Investopedia requires writers to use primary sources to support their work. Variable annuities gave buyers a chance to benefit from rising markets by investing in a menu of mutual funds offered by the insurer. Question #16 of 48Question ID: 606807 We'll bring you back here when you are done. Who assumes the investment risk in a variable annuity contract? In March, the actual net return to the separate account was 8%. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. can be sold by someone with an insurance license only. B)It will be lower. A)2800. 5. [B]The holders may vote to change investment objectives. 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. D)It cannot be determined until the April return is calculated. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: a. the return to investors is dependent on the performance of the securities in the underlying portfolio b. the investment company act of 1940 is the regulating legislation c. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made d. the . Future annuity payments will vary according to the separate account's performance. co. products that should be purchased primarily for the ins. The separate account is used for both variable life insurance and variable annuity investments. D)the rate of return is determined by the underlying portfolio's value. The fund has a particular investment objective, and the value of the money in a variable annuityand the amount of money to be paid outis determined by the investment performance (net of expenses) of that fund. The holder of a VA receives the largest monthly payments under which of the following payout options? You dont have to worry about it anymore. Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? have investment risk that is assumed by the investor Deferred annuities, also referred to as investment annuities, are available in fixed . The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. 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. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. 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. These contracts come with high surrender charges. A policyholder will make a lump sum payment or a series of payments in exchange for a guaranteed amount of income. D)the state insurance department. Surrender fees and penalties for early withdrawal. required to be located off of the company's premises. B)100% taxable. 7. The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. C)municipal bonds. A)variable annuities may only be sold by registered representatives. The value of the separate account is now $30,000. Reference: 12.2.1 in the License Exam. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. 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. Many annuity companies offer a variety of investment options. What Are the Distribution Options for an Inherited Annuity? C)none of these. B)Capital gains taxation on the earnings withdrawn in excess of the owner's basis. the state insurance commission. withdraw funds without any tax consequences. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. B)mutual fund units. D)variable annuities. Most variable annuities are structured to offer investors many different fund alternatives. Variable annuity salespeople must be registered with FINRA and the state insurance department. This customer has no spouse or dependents, which negates the value of the death benefit. How Good of a Deal Is an Indexed Annuity? C)complete all paper work to purchase the annuity contract and obtain the clients signature immediately. In March, the actual net return to the separate account was 8%. The fund is kept within an IHT protected pension trust and can be passed down using a spousal bypass trust (SBT) can be used with personal pension plans to p Any purchase of securities will contain an element of risk. He originally invested $29,000 4 years ago; it now has a value of $39,000. Reference: 12.1.2.1.2 in the License Exam. Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. Please upgrade to Cram Premium to create hundreds of folders! Add to folder Immediate annuities are also available in fixed or variable forms. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. b. the producer is responsible for providing the applicant a summary of coverage that includes all of the following EXCEPT. (The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). continues payments as long as one annuitant is alive. The accumulation period of a variable annuity may continue for many years. have investment risk that is assumed by the investor. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. vote on proposed changes in investment policy. Any withdrawals you make prior to the age of 59 may also be subject to a 10% tax penalty. The accumulation unit's value is used to calculate the total value of the account. are purchased primarily for their insurance features An investor who purchases a fixed annuity contract assumes purchasing-power risk. D)0. FINRA. That can adversely affect your returns over the long term, compared with other types of investments. The separate account performance compared to an assumed interest rate. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. Among annuities, variable annuities differ from fixed annuities, which provide a specific and guaranteed return. Some state statutes and court decisions also protect some or all of the payments from those annuities. A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. must precede every sales presentation. A)II and IV. Question #47 of 48Question ID: 606813 How a Fixed Annuity Works After Retirement. do not have a separate account Contributions to a nonqualified variable annuity are not tax deductible. A separate account will invest in a number of different securities. There is no clear answer to this. A)II and IV. All of the following statements concerning a variable annuity are correct EXCEPT: A fixed annuity is a contract between the policyholder and an insurance company. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. A)I and IV. & securities licenses. B)the investment portfolio is managed professionally. In general, annuities have the following features. Life Insurance vs. Annuity: What's the Difference? Question #27 of 48Question ID: 606818 The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: All Rights Reserved. Mortality assumptions are based on life expectancy or mortality tables prepared by ins. Why Is It Important To Have Your Financial Plan And Goals In Place When Considering Investments? Reference: 12.3.3 in the License Exam. \text{Balance sheet accounts:}\\ D)variable annuities offer the investor protection against capital loss. Introducing Cram Folders! The number of accumulation units can rise during the accumulation period. [D]The portfolio may contain mutual fund shares. C) The entire $10,000 is taxable as ordinary income. 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? The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. C)I and IV. D)A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. D)suitable due to the relative safety of the investment. An investor who has purchased a nonqualified variable annuity has the right to: A guaranteed period commits the insurance company to continue payments after the owner dies to one or more designated beneficiaries; the payments continue to the end of the stated guaranteed periodusually 10 or 20 years (measured from when the owner started receiving the annuity payments). Question #20 of 48Question ID: 606808 B)variable annuities are classified as insurance products. An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses. You can tailor the income stream to suit your needs. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. Universal variable life policies As part of the registration requirements, a prospectus must be filed and distributed to prospective investors. Carefully look at your options when choosing an annuity. a variable annuity guarantees an earnings rate of return. This factor is used to establish the dollar amount of the first annuity payment. A guaranteed lifetime annuity promises to pay the owner an income for the rest of their life. 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. D)I and III. C)suitable due to the death benefit features of a variable annuity. A)defined contribution plans. The value of accumulation and annuity units varies with the investment performance of the separate account. A)variable annuities will protect an investor against capital loss. The growth portion is taxed as ordinary income. withdraw funds without any tax consequences. