Find out how you can intelligently organize your Flashcards. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. When a variable annuity contract is annuitized, the number of annuity units is fixed. This factor is used to establish the dollar amount of the first annuity payment. A)Joint tenants annuity. If an annuitant lives longer than expected, the ins. Question #11 of 48Question ID: 606816 Advantages And Disadvantages Of Adjustable Life, Case Study: Cimb-Principal Asset Management Berhad. In addition, an element of risk must be present. B. separate account may consist of mutual funds. D)I and III. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. 8. She will receive the annuity's entire value in a lump-sum payment. C)Growth mutual funds D)II and III. D)A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Reference: 12.1.4.1 in the License Exam. contract. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. Because the client is older than age 59-, he does not pay 10% premature distribution penalty tax. D)Dow Jones Industrial Average. C)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. The # of annuity units is fixed at the time of annuitization, 4. Based only on these facts, the variable annuity recommendation is B)Universal variable life policy. Her agent recommended she choose a variable annuity as a safe haven for the funds. have investment risk that is assumed by the investor However, it does guarantee payments for life (mortality). B)Variable annuities. Once a variable annuity has been annuitized: Contributions to a nonqualified variable annuity are not tax deductible. Reference: 12.1.2 in the License Exam. Variable annuities offer the possibility of higher returns and greater income than fixed annuities, but theres also a risk that the account will fall in value. C)number of accumulation units. If this client is in the payout phase, how would his April payment compare to his March payment? Introducing Cram Folders! B)variable annuities are classified as insurance products. Nature of the underlying investment fixed or variable, Primary purpose accumulation or pay-out (deferred or immediate), Nature of payout commitment fixed period, fixed amount or lifetime, Premium payment arrangement single premium or flexible premium. Fixed vs. Variable Annuities: Key Differences - Yahoo Finance \text{Balance sheet accounts:}\\ Many investments are taxed year by year, but the investment earningscapital gains and investment incomein annuities arent taxable until the investor withdraws money. The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? the VA recommendation would not be suitable. A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. The annuitized payments are viewed for tax purposes as All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. She will receive the annuity's entire value in a lump-sum payment. Question #29 of 48Question ID: 606831 If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? A market-value adjusted annuity is one that combines two desirable features the ability to select and fix the time period and interest rate over which the annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Question #19 of 48Question ID: 606826 U.S. Securities and Exchange Commission. All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: a. the return to investors is dependent on the performance of the securities in the underlying portfolio b. the investment company act of 1940 is the regulating legislation c. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made d. the . Based only on these facts, the VA recommendation is: A. not suitable because a lifetime income rider is only for someone who is already retired. B)value of annuity units. Which of the following statements regarding variable annuities are TRUE? The # of accumulation units can rise during the accumulation period, 3. Which of the following are defined as securities? Question #31 of 48Question ID: 606836 A)It will stay the same. A policyholder will make a lump sum payment or a series of payments in exchange for a guaranteed amount of income. B)I and III. by jmacewe, How is the distribution taxed? co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. C)the invested money will be professionally managed according to the issuers' investment objectives. As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level. Your answer, Variable annuities., was correct!. B)fixed in value until the holder retires. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. a variable annuity does not guarantee an earnings rate of return. Variable Annuities | Investor.gov We also reference original research from other reputable publishers where appropriate. Explaining What have been the major population changes since the first census in 1790? 2003-2023 Chegg Inc. All rights reserved. A customer has a nonqualified variable annuity. An investor owning which of the following variable annuity contracts would hold accumulation units? The downside was that the buyer was exposed to market risk, which could result in losses. B)the investment portfolio is managed professionally. Reference: 12.3.2.1 in the License Exam. This can be particularly valuable if they are using a strategy called rebalancing, which is recommended by many financial advisors. a variable annuity guarantees an earnings rate of return. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. D) There is no tax as the withdrawal is considered return of capital. The entire amount is taxed as ordinary income. A variable annuity is both an insurance and a securities product. The accumulation unit's value is used to calculate the total value of the account. Once the contract is annuitized, monthly payments to the customer are: Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. C)The entire $10,000 is taxable as ordinary income. Some fixed annuities credit a higher interest rate than the minimum, via a policy dividend that may be declared by the companys board of directors, if the companys actual investment, expense and mortality experience is more favorable than was expected. A)II and IV. There is a common apprehension that if an individual starts an immediate lifetime annuity and dies soon after that, the insurance company keeps all of the investment in the annuity. Fixed Annuity, Retirement Annuities: Know the Pros and Cons. An investor who purchases a fixed annuity contract assumes purchasing-power risk. B) the rate of return is determined by the underlying portfolio's value, C) such an annuity is designed to combat inflation risk, D) the number of annuity units becomes fixed when the contract is annuitized. Question #18 of 48Question ID: 606827 The funds in an annuity are off-limits to creditors and other debt collectors. B)II and III. D)suitable due to the relative safety of the investment. Chapter 4: Annuities Flashcards | Chegg.com A)value of underlying securities held in the separate account. In this case, the investor is taking a lump-sum distribution before reaching age 59- and must pay an additional 10% penalty on the taxable amount. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A)number of annuity units. Variable annuity salespeople must be registered with FINRA and the state insurance department. This factor is used to establish the dollar amount of the first annuity payment. A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant. A variable annuity's separate account is: The separate account is used for both variable life insurance and variable annuity investments. Individuals are reducing their overall risk, because only part of the money is being put in each investment. D)II and III. guarantees payments for a certain period of time. A variation of lifetime annuities continues income until the second one of two annuitants dies. Reference: 12.3.4 in the License Exam. Reference: 12.1.2 in the License Exam. & securities licenses. A VA is a security & must be registered with the SEC, not FINRA. Your answer, Purchasing power risk., was correct!. vote on proposed changes in investment policy. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. Question #41 of 48Question ID: 606801 B)It will be lower. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Question #13 of 48Question ID: 606822 The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. What is the taxable consequence of this withdrawal to your client? The growth of the annuitys value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. D)variable annuities. Must provide full and fair disclosure, 2. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. vote for the investment adviser.4. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. C)II and III. Who assumes the investment risk in a variable annuity contract? Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. The entire amount is taxed as ordinary income. Reference: 12.1.2.1.1. in the License Exam. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. These contracts come with high surrender charges. continues payments as long as one annuitant is alive. Her agent recommended she choose a variable annuity as a safe haven for the funds. All of the following are characteristics of a variable annuity, except Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. must provide full and fair disclosure. Variable annuities are designed to combat inflation risk. We weren't able to detect the audio language on your flashcards. co. actuaries. Reference: 12.1.2.1.1 in the License Exam. Question #43 of 48Question ID: 606809 Find out how you can intelligently organize your Flashcards. Distributions to the annuitant will fluctuate during the payout period. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. A) There is no risk in a variable annuity. Variable annuities grow tax-deferred, so you dont have to pay taxes on any investment gains until you begin receiving income or make a withdrawal. "Variable Annuities: What You Should Know," Page 3. The growth of the annuitys value and/or the benefits paid may be fixed at a dollar amount or by an interest rate, or may grow by a specified formula. . What Are the Biggest Disadvantages of Annuities? A) Two-thirds of the withdrawal is taxable as ordinary income. co. products that should be purchased primarily for the ins. Your customer, still working, informs you that she will be funding a VA you have recommended from 2 sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another VA that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. Question #1 of 48Question ID: 606828. 6. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 D)I and IV. B)Fixed annuity contract with a discussion regarding timing risk If you need to withdraw money from the account because of a financial emergency, you may face surrender fees. Your 65-year-old client owns a nonqualified variable annuity. &\textbf{Increase}&\textbf{Decrease}&\textbf{Normal Balance}\\ The following are all characteristics of variable annuities EXCEPT: [A]The investment portfolio contains insurance protections against losses. All of the following are traits of a Fixed Annuity, except:AThe purchasing power of a fixed dollar benefit amount decreases as the cost of living increasesBThe insurer's general account assets guarantee the fixed annuity contractCThe insurer bears any investment riskDThe actual rate of interest credited will be based on the state-published co., assumes the investment risk. You have created 2 folders. withdraw funds without any tax consequences. If this client is in the payout phase, how would his April payment compare to his March payment? The following annuities are available in fixed or variable form: 1. A)equity funds. C)suitable due to the death benefit features of a variable annuity. Flexible premium annuities are only deferred annuities; that is, they are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from them. Deferred annuities, also referred to as investment annuities, are available in fixed . holder lives longer than expected, 4. a life ins. features they offer rather than as an investment. A)100% tax free. You dont have to worry about it anymore. D)I and III. Reference: 12.2.1 in the License Exam. B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. IncreaseDecreaseNormalBalanceBalancesheetaccounts:AssetCreditLiabilityCreditOwnersequity:CapitalCreditDrawingIncomestatementsaccounts:RevenueCredit(j)ExpenseCreditDebit\begin{array}{lccc} Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. C) The entire amount is taxed as ordinary income, because it is not life insurance. C)annuity units. B)Tax-free municipal bonds Though its stated return might not be as high as the other choices' potential returns, only a fixed annuity fits the objective and risk averse traits of his client. The nature of the securities invested in - bonds and growth stocks - makes it necessary that sales reps and their principals be licensed in securities as well as insurance. An investor who has purchased a nonqualified variable annuity has the right to: Are Variable Annuities Subject to Required Minimum Distributions? For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. Designed to protect against inflation. A separate account will invest in a number of different securities. With variable annuities, the rate of returnand therefore the value of your investmentmight go up or down depending on the performance of the stock, bond and money market funds that you choose as investment options. Future annuity payments will vary according to the separate account's performance.