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. Introducing Cram Folders! A)100% tax free. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? Many annuity companies offer a variety of investment options. What Are the Risks of Annuities in a Recession? This customer has no spouse or dependents, which negates the value of the death benefit. Reference: 12.1.4.2 in the License Exam. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. A)II and IV. \text{Owner's equity:}&&&\\ Distributions from such an annuity are computed on a LIFO basis with the income taxed first. C)the SEC. A joint-and-last-survivor annuity is a payout option where: Your answer, two people are covered and payments continue until the second death., was correct!. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? a life insurance holder dies sooner than expected. However, they are protected by state guaranty associations in the event that the insurance company providing the product goes out of business. Reference: 12.1.2 in the License Exam. the state banking commission. Copyright 2023, Insurance Information Institute, Inc. Variable annuity salespeople must be registered with FINRA and the state insurance department. B)Capital gains taxation on the earnings withdrawn in excess of the owner's basis. When the annuitization option is selected, each payment represents both capital and earnings. 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. A)contact the issuer of the clients existing VA contract to facilitate the clients surrender of the contract. Annuities | FINRA.org A)variable annuities may only be sold by registered representatives. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. This customer has no spouse or dependents, which negates the value of the death benefit. A security is an investment for profit with management performed by a third party. GuranteedExamLife Flashcards by Gabriel Martinez | Brainscape The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. Reference: 12.3.3 in the License Exam. B)the investment portfolio is managed professionally. 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. C)Corporate bonds. There is no clear answer to this. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. C)Variable annuity contract with a discussion regarding interest rate risk Mortality assumptions are based on life expectancy or mortality tables prepared by ins. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A)II and IV. The accumulation period of a variable annuity may continue for many years. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). 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. The growth portion is subject to a 10% penalty. B)Life annuity with period certain. The growth portion is taxed as ordinary income. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. The # of accumulation units is always fixed throughout the accumulation period, 2. How a Fixed Annuity Works After Retirement. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. C)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. a variable annuity does not guarantee payments for life. A)not suitable C) suitable due to the death benefit features of a variable annuity. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. used to escrow late or otherwise delinquent premium payments. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A)the client assumes the investment risk. A)Fixed annuity contract with a discussion regarding purchasing power risk Universal variable life policies The following annuities are available in fixed or variable form: 1. Which of the following are defined as securities? A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. You have created 2 folders. 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. are purchased primarily for their insurance features B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. The amount that is paid doesnt depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if its a fixed annuity) an interest rate that the insurance company believes it can support for the length of the payout period. A)II and IV. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. D)accumulation units. 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. 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. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. Variable Annuities. C)II and IV. Can I Borrow from My Annuity for a House Down Payment? Explaining What have been the major population changes since the first census in 1790? 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). Which of the following recommendations would BEST meet the customer profile? If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. vote for the investment adviser. Question #12 of 48Question ID: 606814 The value of the separate account is now $30,000. Reference: 12.3.1 in the License Exam. Reference: 12.3.3 in the License Exam. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. Why Is It Important To Have Your Financial Plan And Goals In Place When Considering Investments? Distribution of dividends occurs during the accumulation period. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. 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. We'll bring you back here when you are done. . The earnings are taxable but the cost basis is returned tax free. vote for the investment adviser.4. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 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. A)accumulation shares. . A)II and III If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. All of the following are characteristics of Variable Annuity contracts EXCEPT The possibility of higher returns and greater income than fixed annuities, but there's also a risk that the account will fall in value She may choose to receive monthly payments for the rest of her life. B)suitable regardless of funding sources a variable annuity guarantees an earnings rate of return. B)I and III. B)II and III. There is no beneficiary in the event the annuitant dies. Must provide full and fair disclosure, 2. Question #33 of 48Question ID: 606832 A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. D)variable annuities offer the investor protection against capital loss. co. products that should be purchased primarily for the ins. D)II and III. The holder of a VA receives the largest monthly payments under which of the following payout options? An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. Life Insurance vs. Annuity: What's the Difference? For this potential advantage, the investor, rather than the ins. (The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). Unit 12: Variable Annuities Flashcards | Chegg.com For each of the items (a) 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. The tax on this is $2,800 ($10,000 x 28%). The growth portion is taxed as ordinary income. Deferred annuities, also referred to as investment annuities, are available in fixed . Question #36 of 48Question ID: 606805 Changes in payments on a variable annuity correspond most closely to fluctuations in the: Your answer, waiver of premium, was correct!. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. 3. When a variable annuity contract is annuitized, the number of annuity units is fixed. is required by the Securities Act of 1933. He originally invested $29,000 4 years ago; it now has a value of $39,000. This recommendation is: A) suitable due to the relative safety of the investment. A)It will stay the same. Your client owns a variable annuity contract with an AIR of 4%. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. a life insurance holder lives longer than expected. A)exempt from taxes Her agent recommended she choose a variable annuity as a safe haven for the funds. Reference: 12.3.4 in the License Exam. 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). D)Municipal bonds. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. What is the taxable consequence of this withdrawal to your client? 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. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. 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!. Therefore only a fixed annuity could be considered as suitable. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. Your answer, It will be higher., was correct!. Distribution can take place before or during any solicitation for sale. The correct answer is: Defines a securities product All of the following policy elements are not guaranteed in a variable whole life policy, EXCEPT: Select one: a. VAs, blue chip mutual fund portfolios, ETFS & ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client. have investment risk that is assumed by the investor approve changes in the plan portfolio. You can tailor the income stream to suit your needs. Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. B)100% taxable. 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)Keogh plans. Only variable annuities have payout plans that provide the client income for life. As with all tax-deferred accounts, muni bonds are not appropriate investments because interest earned on munis is already tax exempt at the federal level. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero D)It cannot be determined until the April return is calculated. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. The separate account performance compared to an assumed interest rate. For an insurance company, mortality risk turns out unfavorably if: A variable annuity's separate account is: If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? C. variable annuities will protect an investor against capital loss. In addition, you can withdraw 10% of your contract value each year free of surrender charges. 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. Immediate annuities An immediate annuity is designed to start paying an income one time period after the immediate annuity is bought. 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. Add to folder D)II and III. regulated under both securities and insurance laws. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. \text{Income statements accounts:}&&&\\ 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. D)the state insurance department. D)II and IV. C)none of these. For example, an individual might buy a nonqualified single premium deferred variable annuity. holder dies sooner than expected, the ins. B)Value of each annuity unit each month. The value of accumulation and annuity units varies with the investment performance of the separate account. 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. 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. These contracts come with high surrender charges. A client has purchased a nonqualified variable annuity from a commercial insurance company. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. used for the investment of funds paid by contract holders. Who assumes the investment risk in a variable annuity contract? by jmacewe, The payout of an annuitized variable annuity account changes from month to month in a manner determined by which of the following? Annuity death benefits are generally paid in a lump sum. Generally, a life only contract pays the most per month because payments cease at the annuitant's death. B)I and III. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. B)Fixed annuity contract with a discussion regarding timing risk A fixed annuity is a contract between the policyholder and an insurance company. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized.
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