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. 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. D)each annuity unit's value is fixed, but the number of annuity units varies with time. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. 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. Variable annuities must be registered with: A prospectus for a variable annuity contract: When may a variable annuity account be surrendered? He makes the following four statements, all of which are true EXCEPT Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. A)Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. 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. As with most retirement account options, withdrawals before the age of 59 will result in a 10% tax penalty. B)Variable annuities. The # of VA accumulation units can rise during the accumulation period when additional units are being purchased. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. The # of accumulation units can rise during the accumulation period, 3. D)the safety of the principal invested. D)I and IV. B. separate account may consist of mutual funds. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. The remainder of the premium is invested in the separate account. The earnings are taxable but the cost basis is returned tax free. the SEC. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. C)annuity units. D)II and III. There is no beneficiary in the event the annuitant dies. Reference: 12.3.2.1 in the License Exam. A customer has a nonqualified variable annuity. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 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. In these regards, the low interest rate environment in the US market, in spite of the slight interest rate rise in 2017, has eroded the investment income of Use LEFT and RIGHT arrow keys to navigate between flashcards; Use UP and DOWN arrow keys to flip the card; An investor who has purchased a nonqualified variable annuity has the right to: 1. vote on proposed changes in investment policy.2. A)accumulation shares. approve changes in the plan portfolio.3. regulated under both securities and insurance laws. C) suitable due to the death benefit features of a variable annuity. B)I and II With regard to a variable annuity, all of the following may vary EXCEPT: Your answer, number of annuity units., was correct!. D)I and III. A)equity funds. \text{Owner's equity:}&&&\\ B)4200. A) When a variable annuity contract is annuitized, the number of annuity units is fixed. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. Question #1 of 48Question ID: 606828. The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. The separate account is NOT likely to invest in: regulated under both securities and insurance laws. C)II and III. 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. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? Distribution of dividends occurs during the accumulation period. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. Who assumes the investment risk in a variable annuity contract? A)There is no tax as the withdrawal is considered return of capital. In the first year, you decide to withdraw $50,000. Balancesheetaccounts:AssetLiabilityOwnersequity:CapitalDrawingIncomestatementsaccounts:RevenueExpenseIncreaseCreditCreditCreditDecreaseCredit(j)CreditNormalBalanceDebit. D)I and II. Find out how you can intelligently organize your Flashcards. The growth portion is subject to a 10% penalty. Reference: 12.3.3 in the License Exam, Question #34 of 48Question ID: 606834 A VA is a security & must be registered with the SEC, not FINRA. D)II and IV. required to be located off of the company's premises. Lifetime annuities A lifetime annuity provides income for the remaining life of a person (called the annuitant). Distribution can take place before or during any solicitation for sale. There are also immediate annuities, which begin paying income right away. Which of the following are defined as securities? D)accumulation units. 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? \hspace{5pt}\text{Asset}&&\text{Credit}&\\ An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. C)the payout plans provide the client income for life. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. When the annuitization option is selected, each payment represents both capital and earnings. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock indexusually computed as a fraction of that indexs total return. A life annuity is an insurance product that features a predetermined periodic payout amount until the death of the annuitant. How is the distribution taxed? The number of annuity units is fixed at the time of annuitization. Of the answer choices given the best would be to reevaluate the recommendation based on the new information tendered by the client. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. 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. 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. Must provide full and fair disclosure, 2. The payout compared to last month's payout. There are many categories of annuities. D)an accounting measure used to determine payments to the owner of the variable annuity. Only variable annuities have payout plans that provide the client income for life. Your answer, Purchasing power risk., was correct!. B)II and III. . \end{array} A)IPO. A)I and IV. The number of accumulation units is always fixed throughout the accumulation period. Question #38 of 48Question ID: 606798 B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. D)separate account may consist of mutual funds. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: D)Investment risk. The fees on variable annuities can be quite hefty. The # of annuity units is fixed at the time of annuitization, 4. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. 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. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. A client has purchased a nonqualified variable annuity from a commercial insurance company. D) The fact that periodic payments into the contract may increase or decrease. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Reference: 12.3.3 in the License Exam. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? co. actuaries. C) Life annuity with 10 year period certain. Reference: 12.3.2.1 in the License Exam. The tax on this is $2,800 ($10,000 x 28%). Variable annuities must be registered with: A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. 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. The value of a variable annuity is based on the performance of an underlying portfolio of sub accounts selected by the annuity owner. The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. 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. A)each annuity unit's value and the number of annuity units vary with time. What Are Ordinary Annuities, and How Do They Work (With Example)? The investor has already paid tax on the contributions but the earnings have grown tax-deferred. A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. 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. 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). A customer is receiving annuitized payments from a variable annuity. Reference: 12.3.3 in the License Exam. used for the investment of funds paid by contract holders. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: Your answer, variable annuities., was correct!. An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., was correct!. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. Your answer, The policyowner., was correct!. Once a variable annuity has been annuitized: The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. In addition, you can withdraw 10% of your contract value each year free of surrender charges. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. A) Two-thirds of the withdrawal is taxable as ordinary income. C)earnings only and taxable CAV would consider the date from which interest begins to accrue on the bond (the dated date), the bond's maturity date, and the bonds original offering yield. a variable annuity guarantees an earnings rate of return. Question #28 of 48Question ID: 606821 Azanswer team is here with the correct answer to your question. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Annuities are complicated products, so that may be easier said than done. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation.