Many annuity companies offer a variety of investment options. Single premium annuities are often funded by rollovers or from the sale of an appreciated asset. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: B) the yield is always higher than bond yields, C) the yield is always higher than mortgage yields, D) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. Distribution can take place before or during any solicitation for sale. C)II and IV. Which of the following recommendations would best meet the customer profile? As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Please upgrade to Cram Premium to create hundreds of folders! Balancesheetaccounts:AssetLiabilityOwnersequity:CapitalDrawingIncomestatementsaccounts:RevenueExpenseIncreaseCreditCreditCreditDecreaseCredit(j)CreditNormalBalanceDebit. Your answer, waiver of premium, was correct!. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Options. In March, the actual net return to the separate account was 8%. D. Value of each annuity unit each month. Reference: 12.3.3 in the License Exam, Question #34 of 48Question ID: 606834 B. suitable regardless of funding sources, D. suitable is she has enough equity in the home to fund the VA without cashing out the other VA contract. \text{Owner's equity:}&&&\\ Nonqualified annuities A nonqualified annuity is one purchased separately from, or outside of, a taxfavored retirement plan. In addition, an element of risk must be present. The remainder of the premium is invested in the separate account. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. [C]The portfolio is professionally managed. The tax on this is $2,800 ($10,000 x 28%). 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. How a Fixed Annuity Works After Retirement. First, they are complicated, as insurers use different methods to calculate the index return. That can adversely affect your returns over the long term, compared with other types of investments. D)Investment risk. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. Reference: 12.1.2.1.1. in the License Exam. Upon John's death during the accumulation period, Sue takes a lump-sum payment. Qualified annuities A qualified annuity is one used to invest and disburse money in a tax-favored retirement plan, such as an IRA or Keogh plan or plans governed by Internal Revenue Code sections 401(k), 403(b) or 457. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. D)Dow Jones Industrial Average. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? A)not suitable D)II and III. Variable annuities offer investors choices among a number of complex contract features and options. C)the number of annuity units is fixed, and their value remains fixed. Which of the following are defined as securities? A)variable annuities will protect an investor against capital loss. 2. Reference: 12.1.4.1 in the License Exam. This customer has no spouse or dependents, which negates the value of the death benefit. When the first party dies, the annuity payment is made to the survivor. However, if you take a withdrawal during the contractssurrender period, which can be as long as 15 years, youll generally have to pay a surrender fee. Reference: 12.2.1 in the License Exam. Who assumes the investment risk in a variable annuity contract? \text{Balance sheet accounts:}\\ If the customer takes a withdrawal of $10,000, what are the tax consequences? Your answer, It will be higher., was correct!. B)mutual fund units. C)100% tax deferred. All of the following are characteristics of variable whole life EXCEPT. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. 5. \text{Income statements accounts:}&&&\\ C)I and III. This factor is used to establish the dollar amount of the first annuity payment. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. 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. Therefore, ordinary income taxes will apply to the entire $10,000. Question #32 of 48Question ID: 606815 Add to folder A separate account will invest in a number of different securities. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. But again, the need to designate beneficiaries is not an issue for this annuitant. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. B. variable annuities offer the investor protection against capital loss. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. Your answer, The policyowner., was correct!. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. C)I and IV. Often used for retirement planning purposes, it is meant to provide a regular (monthly, quarterly, annual) income stream, starting at some point in the future. The entire amount is taxed as ordinary income. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? A)IPO. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. Fixed Annuity, Retirement Annuities: Know the Pros and Cons. vote on proposed changes in investment policy. D)suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract, Based on the information given in the question, the VA recommendation would not be suitable. The offers that appear in this table are from partnerships from which Investopedia receives compensation. D) Mutual Fund portfolio consisting of blue chip stocks. Individuals are reducing their overall risk, because only part of the money is being put in each investment. A security is any investment for profit with management performed by a third party. Reference: 12.1.4.1 in the License Exam. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities. Dividing the funds available so as to fund 2 separate contracts, whether they be joint with last survivor or life income, would not be cost efficient for spouses. This customer has no spouse or dependents, which negates the value of the death benefit. D)Any tax due is deferred. Mortality assumptions are based on life expectancy or mortality tables prepared by ins. Fixed annuities, on the other hand, provide a guaranteed return. A fixed annuity is a contract between the policyholder and an insurance company. Generally the most that creditors can access is the payments as they are made, since the money the annuity owner gave the insurance company now belongs to the company. An investor owning which of the following variable annuity contracts would hold accumulation units? Your client owns a variable annuity contract with an AIR of 4%. