Premiums made into the annuity purchase accumulation units, c. The separate account provides for a guaranteed minimum return, d. Each month the payment will increase, decrease, or remain the same as the previous months payment based on the actual return as compared to the assumed interest rate (AIR). For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. A)number of annuity units. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). 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. Once the contract is annuitized, monthly payments to the customer are: A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? Variable Annuity: Definition and How It Works, Vs. Fixed Annuity Question #45 of 48Question ID: 606795 For a retired person, which of the following investments would provide the greatest protection against inflation? withdraw funds without any tax consequences. a life insurance holder lives longer than expected. Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. Chapter 12: Variable Annuities. Balancesheetaccounts:AssetLiabilityOwnersequity:CapitalDrawingIncomestatementsaccounts:RevenueExpenseIncreaseCreditCreditCreditDecreaseCredit(j)CreditNormalBalanceDebit. It is a variable annuity. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. C) suitable due to the death benefit features of a variable annuity. This customer has no spouse or dependents, which negates the value of the death benefit. In March, the actual net return to the separate account was 8%. 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. Question #40 of 48Question ID: 606800 A deferred annuity is an insurance contract that promises to pay the buyer a regular stream of income, or a lump sum, at some date in the future. C)the payout plans provide the client income for life. When the annuitization option is selected, each payment represents both capital and earnings. 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. [D]The portfolio may contain mutual fund shares. D)I and II. \hspace{5pt}\text{Revenue}&\text{Credit}&(j)&\\ An investor who has purchased a nonqualified variable annuity has the right to: Which of the following statements regarding variable annuities are TRUE? D)II and IV. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? A fixed annuity is an insurance contract that pays a guaranteed rate of interest on the owner's contributions and later provides a guaranteed income. Reference: 12.2.1 in the License Exam. For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. approve changes in the plan portfolio.3. Many variable annuities invest the separate account in mutual funds. 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? In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. With regard to a variable annuity, all of the following may vary EXCEPT: Your answer, number of annuity units., was correct!. Life Insurance vs. Annuity: What's the Difference? The separate account is NOT likely to invest in: 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 Reference: 12.2.1 in the License Exam. D) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59- years old. C)the yield is always higher than bond yields. C)complete all paper work to purchase the annuity contract and obtain the clients signature immediately. A customer, who has contributed to an IRA and to an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. C)Money market fund. A)the yield is always higher than mortgage yields. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. A separate account will invest in a number of different securities. Reference: 12.1.2.1.2 in the License Exam. D. Value of each annuity unit each month. Investopedia requires writers to use primary sources to support their work. C)the number of annuity units is fixed, and their value remains fixed. Question #17 of 48Question ID: 606802 D)I and III. 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. vote for the investment adviser. 8. 5. Weight the criteria. There is no clear answer to this. A)II and IV. \hspace{5pt}\text{Expense}&&\text{Credit}&\text{Debit}\\ A fixed annuity is a contract between the policyholder and an insurance company. In addition, an element of risk must be present. used for the investment of funds paid by contract holders. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. The offers that appear in this table are from partnerships from which Investopedia receives compensation. C. variable annuities are classified as insurance products. How to Rollover a Variable Annuity Into an IRA. 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. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. D)suitable due to the relative safety of the investment. The growth portion is taxed as a capital gain. Among annuities, variable annuities differ from fixed annuities, which provide a specific and guaranteed return. Uses in Investing, Pros, and Cons, Indexed Annuity: Definition, How It Works, Yields, and Caps, Joint and Survivor Annuity: Key Takeaways. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. A)Fixed annuity contract with a discussion regarding purchasing power risk Question #32 of 48Question ID: 606815 Are you having trouble answering the question All of the following are characteristics of a variable annuity, except:? A)II and III Question #36 of 48Question ID: 606805 If you die before the payout phase, your beneficiaries may receive a. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be MOST suitable? used to escrow late or otherwise delinquent premium payments. Reference: 12.3.3 in the License Exam. D)the state insurance department. Variable Annuities | Investor.gov Question #29 of 48Question ID: 606831 The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. GuranteedExamLife Flashcards by Gabriel Martinez | Brainscape The separate account is NOT likely to invest in: The earnings on dollars invested into a variable annuity accumulate tax-deferred, which is why variable annuities are popular products for retirement accumulation. Cram has partnered with the National Tutoring Association. Variable Annuities: A Good Retirement Investment? B)a majority vote from the shareholders is required to change the investment objectives. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. All of the following statements concerning a variable annuity are correct EXCEPT: A. the invested money will be professionally managed according to the issuers' investment objectives. Chapter 12: Variable Annuities Flashcards | Quizlet Fixed annuities are regulated by state insurance departments. 