C)III and IV Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. Introducing Cram Folders! Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. a variable annuity guarantees an earnings rate of return. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: Your answer, the payout plans provide the client income for life., was correct!. Annuities basics | III 7. The funds in an annuity are off-limits to creditors and other debt collectors. PDF Variable Annuities: What You Should Know - SEC The annuity has grown to value of $60,000. the VA recommendation would not be suitable. What Are the Biggest Disadvantages of Annuities? C)Life annuity. D) The fact that periodic payments into the contract may increase or decrease. The following annuities are available in fixed or variable form: 1. A client has purchased a nonqualified variable annuity from a commercial insurance company. If you need to withdraw money from the account because of a financial emergency, you may face surrender fees. An investor who has purchased a nonqualified variable annuity has the right to: B)It will be lower. How Good of a Deal Is an Indexed Annuity? D)variable annuities. B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. Question #22 of 48Question ID: 606803 All of the following statements concerning a variable annuity are correct EXCEPT: 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? Reference: 12.1.4.1 in the License Exam. Variable annuity salespeople must register with all of the following EXCEPT: Your answer, the state banking commission., was correct!. Question #47 of 48Question ID: 606813 The downside was that the buyer was exposed to market risk, which could result in losses. It may decrease in value. Only variable annuities have payout plans that provide the client income for life. C)I and IV. Which Earns More: Variable or Fixed Annuities? a variable annuity guarantees payments for life. The second phase is triggered when the annuity owner asks the insurer to start the flow of income, often referred to as the payout phase. 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. 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. Question #36 of 48Question ID: 606805 Her agent recommended she choose a variable annuity as a safe haven for the funds. B)Universal variable life policy. A customer is receiving annuitized payments from a variable annuity. The separate account is used for both variable life insurance and variable annuity investments. Variable Annuities | Investor.gov C)III and IV. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. Annuities are financial products intended to enhance retirement security. B)I and III. Many variable annuities invest the separate account in mutual funds. D)Variable annuity. A)variable annuities may only be sold by registered representatives. A lifetime immediate annuity converts an investment into a stream of payments that last until the annuity owner dies. 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. Fixed annuities, on the other hand, provide a guaranteed return. 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. That can adversely affect your returns over the long term, compared with other types of investments. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Life annuity has the largest payout because less risk is assumed by the insurance company. The # of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. For example, individuals can invest in a fixed annuity that credits a specified interest rate, similar to a bank Certificate of Deposit (CD). A)the number of annuity units becomes fixed when the contract is annuitized. When money is deposited into the annuity, it is purchasing accumulation units. Many variable annuities invest the separate account in mutual funds. through (l), indicate whether the proper answer is a debit or a credit. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. In a variable life annuity with 10-year period certain, a contract holder receives: All of the following statements about variable annuities are true EXCEPT: Your answer, a minimum rate of return is guaranteed., was correct!. Immediate life annuity with 10-year period certain. Must precede every sales presentation. 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. Equity-Indexed Annuity: How They Work. and Their Limitations - Investopedia Reference: 12.1.2 in the License Exam. 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. B)I and III. Question #19 of 48Question ID: 606826 B) the state insurance department. How to Rollover a Variable Annuity Into an IRA. Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. A) The fact that the annuity payment may increase or decrease. Of the answer choices given the best would be to reevaluate the recommendation based on the new information tendered by the client. 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? 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. C)Growth mutual funds You can tailor the income stream to suit your needs. C)I and IV. The number of accumulation units is always fixed throughout the accumulation period. Question #29 of 48Question ID: 606831 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. Question #45 of 48Question ID: 606795 Question #16 of 48Question ID: 606807 D)the rate of return is determined by the underlying portfolio's value. Please select the correct language below. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). D)Dow Jones Industrial Average. John is the annuitant in a variable plan, and Sue is the beneficiary. Variable annuities gave buyers a chance to benefit from rising markets by investing in a menu of mutual funds offered by the insurer. Mortality assumptions are based on life expectancy or mortality tables prepared by ins. 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!. We weren't able to detect the audio language on your flashcards. The separate account is NOT likely to invest in: Your answer, municipal bonds., was correct!. Flexible premium annuities A flexible premium annuity is an annuity that is intended to be funded by a series of payments. However, they are protected by state guaranty associations in the event that the insurance company providing the product goes out of business. IncreaseDecreaseNormalBalanceBalancesheetaccounts:AssetCreditLiabilityCreditOwnersequity:CapitalCreditDrawingIncomestatementsaccounts:RevenueCredit(j)ExpenseCreditDebit\begin{array}{lccc} The beneficiary is taxed at ordinary income rates during the year the lump sum is received. First, they are complicated, as insurers use different methods to calculate the index return. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Compound Accreted Value (CAV) of a municipal bond is used as the starting point in determining the value of a zero coupon bond. Your answer, It will be higher., was correct!. 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. C)III and IV. This can be particularly valuable if they are using a strategy called rebalancing, which is recommended by many financial advisors. The value of accumulation and annuity units varies with the investment performance of the separate account. 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%. 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. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. Nonqualified annuities A nonqualified annuity is one purchased separately from, or outside of, a taxfavored retirement plan. contract. One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. What is her total tax liability? . U.S. Securities and Exchange Commission. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. No other type of financial product can promise to do this. Question #26 of 48Question ID: 606811 An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses. 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. 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. A variable annuity is both an insurance and a securities product. You can buy an annuity with either a lump sum or a series of payments, and the accounts value will grow accordingly. 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 For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero Question #46 of 48Question ID: 606796 An investor who purchases a fixed annuity contract assumes purchasing-power risk. No, annuities are not FDIC-insured as they are not bank products. With regard to a variable annuity, all of the following may vary EXCEPT: Your answer, number of annuity units., was correct!. Question #42 of 48Question ID: 606830 D)A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. How is the distribution taxed? A)II and III. B)Fixed annuity contract with a discussion regarding timing risk 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. A guaranteed lifetime annuity promises to pay the owner an income for the rest of their life. 6. Once a variable annuity has been annuitized: The # of accumulation units can rise during the accumulation period, 3. C)The entire $10,000 is taxable as ordinary income. A)IPO. 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. approve changes in the plan portfolio.3. D)It cannot be determined until the April return is calculated. A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 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. 4.5 Variable Products Flashcards | Chegg.com Which of the following recommendations would best meet the customer profile? Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. The number of annuity units rises once annuitization begins. regulated under both securities and insurance laws. Reference: 12.3.2.1 in the License Exam. a variable annuity does not guarantee payments for life. Question #40 of 48Question ID: 606800 withdraw funds without any tax consequences. All of the following are characteristics of variable whole life EXCEPT. C) The entire $10,000 is taxable as ordinary income. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. Azanswer team is here with the correct answer to your question. 1. have investment risk that is assumed by the investor, 3. can be sold by someone with only an insurance license, 4. are purchased primarily for their insurance features. 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. Each of the remaining statements are true. Contributions to a nonqualified variable annuity are not tax deductible. A separate account will invest in a number of different securities. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. Your 65-year-old client owns a nonqualified variable annuity. Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. Question #38 of 48Question ID: 606798 Sub accounts and mutual funds are conceptually. What Are the Risks of Annuities in a Recession? An annuity is an insurance product that promises to pay out income at a future date based on invested funds. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). C)municipal bonds. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. Are Variable Annuities Subject to Required Minimum Distributions? 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 exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). Question #14 of 48Question ID: 606823 The growth portion is taxed as ordinary income. 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. A)Purchasing power risk. Which of the following recommendations would BEST meet the customer profile? C)It will be higher. 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. Brainstorm a list of criteria by which you would select and prioritize projects. C)I and III. Variable annuities should be considered long-term investments due to the limitations on withdrawals. The annuity unit's value represents a guaranteed return. [D]The portfolio may contain mutual fund shares. features they offer rather than as an investment. With regard to a variable annuity, all of the following may vary EXCEPT: C)the number of annuity units is fixed, and their value remains fixed. 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!. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. As with most retirement account options, withdrawals before the age of 59 will result in a 10% tax penalty. 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. 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 B)Two-thirds of the withdrawal is taxable as ordinary income. This customer has no spouse or dependents, which negates the value of the death benefit. 