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. She may choose to receive monthly payments for the rest of her life. C)I and IV. The following table summarizes the rules of debit and credit. In concept, the payments come from three pockets: The original investment, investment earnings and money from a pool of people in the investors group who do not live as long as actuarial tables forecast. However, they are protected by state guaranty associations in the event that the insurance company providing the product goes out of business. A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. D)an accounting measure used to determine payments to the owner of the variable annuity. 2003-2023 Chegg Inc. All rights reserved. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. If you die before the payout phase, your beneficiaries may receive a. B)It will be lower. A prospectus for a variable annuity contract: 1. Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? B)II and III. A) Two-thirds of the withdrawal is taxable as ordinary income. All of the following are characteristics of a variable annuity, except. B)I and IV. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). 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. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. B)Variable annuities. The fund has a particular investment objective, and the value of the money in a variable annuityand the amount of money to be paid outis determined by the investment performance (net of expenses) of that fund. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. C)none of these. A variable annuity's separate account is: C)earnings only and taxable Your answer, Variable annuities., was correct!. Sub accounts and mutual funds are conceptually identical, but sub accounts don't have ticker symbols that investors can easily type into a fund tracker for research purposes. A)contact the issuer of the clients existing VA contract to facilitate the clients surrender of the contract. Question #42 of 48Question ID: 606830 If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? B)Universal variable life policy. Question #46 of 48Question ID: 606796 Question #11 of 48Question ID: 606816 Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. A)an accounting measure used to determine the contract owner's interest in the separate account. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. The number of annuity units rises once annuitization begins. C)prime rate. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: Your answer, changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices., was correct!. Universal variable life policies He originally invested $50,000 four years ago. Life annuity has the largest payout because less risk is assumed by the insurance company. D)partially a tax-free return of capital and partially taxable. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: Your client owns a variable annuity contract with an AIR of 4%. Deferred annuities A deferred annuity is designed to collect premiums and accrue investment income over an extended period for payout at a later timefor example, when an individual retires. In contrast to mutual funds and other investments made with aftertax money, with annuities there are no tax consequences if owners change how their funds are invested. VA contracts must be sold by prospectus due to the characterization of the separate accounts as securities, which must be registered under the Securities Act of 1933 & the Investment Co. Act of 1940. Reference: 12.3.3 in the License Exam. are purchased primarily for their insurance features \hspace{5pt}\text{Drawing}&&&\\ An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. Reference: 12.3.3 in the License Exam. Which of the following recommendations would best meet the customer profile? No, annuities are not FDIC-insured as they are not bank products. Carefully look at your options when choosing an annuity. A)equity funds. In general, annuities have the following features. C)III and IV. This compensation may impact how and where listings appear. In addition, insurer charges ten percent penalty if insured withdraw before he or she turns to fifty nigh and six month or become disabled, unless return wit Current assumption insurance is used to act like a bank; policy holders can put a good amount of money in an account to earn interest. C)Variable annuity contract with a discussion regarding interest rate risk Reference: 12.3.1 in the License Exam. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. U.S. Securities and Exchange Commission. B)suitable regardless of funding sources Question #12 of 48Question ID: 606814 C. variable annuities will protect an investor against capital loss. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. The customer, in the accumulation stage of the annuity, is holding accumulation units. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Premiums made into the annuity purchase accumulation units. An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. C. variable annuities are classified as insurance products. Reference: 12.2.1 in the License Exam. If the owner of a VA dies during the accumulation period, any death benefit will: B) be paid to the issuing company to complete the plan, C) be paid to the designated beneficiary, D) be paid to any legal heirs as recognized by the annuitant's state of domicile. A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of sub accounts. C)Money market fund. If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? An accumulation unit in a variable annuity contract is: Your answer, an accounting measure used to determine the contract owner's interest in the separate account., was correct!. He originally invested $29,000 4 years ago; it now has a value of $39,000. 