C)100% tax deferred. A)accumulation shares. A) There is no risk in a variable annuity. Premiums made into the annuity purchase accumulation units. Each of the remaining statements are true. Variable annuities must be registered with: A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Lifetime annuities A lifetime annuity provides income for the remaining life of a person (called the annuitant). A customer has a nonqualified variable annuity. Investopedia requires writers to use primary sources to support their work. She may choose to receive monthly payments for the rest of her life. PDF Variable Annuities: What You Should Know - SEC D)Joint and last survivor annuity. The growth portion is taxed as a capital gain. 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. This customer has no spouse or dependents, which negates the value of the death benefit. A customer has a nonqualified variable annuity. Copyright 2023, Insurance Information Institute, Inc. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. 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. There is a common apprehension that if an individual starts an immediate lifetime annuity and dies soon after that, the insurance company keeps all of the investment in the annuity. The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. Variable annuities offer the possibility of higher returns and greater income than fixed annuities, but theres also a risk that the account will fall in value. C)the payout plans provide the client income for life. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. 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. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Thanks for choosing us. A)not suitable must precede every sales presentation. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. Please sign in to share these flashcards. C) a VA contract does not guarantee any type of return. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount. The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. 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 B)IRAs. 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. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. 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. Variable Annuities: A Good Retirement Investment? Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. Many annuity companies offer a variety of investment options. 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. A prospectus for a variable annuity contract: Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. Your 65-year-old client owns a nonqualified variable annuity. D) Mutual Fund portfolio consisting of blue chip stocks. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. She may choose to receive monthly payments for the rest of her life. A)II and III An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. The # of annuity units is fixed at the time of annuitization, 4. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? Variable Annuities. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. D)suitable due to the relative safety of the investment. The number of annuity units is fixed at the time of annuitization. Your answer, waiver of premium, was correct!. A separate account will invest in a number of different securities. Deferred annuities, also referred to as investment annuities, are available in fixed . What is her total tax liability? Many investments are taxed year by year, but the investment earningscapital gains and investment incomein annuities arent taxable until the investor withdraws money. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison to the assumed interest rate. These contracts cover both lives and will continue to make payments until the last spouse dies. Explaining What have been the major population changes since the first census in 1790? The # of annuity units rises once annuitization begins. D)0. Which of the following are defined as securities? Immediate annuities An immediate annuity is designed to start paying an income one time period after the immediate annuity is bought. C)I and III. The # of accumulation units is always fixed throughout the accumulation period, 2. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. Variable annuities should be considered long-term investments due to the limitations on withdrawals. FINRA. A registered person recommends the purchase of a variable annuity to one of his clients. A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. The annuity unit's value represents a guaranteed return. A) U.S. Securities and Exchange Commission. Question #38 of 48Question ID: 606798 He makes the following four statements, all of which are true EXCEPT A)II and IV. Question #35 of 48Question ID: 606810 Fixed Annuity, Retirement Annuities: Know the Pros and Cons. Reference: 12.1.2 in the License Exam, Question #23 of 48Question ID: 901858 used for the investment of funds paid by contract holders. He originally invested $29,000 4 years ago; it now has a value of $39,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? C)III and IV. c. The separate account provides for a guaranteed minimum return. If one purchases an annuity for a set price, the issuing company would invest the funds and hold them until they are supposed to be disbursed, generally based on the owner's age. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. For each of the items (a) An investor who has purchased a nonqualified variable annuity has the right to: Which of the following statements regarding variable annuities are TRUE? A lifetime immediate annuity converts an investment into a stream of payments that last until the annuity owner dies. C)Keogh plans. During the accumulation phase, the number of accumulation units will increase as additional money is invested. Why Is It Important To Have Your Financial Plan And Goals In Place When Considering Investments? What Are the Risks of Annuities in a Recession? All of the following are characteristics of variable whole life EXCEPT. These contracts come with high surrender charges. What Are the Distribution Options for an Inherited Annuity? In addition, you can withdraw 10% of your contract value each year free of surrender charges. holder dies sooner than expected, the ins. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. vote on proposed changes in investment policy. For example, individuals can invest in a fixed annuity that credits a specified interest rate, similar to a bank Certificate of Deposit (CD). 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. Distributions to the annuitant will fluctuate during the payout period. The entire amount is taxed as ordinary income. Question #12 of 48Question ID: 606814 A) The fact that the annuity payment may increase or decrease. Reference: 12.1.4.1 in the License Exam. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. For a retired person, which of the following investments would provide the greatest protection against inflation? Surrender fees and penalties for early withdrawal. Reference: 12.1.2 in the License Exam. 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. Reference: 12.3.1 in the License Exam. Reference: 12.3.3 in the License Exam, Question #34 of 48Question ID: 606834 a variable annuity does not guarantee payments for life. All Rights Reserved. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: 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. The accumulation unit's value is used to calculate the total value of the account. D)money market funds. There are many categories of annuities. D) The investment risk is shared between the insurance company and the policyowner. 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. That can adversely affect your returns over the long term, compared with other types of investments. D)II and III. 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. 6. Variable Annuities Flashcards | Quizlet This recommendation is: C)the yield is always higher than bond yields. d. 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. Only variable annuities have payout plans that provide the client income for life. Based on the client's profile, which of the following would be the best recommendation? D. a majority vote from the shareholders is required to change the investment objectives. Variable annuities grow tax-deferred, so you dont have to pay taxes on any investment gains until you begin receiving income or make a withdrawal. D)the safety of the principal invested. D)partially a tax-free return of capital and partially taxable. Most variable annuities are structured to offer investors many different fund alternatives. C) The entire $10,000 is taxable as ordinary income. An investor who purchases a fixed annuity contract assumes purchasing-power risk. The investor purchased accumulation units. An investor owning which of the following variable annuity contracts would hold accumulation units? Reference: 12.1.4 in the License Exam. 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. Therefore, ordinary income taxes will apply to the entire $10,000. Which of the following statements regarding variable annuities are TRUE? A)value of underlying securities held in the separate account. . Distribution of dividends occurs during the accumulation period. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: [C]The portfolio is professionally managed. C)II and IV. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. C)prime rate. B) the state insurance department. 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? For this potential advantage, the investor, rather than the ins. The accumulation period of a variable annuity may continue for many years. Fixed vs. Variable Annuities: Key Differences - Yahoo Finance The customer, in the accumulation stage of the annuity, is holding accumulation units. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. CDs insured by the FDIC. B)corporate stock. Reference: 12.3.3 in the License Exam. C. variable annuities will protect an investor against capital loss. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. 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. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Reference: 12.3.4 in the License Exam. Therefore, variable annuities must be registered with the state insurance commission and the SEC. A separate account will invest in a number of different securities. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? C)I and IV. The time period depends on how often the income is to be paid. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. A variable annuity is both an insurance and a securities product. Question #45 of 48Question ID: 606795 "Variable Annuities: What You Should Know," Page 10. Reference: 12.3.2.4 in the License Exam. A)variable annuities may only be sold by registered representatives. the VA recommendation would not be suitable. Annuities basics | III 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. C. variable annuities are classified as insurance products. Her intent was to use the funds for the down payment on a house after graduation. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. [D]The portfolio may contain mutual fund shares. A security is any investment for profit with management performed by a third party. He originally invested $29,000 4 years ago; it now has a value of $39,000. A)defined contribution plans. A)an accounting measure used to determine the contract owner's interest in the separate account. Variable annuities are designed to combat inflation risk. This would not align with the couple's criteria for coverage as long as they both live. 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. The value of the separate account is now $30,000. Future annuity payments will vary according to the separate account's performance. They are also riddled with fees, which can cut into profits. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. is required by the Securities Act of 1933. C)III and IV An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. We also reference original research from other reputable publishers where appropriate. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. The accumulation unit's value is used to calculate the total value of the account. D)Variable annuity. The payment might be invested for growth for a long period of timea single premium deferred annuityor invested for a short time, after which the payout beginsa single premium immediate annuity. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Your client has $50,000 to invest. Variable annuities gave buyers a chance to benefit from rising markets by investing in a menu of mutual funds offered by the insurer. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. Weight the criteria. 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 #16 of 48Question ID: 606807 C)It will be higher. Life Insurance vs. Annuity: What's the Difference? Which is it? co., assumes the investment risk. Reference: 12.1.2.1.1 in the License Exam. co. will have to continue payments longer than expected. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. A client has purchased a nonqualified variable annuity from a commercial insurance company. If this client is in the payout phase, how would his April payment compare to his March payment? A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 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. An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., 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. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. C)The entire $10,000 is taxable as ordinary income. Fixed annuities. SIE Practice Exam #2 (score 93%) Flashcards | Quizlet Uses in Investing, Pros, and Cons, Indexed Annuity: Definition, How It Works, Yields, and Caps, Joint and Survivor Annuity: Key Takeaways. 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. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. Compound Accreted Value (CAV) of a municipal bond is used as the starting point in determining the value of a zero coupon bond. This tax deferral is also true of 401(k) s and IRAs; however, unlike these products, there are no limits on the amount one can put into an annuity. Variable annuity salespeople must be registered with FINRA and the state insurance department. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. 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. B)variable annuities are classified as insurance products. Based only on these facts, the variable annuity recommendation is There is no clear answer to this. have investment risk that is assumed by the investor 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? The value of a variable annuity is based on the performance of an underlying portfolio of sub accounts selected by the annuity owner. A)Fixed annuity contract with a discussion regarding purchasing power risk People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. withdraw funds without any tax consequences. 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. A separate account will invest in a number of different securities. \hspace{5pt}\text{Capital}&\text{Credit}&&\\ D)each annuity unit's value is fixed, but the number of annuity units varies with time. The annuitized payments are viewed for tax purposes as 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. 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. U.S. Securities and Exchange Commission. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. 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. vote for the investment adviser. The most popular type of variable annuity is a deferred annuity. Question #40 of 48Question ID: 606800 Azanswer team is here with the correct answer to your question. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A)II and IV. 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. In March, the actual net return to the separate account was 8%. Question #25 of 48Question ID: 606819 The following are all characteristics of variable annuities EXCEPT: [A]The investment portfolio contains insurance protections against losses. the producer is responsible for providing the applicant a summary of coverage that includes all of the following EXCEPT. Can I Borrow from My Annuity for a House Down Payment? One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. they have all the same characteristics as life insurance An Immediate Annuity is designed to provide each of the following features, EXCEPT: The creation of an estate Your client has a large sum of money to invest from the proceeds of the sale of his home. Chapter 4: Annuities Flashcards | Chegg.com In other words, the money in a fixed annuity will grow and will not drop in value. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? B)4200. In general, annuities have the following features. A)the state banking commission. 5. Variable annuity salespeople must register with all of the following EXCEPT: Your answer, the state banking commission., was correct!. B)II and III. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. 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. Annuity death benefits are generally paid in a lump sum. used to escrow late or otherwise delinquent premium payments. First, they are complicated, as insurers use different methods to calculate the index return. 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. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. What Are Ordinary Annuities, and How Do They Work (With Example)? 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. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. 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. 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. You can tailor the income stream to suit your needs. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. the state insurance commission. Contributions to a nonqualified variable annuity are not tax deductible. Fixed annuities typically earn at a lower, stable rate. 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. contract. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). A)II and IV. The separate account performance compared to last month's performance. Her agent recommended she choose a variable annuity as a safe haven for the funds. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? When a VA contract is annuitized, the # of annuity units is fixed. 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. B)a minimum rate of return is guaranteed. B)I and III. 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. Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. Single premium annuities A single premium annuity is an annuity funded by a single payment. 4.5 Variable Products Flashcards | Chegg.com B) a VA contract is not required to be sold by prospectus because it is an ins. a life insurance holder dies sooner than expected. B)suitable regardless of funding sources 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