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. 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. & securities licenses. The most important consideration in purchasing a VA is to be aware that benefit payments will fluctuate with the investment performance of the separate account. A registered person recommends the purchase of a variable annuity to one of his clients. a variable annuity does not guarantee an earnings rate of return. A prospectus for a variable annuity contract: 1. the state insurance commission. The number of accumulation units can rise during the accumulation period. Introducing Cram Folders! C)prime rate. All Rights Reserved. A policyholder will make a lump sum payment or a series of payments in exchange for a guaranteed amount of income. If you die before the payout phase, your beneficiaries may receive a. Single premium annuities are often funded by rollovers or from the sale of an appreciated asset. B)reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. In March, the actual net return to the separate account was 8%. D) Mutual Fund portfolio consisting of blue chip stocks. \end{array} Question #32 of 48Question ID: 606815 The entire amount is taxed as ordinary income. In general, annuities have the following features. required to be located off of the company's premises. A)Fixed annuities. must precede every sales presentation. The number of annuity units is fixed at the time of annuitization. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. There is no clear answer to this. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. the SEC. Changes in payments on a variable annuity correspond most closely to fluctuations in the: Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. If an ins. Reference: 12.1.2.1.2 in the License Exam. D) a VA contract is subject to fluctuating values due to market fluctuations in the underlying separate accounts. B)value of annuity units. C)the invested money will be professionally managed according to the issuers' investment objectives. This factor is used to establish the dollar amount of the first annuity payment. 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. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. She may choose to receive monthly payments for the rest of her life. co. will have to continue payments longer than expected. You dont have to worry about it anymore. B)a minimum rate of return is guaranteed. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. This compensation may impact how and where listings appear. Therefore, variable annuities must be registered with the state insurance commission and the SEC. D) The investment risk is shared between the insurance company and the policyowner. 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? You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. The number of accumulation units can rise during the accumulation period. . An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., was correct!. \text{Owner's equity:}&&&\\ Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example, Present Value of an Annuity: Meaning, Formula, and Example, Future Value of an Annuity: What Is It, Formula, and Calculation, Calculating Present and Future Value of Annuities, Annuity Table: Overview, Examples, and Formulas, Present Value Interest Factor of Annuity (PVIFA) Formula, Tables. The value of the separate account is now $30,000. withdraw funds without any tax consequences. Her intent was to use the funds for the down payment on a house after graduation. Reference: 12.1.2 in the License Exam, Question #23 of 48Question ID: 901858 &\textbf{Increase}&\textbf{Decrease}&\textbf{Normal Balance}\\ In deciding whether to put money into a variable annuity versus some other type of investment, its worth weighing these pros and cons. 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. This withdrawal flexibility is achieved by adjusting the annuitys value, up or down, to reflect the change in the general level of interest rates from the start of the selected time period to the time of withdrawal. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic pay-ments to you, beginning either immediately or at some future date. If this client is in the payout phase, how would his April payment compare to his March payment? Variable Annuities. But again, the need to designate beneficiaries is not an issue for this annuitant. Reference: 12.1.2 in the License Exam. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. 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. Because the client is older than age 59-, he does not pay 10% premature distribution penalty tax. The offers that appear in this table are from partnerships from which Investopedia receives compensation. vote on proposed changes in investment policy. Fixed annuities. A)II and IV. Types of Annuities Flashcards by Liliana Benavides | Brainscape Under the terms of the plan, money paid into the annuity is not included in taxable income for the year in which it is paid. B)corporate stock. We also reference original research from other reputable publishers where appropriate. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. Your answer, Variable annuities., was correct!. vote for the investment adviser. The following annuities are available in fixed or variable form: 1. She will receive the annuity's entire value in a lump-sum payment. A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. The separate account is NOT likely to invest in: B)I and III. 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. D)0. 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. 8. 2. Question #15 of 48Question ID: 606804 He must ensure that the client, in addition to meeting suitability requirements, is aware of all of the following EXCEPT: A) a VA contract will provide a fluctuating monthly check upon the annuitization of the contract. Distribution can take place before or during any solicitation for sale. Options. A)Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. Reference: 12.3.3 in the License Exam. If an annuitant lives longer than expected, the ins. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. C)suitable due to the death benefit features of a variable annuity.