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. co. will have to continue payments longer than expected. A separate account will invest in a number of different securities. C)Keogh plans. continues payments as long as one annuitant is alive. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both ins. Reference: 12.1.2 in the License Exam. Reference: 12.3.1 in the License Exam, Question #30 of 48Question ID: 606833 Chapter 12: Variable Annuities. Distribution can take place before or during any solicitation for sale. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Question #29 of 48Question ID: 606831 You dont have to worry about it anymore. This can be particularly valuable if they are using a strategy called rebalancing, which is recommended by many financial advisors. A)variable annuities may only be sold by registered representatives. Registration with FINRA is de factor registration with the SEC; no registration is required by the state banking commission. B)100% taxable. D)II and III. Investment earnings of all annuities, qualified and nonqualified, are tax-deferred until they are withdrawn; at that point they are treated as taxable income (regardless of whether they came from selling capital at a gain or from dividends). Which of the following recommendations would BEST meet the customer profile? 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. How is the distribution taxed? There is no beneficiary in the event the annuitant dies. Which of the following are defined as securities? A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of sub accounts. When a variable annuity contract is annuitized, the number of annuity units is fixed. B)Capital gains taxation on the earnings withdrawn in excess of the owner's basis. How Are Nonqualified Variable Annuities Taxed? used to escrow late or otherwise delinquent premium payments. Fixed annuities are regulated by state insurance departments. Once a variable annuity has been annuitized: A) An investor who has purchased a nonqualified variable annuity has the right to: Distributions to the annuitant will fluctuate during the payout period. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. holder dies sooner than expected. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Why Is It Important To Have Your Financial Plan And Goals In Place When Considering Investments? Deferred annuities A deferred annuity is designed to collect premiums and accrue investment income over an extended period for payout at a later timefor example, when an individual retires. A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. Reference: 12.1.1 in the License Exam. Annuities are complicated products, so that may be easier said than done. Question #24 of 48Question ID: 606806 There is no clear answer to this. A lifetime immediate annuity converts an investment into a stream of payments that last until the annuity owner dies. A guaranteed period commits the insurance company to continue payments after the owner dies to one or more designated beneficiaries; the payments continue to the end of the stated guaranteed periodusually 10 or 20 years (measured from when the owner started receiving the annuity payments). D)I and IV, Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. \hspace{5pt}\text{Liability}&\text{Credit}&&\\ 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. Reference: 12.1.2 in the License Exam. For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. All of the following are characteristics of a variable annuity, except: a. 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. All Rights Reserved. The # of accumulation units can rise during the accumulation period, 3. Which is it? If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain period of time designated in the contract should the annuitant die within that period. The # of annuity units is fixed at the time of annuitization, 4. All of the following statements concerning a variable annuity are correct EXCEPT: A)each annuity unit's value and the number of annuity units vary with time. Reference: 12.1.4 in the License Exam. What Are the Risks of Annuities in a Recession? co. actuaries. D) The investment risk is shared between the insurance company and the policyowner. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. You should now have gotten the answer to your question All of the following are characteristics of a variable annuity, except:, which was part of Insurance MCQs & Answers. Most variable annuities are structured to offer investors many different fund alternatives. Cram has partnered with the National Tutoring Association. the VA recommendation would not be suitable. Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. D)I and III. If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: Your answer, accumulation units., was correct!. B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. A)II and IV. Changes in payments on a variable annuity correspond most closely to fluctuations in the: Once a customer annuitizes a variable annuity, which of the following statements are TRUE? D)the rate of return is determined by the underlying portfolio's value. Investopedia requires writers to use primary sources to support their work. Question #40 of 48Question ID: 606800 Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? D) There is no tax as the withdrawal is considered return of capital. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? Question #37 of 48Question ID: 606817 C) a VA contract does not guarantee any type of return. This recommendation is: A) suitable due to the relative safety of the investment. D)variable annuities offer the investor protection against capital loss. The number of annuity units is fixed at the time of annuitization. A client has purchased a nonqualified variable annuity from a commercial insurance company.

Devon Manor Apartments Milford, Ct, Articles T