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. A) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children, D) Age 56, available cash to invest, makes the max retirement plan contributions to an existing IRA & 401K plan. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 1. a VA guarantees an earnings rate of return, 2. a VA does not guarantee an earnings rate of return, 4. a VA does not guarantee payments for life. holder dies sooner than expected. 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. A VA is a security & must be registered with the SEC, not FINRA. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 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. Future annuity payments will vary according to the separate account's performance. "Variable Annuities: What You Should Know," Page 6. A)100% tax free. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. Deferred annuities, also referred to as investment annuities, are available in fixed or variable forms. B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. A)II and IV. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. C)the invested money will be professionally managed according to the issuers' investment objectives. This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. D)each annuity unit's value is fixed, but the number of annuity units varies with time. U.S. Securities and Exchange Commission. Please select the correct language below. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. Upon John's death during the accumulation period, Sue takes a lump-sum payment. From an insurance company, mortality risk turns out unfavorably if: 1. an annuitant lives longer than expected, 2. an annuitant dies sooner than expected, 3. a life ins. Please sign in to share these flashcards. A)a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant Immediate annuities An immediate annuity is designed to start paying an income one time period after the immediate annuity is bought. A)I and IV. D) a VA contract is subject to fluctuating values due to market fluctuations in the underlying separate accounts. What Are the Biggest Disadvantages of Annuities? A separate account will invest in a number of different securities. When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? Therefore, ordinary income taxes will apply to the entire $10,000. Reference: 12.1.2.1.1 in the License Exam. Of the answer choices given the best would be to reevaluate the recommendation based on the new information tendered by the client. 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. C)The entire $10,000 is taxable as ordinary income. A)the state banking commission. a variable annuity does not guarantee an earnings rate of return. C)II and IV. C)100% tax deferred. Variable annuities must be registered with: A prospectus for a variable annuity contract: When may a variable annuity account be surrendered? B. separate account may consist of mutual funds. A customer is receiving annuitized payments from a variable annuity. B)Universal variable life policy. a variable annuity does not guarantee an earnings rate of return. Question #47 of 48Question ID: 606813 Thanks for choosing us. Which of the following recommendations would BEST meet the customer profile? Copyright 2023, Insurance Information Institute, Inc. This customer has no spouse or dependents, which negates the value of the death benefit. C)Growth mutual funds You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. If an annuitant lives longer than expected, the ins. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. Based on the client's profile, which of the following would be the best recommendation? Universal variable life policies Once a variable annuity has been annuitized: Your answer, each annuity unit's value varies with time, but the number of annuity units is fixed., was correct!. C)III and IV. Once a variable annuity has been annuitized: the state banking commission. A)IPO. Deferred annuities, also referred to as investment annuities, are available in fixed . Variable annuities offer investors choices among a number of complex contract features and options. Question #13 of 48Question ID: 606822 An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. He originally invested $29,000 4 years ago; it now has a value of $39,000. 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. 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? The holder of a variable annuity receives the largest monthly payments under which of the following payout options? This factor is used to establish the dollar amount of the first annuity payment. C)prime rate. For each of the items (a) B)II and III. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. B)variable annuities are classified as insurance products. Variable annuities are designed to combat inflation risk. 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. However, it does guarantee payments for life (mortality). 2003-2023 Chegg Inc. All rights reserved. Carefully look at your options when choosing an annuity. B)I and III. Question #42 of 48Question ID: 606830 D)Variable annuity. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: The customer, in the accumulation stage of the annuity, is holding accumulation units. Sub accounts and mutual funds are conceptually. If the owner of a variable annuity dies during the accumulation period, any death benefit will: Your answer, be paid to a designated beneficiary., was correct!. Reference: 12.3.4 in the License Exam, Chapter 16: U.S. Government and State Rules a, Chapter 17: Other SEC and SRO Rules and Regul, Chapter 15: Ethics, Recommendations, and Taxa, Chapter 13: Direct Participation Programs, Fundamentals of Financial Management, Concise Edition, Joe B. Hoyle, Thomas F. Schaefer, Timothy S. Doupnik, Carl Warren, James M Reeve, Jonathan E. Duchac. do not have a separate account The value of accumulation and annuity units varies with the investment performance of the separate account. Reference: 12.3.1 in the License Exam. Distribution can take place before or during any solicitation for sale. Money in a variable annuity is invested in a fundlike a mutual fund but one open only to investors in the insurance companys variable life insurance and variable annuities. Advantages And Disadvantages Of Adjustable Life, Case Study: Cimb-Principal Asset Management Berhad. