Some state statutes and court decisions also protect some or all of the payments from those annuities. Who assumes the investment risk in a variable annuity contract? D. a majority vote from the shareholders is required to change the investment objectives. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. 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. First, they are complicated, as insurers use different methods to calculate the index return. 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. C)municipal bonds. Reference: 12.1.2.1.1. in the License Exam. 8. It may decrease in value. Variable annuity contracts were devised to help investors keep pace with inflation. The funds in an annuity are off-limits to creditors and other debt collectors. D)suitable due to the relative safety of the investment. the VA recommendation would not be suitable. In a fixed annuity, the insurance company guarantees the principal and a minimum rate of 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. Annuities are complicated products, so that may be easier said than done. In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: Your answer, mortality guarantee., was correct!. Variable Annuity Advantages and Disadvantages, Guide to Annuities: What They Are, Types, and How They Work. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. 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? B)fixed in value until the holder retires. A variable annuity's separate account is: Explaining What have been the major population changes since the first census in 1790? 2003-2023 Chegg Inc. All rights reserved. Distributions to the annuitant will fluctuate during the payout period. If the owner of a variable annuity dies during the accumulation period, any death benefit will: Your answer, be paid to a designated beneficiary., was correct!. Many investments are taxed year by year, but the investment earningscapital gains and investment incomein annuities arent taxable until the investor withdraws money. C)III and IV. Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. The following are all characteristics of variable annuities EXCEPT: [A]The investment portfolio contains insurance protections against losses. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. If this client is in the payout phase, how would his April payment compare to his March payment? Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. The investor purchased accumulation units. Question #25 of 48Question ID: 606819 When money is deposited into the annuity, it is purchasing accumulation units. She will receive the annuity's entire value in a lump-sum payment. approve changes in the plan portfolio. C)I and IV. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. 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. John is the annuitant in a variable plan, and Sue is the beneficiary. Immediate life annuity with 10-year period certain. A)It will stay the same. The time period depends on how often the income is to be paid. Question #44 of 48Question ID: 606797 An individual retirement annuity is an investment vehiclesimilar to an individual retirement accountthat is offered by insurance companies. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. When you visit the site, Dotdash Meredith and its partners may store or retrieve information on your browser, mostly in the form of cookies. B)It will be lower. FINRA. A customer is receiving annuitized payments from a variable annuity. That can adversely affect your returns over the long term, compared with other types of investments. 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. Question #15 of 48Question ID: 606804 Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? But again, the need to designate beneficiaries is not an issue for this annuitant. Which of the following statements regarding variable annuities are TRUE? A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. A)Purchasing power risk. We weren't able to detect the audio language on your flashcards. C)The entire $10,000 is taxable as ordinary income. An investor who has purchased a nonqualified variable annuity has the right to: Which of the following statements regarding variable annuities are TRUE? The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Can I Borrow from My Annuity for a House Down Payment? D)variable annuities offer the investor protection against capital loss. A)value of underlying securities held in the separate account. Variable Annuities. If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? &\textbf{Increase}&\textbf{Decrease}&\textbf{Normal Balance}\\ \hline Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. B)each annuity unit's value varies with time, but the number of annuity units is fixed. This compensation may impact how and where listings appear. In other words, the money in a fixed annuity will grow and will not drop in value. The accumulation period of a variable annuity may continue for many years. A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. A security is an investment for profit with management performed by a third party. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. [D]The portfolio may contain mutual fund shares. The growth portion is taxed as ordinary income. The holder of a VA receives the largest monthly payments under which of the following payout options? B)a minimum rate of return is guaranteed. Variable annuity salespeople must register with all of the following EXCEPT: C) The entire $10,000 is taxable as ordinary income. 