Annuity that covers two people, usually married, paid as long as one of the annuitants is alive
Refund Annuity
Payments will continue after death of the insured until the full value of the initial premium (principal) has been returned.
Mortality Guarantee
Guarantees payout for as long as annuitant lives
What any earnings withdrawals are taxed as
Ordinary income
Are any contributions taxed?
No
Synonym terms for whole life
Ordinary life, straight life
If the policyowner decides to stop paying the premiums, the policyowner may… (3)
- Surrender the policy for its cash value
- Take a reduced paid-up policy where the death benefit is decreased and future premiums are no longer required
- Take extended term insurance
Current annual rate in universal life
Varies with current market conditions and may change every year
Contract rate in universal life
Minimum guaranteed interest rate, and the policy will never pay less than that amount
3 advantages of universal life
- The ability to adjust the amount of premium payments
- The ability to change the death benefit amount
- When the cash value is sufficient, no premium payment is required
Variable life insurance
The general account receives an amount equal to the actual cost of the life insurance, and the portion in excess of that is invested in a separate account.
Universal variable life insurance
type of variable life insurance with flexible premiums where premiums are invested in a separate account
Charges deducted from the gross premium
- Sales load
- Administrative fee
- State premium taxes
How much of the cash value must be available for a policy loan after the policy has been in force for three years?
75%
Is the insurer is required to loan 100% of the cash value from variable life policy loans
No
When cash value is reduced by the amount of the loan, what happened
The insured surrendered the contract
Unique feature of variable life insurance
Right to exchange a VLI contract for a form of permanent insurance issued by the company with comparable benefits (usually whole life)
Two testable facts about contract exchange provision
- The contract exchange provision must be available for a minimum of twenty-four months
- No evidence of insurability is required for the exchange
Contract holders receive one vote per what dollar amount of cash value
$100
How long a variable life policy must be in force for before loan provision can be made available
3 years
What describes the relationship between annuity units and their value during the payout period of a variable annuity?
Number of units remains constant, but unit value varies
Which term policy always has the lowest initial premium
Annual renewable term
Which policy generally offers no cash value and is not tied to the stock market
Term life insurance
Variable annuity greatest strength and weakness
Strength: Potential to keep with inflation
Weakness: Lack of guarantees
What is guaranteed by a variable life policy
Minimum death benefit
What annuitization guarantees
Income that will last for the client’s lifetime
Maximum sales charge of a variable life insurance plan
9% averaged over 20 years
