Variable Annuities (UITs) Flashcards
Investment risk in a variable annuity contract is carried by the:
A. purchaser
B. issuer
C. custodian
D. manager
The best answer is A.
Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk.
For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop.
Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.
A variable annuity is a(n):
A. security regulated under the Investment Company Act of 1940
B. insurance product that is not regulated under the Investment Company Act of 1940
C. security but it has no prospectus delivery requirement
D. insurance product that has no prospectus requirement
The best answer is A.
Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk.
For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop.
Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940.
To sell variable annuities, a salesperson must be registered with all of the following EXCEPT (the):
A. FINRA
B. State Insurance Commission
C. State Banking Commission
D. SEC
The best answer is C.
To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state’s “blue sky” laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
Typically, accumulation units of variable annuities represent an investment interest in underlying:
A. mutual fund shares
B. life insurance policies
C. direct participation programs
D. pension fund investments
The best answer is A.
To fund variable annuity contracts, the monies paid in by contract holders are invested in a separate investment account that buys designated mutual fund shares. Thus, the separate account “accumulation units” really represent an interest in underlying mutual fund shares. The contract holder has the choice of different types of mutual fund investments that can be made by the separate account.
Payments into a variable annuity contract are deposited to the insurance company’s:
A. general account
B. special account
C. separate account
D. special memorandum account
The best answer is C.
Monies deposited to a variable annuity are deposited into a separate investment account (that is, separate from the insurance company’s general investment account). The separate account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity received.
Which statement is TRUE regarding variable annuities during the accumulation phase?
A. Periodic payments of fixed or varying dollar amounts can be made into the separate account
B. All payments into the contract must be made in a lump sum at the time of purchase
C. Periodic distributions of fixed dollar amounts can be made to the holder from the separate account
D. Periodic distributions of varying dollar amounts can be made to the holder from the separate account
The best answer is A.
During the accumulation phase of a variable annuity contract, money can be paid into the plan; but distributions cannot be taken.
When distributions commence in the annuity phase, no more monies can be paid into the plan.
Thus, the accumulation phase allows payments to be made into the plan; but distributions cannot be taken out of the plan.
Which statement is TRUE when describing the “build-up” in a variable annuity separate account during the accumulation phase?
A. All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more annuity units
B. All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred
C. All interest, dividends, and capital gains from the securities in the account are taxable
D. All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units
The best answer is B.
During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units (NOT annuity units) for the contract holder.
The “build-up” of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.
An “annuity unit” of a variable annuity contract is a(n):
A. share of common stock representing an interest in the underlying portfolio
B. accounting measure of the owner’s interest in the separate account
C. accounting measure of the annuity amount to be received by the owner
D. share of beneficial interest in a fixed portfolio
The best answer is C.
Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.
Which is the BEST definition of an “annuity unit”?
A. An accounting measure used to determine the number of units the contract holder may purchase in the separate account
B. An accounting measure used to establish the contract holder’s ownership interest
C. An accounting measure upon which the amount of pay out is determined
D. An accounting measure used to determine the contract holder’s death benefit
The best answer is C.
Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.
Any changes in value of a variable annuity unit are directly related to changes in the:
A. Standard and Poor’s 500 Average
B. Value of the securities funding the separate account
C. Consumer Price Index
D. Dow Jones Averages
The best answer is B.
Since the separate account of investments funds a variable annuity, annuity unit values are directly influenced by changes in the values of the securities in the separate account.
All of the following are variable annuity payment options EXCEPT:
A. Life Annuity
B. Life Annuity with Period Certain
C. Joint and Last Survivor
D. Joint Tenants with Rights of Survivorship
The best answer is D.
Annuity payment options include a life annuity; life annuity with a period certain (which pays for a minimum guaranteed period, regardless); and a joint and last survivor annuity (which covers 2 lifespans, such as both a husband and wife). Joint tenants with rights of survivorship is an ownership option for a joint account, where each tenant 100% owns the account (typical for a husband and wife).
Which statement is TRUE about a Life Annuity?
A. A Life Annuity will continue to pay to a beneficiary when the person dies
B. The periodic payment for a Life Annuity will be higher than the periodic payment for a Period Certain annuity
C. Life annuities are a good choice for those seeking to leave assets to heirs
D. The periodic payment for a Life Annuity will be reduced by 1/2 on the death of the contract holder
The best answer is B.
A life annuity ceases when that person dies, so this is not a good choice for someone seeking to leave assets to heirs.
A life annuity - period certain continues to make payments to a beneficiary if the person dies prior to the end of the “certain period.” For example, if a life annuity -10 year period certain is purchased, and the purchaser dies after the 3rd year, the annuity continues to pay to a beneficiary for another 7 years.
Because of the minimum guaranteed payment period, the periodic payment amount is lower than a simple life annuity (since the insurance company must pay for a longer guaranteed time period).
Which statement is TRUE regarding a life annuity?
A. The shorter the expected annuity period, the larger the monthly payment
B. The longer the expected annuity period, the more stable the monthly payment
C. A life annuity usually pays the smallest amount of all of the annuity payment options
D. A life annuity usually pays the beneficiary full face value if the annuitant dies prior to age 70 1/2.
The best answer is A.
The shorter the time period to “expected death” when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to “expected death” when the separate account is annuitized, the smaller the monthly payment will be.
Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period.
A life annuity lasts only for that person’s life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.
A customer buys a variable annuity and elects a payout option of Life Income with a 20 year period certain. This means that payments will continue for:
A. the annuitant’s life, not to exceed 20 years
B. the annuitant’s life, but if he dies before 20 years elapse, payments continue to his heir(s)
C. the life of the annuitant and then cease
D. 20 years to the annuitant or beneficiary
The best answer is B.
An annuity payout option of Life-with Period Certain means that the annuity continues for the customer’s life, but if he dies before the “period certain” (20 years in this case) is completed, payments will continue to a beneficiary until the 20 year period is completed.
An annuitized account in a variable annuity is most similar to:
A. a mutual fund
B. a whole life insurance unit
C. pension payments
D. an individual retirement account
The best answer is C.
Once a variable annuity separate account interest is “annuitized,” the holder gets a fixed number of annuity units. Each month, the holder gets a payment equal to the fixed number of units x the unit value (which varies based upon the performance of the underlying investments). The payments continue for life. Thus, an annuitized account is most similar to pension payments.