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. In March, the actual net return to the separate account was 8%. Once a variable annuity has been annuitized: Distribution of dividends occurs during the accumulation period. Fixed annuities, on the other hand, provide a guaranteed return. The number of accumulation units is always fixed throughout the accumulation period. required to be located off of the company's premises. What Are the Biggest Disadvantages of Annuities? Which Earns More: Variable or Fixed Annuities? C)earnings only and taxable If the customer takes a withdrawal of $10,000, what are the tax consequences? must be filed with FINRA. Lifetime annuities A lifetime annuity provides income for the remaining life of a person (called the annuitant). Flexible premium annuities A flexible premium annuity is an annuity that is intended to be funded by a series of payments. Surrender fees and penalties for early withdrawal. 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. Reference: 12.1.2 in the License Exam. The growth portion is taxed as a capital gain. The growth portion is taxed as a capital gain. 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. Cram has partnered with the National Tutoring Association. A)Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. a variable annuity guarantees payments for life. C)100% tax deferred. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. Introducing Cram Folders! B)II and III. withdraw funds without any tax consequences. You should now have gotten the answer to your question All of the following are characteristics of a variable annuity, except:, which was part of Insurance MCQs & Answers. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Your customer in his early 30s has received a modest inheritance from a relative. You can learn more about the standards we follow in producing accurate, unbiased content in our. Immediate annuities are also available in fixed or variable forms. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. B)Fixed annuity contract with a discussion regarding timing risk Future annuity payments will vary according to the separate account's performance. regulated under both securities and insurance laws. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. D)value of accumulation units. \text{Balance sheet accounts:}\\ 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. B)suitable regardless of funding sources C)II and IV. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. a variable annuity does not guarantee an earnings rate of return. An annuity is an agreement for one person or organization to pay another a series of payments. D)Joint and last survivor annuity. The number of annuity units rises once annuitization begins. In addition, an element of risk must be present. Generally the most that creditors can access is the payments as they are made, since the money the annuity owner gave the insurance company now belongs to the company. 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. 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. The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. Sub accounts and mutual funds are conceptually. . What Are the Distribution Options for an Inherited Annuity? C)none of these. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. Many annuity companies offer a variety of investment options. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. guarantees payments for a certain period of time. B)Variable annuities. We also reference original research from other reputable publishers where appropriate. "Variable Annuities: What You Should Know," Page 10. C)Keogh plans. With regard to a variable annuity, all of the following may vary EXCEPT: 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. Reference: 12.1.4.1 in the License Exam. No, annuities are not FDIC-insured as they are not bank products. C)with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually Variable annuities are riskier than fixed annuities because the underlying investments may lose value. 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)accumulation shares. B)I and III. They can be classified by: An annuity can be classified in several of these categories at once. Based only on these facts, the variable annuity recommendation is B)I and III. 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. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. Each of the remaining statements are true. Question #33 of 48Question ID: 606832 Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. C)It will be higher. \hspace{5pt}\text{Asset}&&\text{Credit}&\\ C)the SEC. C)III and IV Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). Variable annuities are designed to combat inflation risk. Reference: 12.1.2 in the License Exam. Reference: 12.3.1 in the License Exam, Question #30 of 48Question ID: 606833 Add to folder A separate account will invest in a number of different securities. This would not align with the couple's criteria for coverage as long as they both live. Which of the following recommendations would best meet the customer profile? the state banking commission. There are two elements that contribute to the value of a variable annuity: the principal, which is the amount of money you pay into the annuity, and the returns that your annuitys underlying investments deliver on that principal over the course of time. 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. B) Any tax due is deferred. A variable annuity is both an insurance and a securities product. A)II and IV. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. Reference: 12.1.4.1 in the License Exam. For a retired person, which of the following investments would provide the greatest protection against inflation? 1. 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. a variable annuity does not guarantee an earnings rate of return. Life annuity has the largest payout because less risk is assumed by the insurance company. 