Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short period of time is not suitable. The accumulation period of a variable annuity may continue for many years. One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. B)mutual fund units. Question #46 of 48Question ID: 606796 When the second party dies, all payments cease. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. D)money market funds. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. A)2800. Question #17 of 48Question ID: 606802 He originally invested $29,000 4 years ago; it now has a value of $39,000. However, it does guarantee payments for life (mortality). C)Keogh plans. Which of the following statements regarding variable annuities are TRUE? With regard to a variable annuity, all of the following may vary EXCEPT: Your answer, number of annuity units., was correct!. D)Any tax due is deferred. Reference: 12.2.1 in the License Exam. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. An individual retirement annuity is an investment vehiclesimilar to an individual retirement accountthat is offered by insurance companies. Question #22 of 48Question ID: 606803 Variable Annuities. None of the other investments listed here offer tax-deferred growth. How is the distribution taxed? D)variable annuities offer the investor protection against capital loss. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. \end{array} The accumulation unit's value is used to calculate the total value of the account. a variable annuity guarantees payments for life. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? audio not yet available for this language, {"cdnAssetsUrl":"","site_dot_caption":"Cram.com","premium_user":false,"premium_set":false,"payreferer":"clone_set","payreferer_set_title":"Variable Annuities","payreferer_url":"\/flashcards\/copy\/variable-annuities-5097323","isGuest":true,"ga_id":"UA-272909-1","facebook":{"clientId":"363499237066029","version":"v12.0","language":"en_US"}}. As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. Must precede every sales presentation. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. The time period depends on how often the income is to be paid. \text{Income statements accounts:}&&&\\ Usually the term annuity relates to a contract between an individual and a life insurance company. These contracts come with high surrender charges. a life insurance holder dies sooner than expected. C) The entire amount is taxed as ordinary income, because it is not life insurance. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. A)not suitable Question #14 of 48Question ID: 606823 The number of annuity units is fixed at the time of annuitization. Reference: 12.1.4.2 in the License Exam. D) a VA contract is subject to fluctuating values due to market fluctuations in the underlying separate accounts. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. A prospectus for a variable annuity contract: If they buy a variable annuity, their money can be invested in stocks, bonds or mutual funds. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. C)the yield is always higher than bond yields. If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be MOST suitable? Nonqualified annuities A nonqualified annuity is one purchased separately from, or outside of, a taxfavored retirement plan. D)all return of cost basis and nontaxable, Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. Question #13 of 48Question ID: 606822 The payout compared to the initial payout upon annuitization. There are also immediate annuities, which begin paying income right away. [D]The portfolio may contain mutual fund shares. However, it does guarantee payments for life (mortality). A)value of underlying securities held in the separate account. Reference: 12.1.1 in the License Exam. There are many categories of annuities. A)Joint tenants annuity. The value of the separate account is now $30,000. The # of annuity units is fixed at the time of annuitization, 4. In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. \hspace{5pt}\text{Asset}&&\text{Credit}&\\ Investopedia requires writers to use primary sources to support their work. C)III and IV. How a Fixed Annuity Works After Retirement. What Are the Risks of Annuities in a Recession? used for the investment of funds paid by contract holders. Annuities are similar to other forms of investing in that the owner invests money with the hope that it will gain in value, but annuities also come with higher fees than most mutual funds. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? 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 There Penalties for Withdrawing Money From Annuities? Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 U.S. Securities and Exchange Commission. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. 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. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. A)III and IV. D)II and III. All Rights Reserved. Reference: 12.1.4 in the License Exam. Must provide full and fair disclosure, 2. U.S. Securities and Exchange Commission. Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? B)Variable annuities. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. Find out how you can intelligently organize your Flashcards. Flexible premium annuities A flexible premium annuity is an annuity that is intended to be funded by a series of payments. It is a variable annuity. D) The fact that periodic payments into the contract may increase or decrease. 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 . Investopedia does not include all offers available in the marketplace. Question #25 of 48Question ID: 606819 A variation of lifetime annuities continues income until the second one of two annuitants dies. Surrender fees and penalties for early withdrawal. His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. The funds in an annuity are off-limits to creditors and other debt collectors. In the case of deferred annuities, this is often referred to as the accumulation phase. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Variable Annuities Flashcards - Cram.com 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. A)II and IV. D) Mutual Fund portfolio consisting of blue chip stocks. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. The most suitable option and one considered effective for married couples is a single joint and last survivor contract. The annuity unit's value represents a guaranteed return. a variable annuity does not guarantee payments for life. Copyright 2023, Insurance Information Institute, Inc. Variable annuities must be registered with: A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. In addition, an element of risk must be present. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. Question #40 of 48Question ID: 606800 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. How Good of a Deal Is an Indexed Annuity? D)partially a tax-free return of capital and partially taxable. He originally invested $50,000 four years ago. used to escrow late or otherwise delinquent premium payments. D)A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. Here is how guaranteed lifetime annuities work. Bear in mind that between the numerous feessuch as investment management fees,mortality fees, and administrative feesand charges for any additional riders, a variable annuitysexpenses can quickly add up. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance. B)I and IV. Sub accounts and mutual funds are conceptually identical, but sub accounts don't have ticker symbols that investors can easily type into a fund tracker for research purposes. How is the distribution taxed? If an annuitant lives longer than expected, the ins. A)II and IV. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. Question #1 of 48Question ID: 606828. regulated under both securities and insurance laws. C) suitable due to the death benefit features of a variable annuity. 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. \hspace{5pt}\text{Drawing}&&&\\ B)It will be lower. D)II and IV. holder dies sooner than expected. Your email address will not be published. Mortality assumptions are based on life expectancy or mortality tables prepared by ins. What is the taxable consequence of this withdrawal to your client? Reference: 12.3.2.1 in the License Exam. All of the following are characteristics of a variable annuity, except: a. 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!. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. Fixed annuities. A client has purchased a nonqualified variable annuity from a commercial insurance company. A)variable annuities will protect an investor against capital loss. When the first party dies, the annuity payment is made to the survivor. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. 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. The # of annuity units rises once annuitization begins. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. B)II and III. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. Reference: 12.1.2 in the License Exam, Question #23 of 48Question ID: 901858 B) unsuitable because the return on something as conservative as a variable annuity tends to be low. Your answer, Life annuity., was correct!. 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 universal variable life policy should be purchased primarily for its insurance features, not its investment features. Reference: 12.1.2 in the License Exam. A)the state banking commission. You can tailor the income stream to suit your needs. through (l), indicate whether the proper answer is a debit or a credit. A)the yield is always higher than mortgage yields. In March, the actual net return to the separate account was 8%. In general, annuities have the following features. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. All of the following statements regarding variable annuities are true EXCEPT: Types of Annuities Flashcards by Liliana Benavides | Brainscape 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. 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. The following table summarizes the rules of debit and credit. Future annuity payments will vary according to the separate account's performance. 8. The most popular type of variable annuity is a deferred annuity. Question #12 of 48Question ID: 606814 Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. C)the payout plans provide the client income for life. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. This customer has no spouse or dependents, which negates the value of the death benefit. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. From an insurance company, mortality risk turns out unfavorably if: 1. an annuitant lives longer than expected, 2. an annuitant dies sooner than expected, 3. a life ins. 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. Annuities basics | III A variable annuity's separate account is: Variable annuities gave buyers a chance to benefit from rising markets by investing in a menu of mutual funds offered by the insurer. D)I and III. First, they are complicated, as insurers use different methods to calculate the index return. B)cost of living. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. What Are Ordinary Annuities, and How Do They Work (With Example)? No, annuities are not FDIC-insured as they are not bank products. 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. Premiums made into the annuity purchase accumulation units. Variable Annuitization is an annuity option where income payments received by the policyholder vary based on the investment performance of the annuity. Fixed annuities, on the other hand, provide a guaranteed return. B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. A) The fact that the annuity payment may increase or decrease. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. B)fixed in value until the holder retires.
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