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: The number of annuity units is fixed at the time of annuitization. Under rebalancing, investors shift their investments periodically to return them to the proportions that represent the risk/return combination most appropriate for the investors situation. B)Two-thirds of the withdrawal is taxable as ordinary income. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. How is the distribution taxed? A)each annuity unit's value and the number of annuity units vary with time. A) Two-thirds of the withdrawal is taxable as ordinary income. The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. An investor who has purchased a nonqualified variable annuity has the right to: The growth portion is taxed as ordinary income. Add to folder If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased. Guaranteed Lifetime Annuity: How They Work, When They Pay You, Life Annuity: Definition, How It Works, Types, This is also generally true of retirement plans. contract. A)variable annuities may only be sold by registered representatives. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Bear in mind that between the numerous feessuch as investment management fees,mortality fees, and administrative feesand charges for any additional riders, a variable annuitysexpenses can quickly add up. Future annuity payments will vary according to the separate account's performance. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. A)value of underlying securities held in the separate account. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. \text{Owner's equity:}&&&\\ This can be particularly valuable if they are using a strategy called rebalancing, which is recommended by many financial advisors. D) There is no tax as the withdrawal is considered return of capital. D. a majority vote from the shareholders is required to change the investment objectives. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. Variable annuities must be registered with: With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. Reference: 12.1.2.1.1. in the License Exam. What is the taxable consequence of this withdrawal to your client? The accumulation period of a variable annuity may continue for many years. Variable Annuities. B)Tax-free municipal bonds Brainstorm a list of criteria by which you would select and prioritize projects. 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. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. No other type of financial product can promise to do this. Typically, they allow one withdrawal each year during the accumulation phase. Therefore only a fixed annuity could be considered as suitable. C)I and IV. Introducing Cram Folders! Distributions to the annuitant will fluctuate during the payout period. Once annuitized, the number of annuity units does not vary. CDs insured by the FDIC. If you need to withdraw money from the account because of a financial emergency, you may face surrender fees. You dont have to worry about it anymore. regulated under both securities and insurance laws. The funds in an annuity are off-limits to creditors and other debt collectors. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. The # of accumulation units is always fixed throughout the accumulation period, 2. If this client is in the payout phase, how would his April payment compare to his March payment? D)Joint and last survivor annuity. Before buying a variable annuity, investors should carefully read the prospectus to try to understand the expenses, risks, and formulas for calculating investment gains or losses. However, a discussion should occur regarding the risks that are associated with a fixed annuity; purchasing power risk. How is the distribution taxed? In addition, if the customer is not at least 59-, there will be a tax penalty of an additional 10%. All of the following statements about variable annuities are true EXCEPT: For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? 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. A)Fixed annuities. Oct. 2014, Subjects: Annuity Contracts,Purchasing Annuities,Receiving Distribution from Annuities,Variable Life. The number of accumulation units is always fixed throughout the accumulation period. The tax on this is $2,800 ($10,000 x 28%). can be sold by someone with only an insurance license Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. Question #16 of 48Question ID: 606807 Variable annuity salespeople must register with all of the following EXCEPT: A) FINRA. He earned the Chartered Financial Consultant designation for advanced financial planning, the Chartered Life Underwriter designation for advanced insurance specialization, the Accredited Financial Counselor for Financial Counseling and both the Retirement Income Certified Professional, and Certified Retirement Counselor designations for advance retirement planning. Question #46 of 48Question ID: 606796 D)A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. She may choose to receive monthly payments for the rest of her life. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities. used for the investment of funds paid by contract holders. 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. Reference: 12.1.2 in the License Exam, Question #23 of 48Question ID: 901858 Variable annuity salespeople must register with all of the following EXCEPT: Your answer, the state banking commission., was correct!. In general, annuities have the following features. For example, individuals can invest in a fixed annuity that credits a specified interest rate, similar to a bank Certificate of Deposit (CD). features they offer rather than as an investment. What Are the Risks of Annuities in a Recession? Here is how guaranteed lifetime annuities work. A)accumulation shares. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? Reference: 12.3.3 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. Your customer, still working, informs you that she will be funding a variable annuity 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 variable annuity that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. Universal variable life policies are ins. A)II and IV. Reference: 12.1.4.1 in the License Exam. C)annuity units. D)with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed, With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. U.S. Securities and Exchange Commission. Variable annuities should be considered long-term investments due to the limitations on withdrawals. It may decrease in value. A customer has a nonqualified variable annuity. For this potential advantage, the investor, rather than the ins.

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