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!. These include white papers, government data, original reporting, and interviews with industry experts. used to escrow late or otherwise delinquent premium payments. a life insurance holder lives longer than expected. A customer has a nonqualified variable annuity. Reference: 12.2.1 in the License Exam. They are also riddled with fees, which can cut into profits. The most popular type of variable annuity is a deferred annuity. \hspace{5pt}\text{Liability}&\text{Credit}&&\\ 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. C)Money market fund. The following annuities are available in fixed or variable form: 1. Her agent recommended she choose a variable annuity as a safe haven for the funds. A fixed annuity is a contract between the policyholder and an insurance company. Variable annuity salespeople must register with all of the following EXCEPT: Your answer, the state banking commission., was correct!. A variation of lifetime annuities continues income until the second one of two annuitants dies. A) VAs, blue chip mutual fund portfolios, ETFS & ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client. contract. C)the payout plans provide the client income for life. Her agent recommended she choose a variable annuity as a safe haven for the funds. co. actuaries. a variable annuity guarantees an earnings rate of return. 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. B)changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. Reference: 12.3.4 in the License Exam. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both insurance and securities licenses. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: For example, if the income is monthly, the first payment comes one month after the immediate annuity is bought. The most suitable option and one considered effective for married couples is a single joint and last survivor contract. How Are Nonqualified Variable Annuities Taxed? An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. The value of the separate account is now $30,000. When a variable annuity contract is annuitized, the number of annuity units is fixed. B)II and III. The number of accumulation units is always fixed throughout the accumulation period. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. A)I and IV. A)defined contribution plans. IncreaseDecreaseNormalBalanceBalancesheetaccounts:AssetCreditLiabilityCreditOwnersequity:CapitalCreditDrawingIncomestatementsaccounts:RevenueCredit(j)ExpenseCreditDebit\begin{array}{lccc} Copyright 2023, Insurance Information Institute, Inc. 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. It is a variable annuity. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. C)the yield is always higher than bond yields. A)the yield is always higher than mortgage yields. How to Rollover a Variable Annuity Into an IRA. b. The number of annuity units is fixed at the time of annuitization. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? B)the investment portfolio is managed professionally. Question #19 of 48Question ID: 606826 used for the investment of funds paid by contract holders. The client's investment objectives, tax bracket, investment experience and risk tolerance all align well with a VA recommendation. Introducing Cram Folders! The separate account is NOT likely to invest in: Your answer, municipal bonds., was correct!. When the annuitization option is selected, each payment represents both capital and earnings. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 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. People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. A)II and IV. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. The growth of the annuitys value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. In March, the actual net return to the separate account was 8%. Please select the correct language below. Please sign in to access member exclusive content. A guaranteed lifetime annuity promises to pay the owner an income for the rest of their life. \hspace{5pt}\text{Drawing}&&&\\ Nonqualified annuities A nonqualified annuity is one purchased separately from, or outside of, a taxfavored retirement plan. How is the distribution taxed? Question #43 of 48Question ID: 606809 Reference: 12.3.1 in the License Exam. Question #41 of 48Question ID: 606801 "Variable Annuities: What You Should Know," Page 3. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? Reference: 12.1.2.1.1 in the License Exam. Question #16 of 48Question ID: 606807 If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? 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. The # of VA accumulation units can rise during the accumulation period when additional units are being purchased. Which of the following are defined as securities? A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. Question #14 of 48Question ID: 606823 Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. A variable annuity is both an insurance and a securities product. Are you having trouble answering the question All of the following are characteristics of a variable annuity, except:? Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. A prospectus for a variable annuity contract: 1. B) the state insurance department. Your client owns a variable annuity contract with an AIR of 4%. 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. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. D)Dow Jones Industrial Average. C)III and IV. Which of the following recommendations would BEST meet the customer profile? The number of accumulation units can rise during the accumulation period. Because this is not guaranteed, the policyowner bears the investment risk. a. 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. 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. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Variable annuity salespeople must be registered with FINRA and the state insurance department.
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