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Series 7 > Unit 9: Insurance > Flashcards

Unit 9: Insurance Flashcards

1
Q

What is an annuity? How is the income taxed? What is the contribution amount?

A
  1. Contract between an individual and a life insurance company - purchased for retirement income?
  2. Income is tax deferred (no current income)
  3. No legal limit to contribution amount (IRAs and other qualified retirement plans have limits)
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2
Q

What is an annuitant?

A
  1. Person making payments (lump sum or periodic payments)
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3
Q

What is a fixed annuity? What is its return structure? Is it a security? What is the major risk its subjected to? What licenses does the seller need?

A
  1. Insurance product that offers guaranteed fixed rate of return to be paid out in retirement (paid to the general account of an insurance company)
  2. Guaranteed fixed rate of return
  3. Insurance product, not a security
  4. Subject to inflation risk (purchasing power risk)
  5. Insurance
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4
Q

What is a variable annuity? Is it a security? What licenses does it need? What documentation does it require? What risk does it protect against?

A
  1. Payments are made to the subaccount and then are invested
  2. Yes, its a security
  3. Sales agents need insurance and securities licenses
  4. Prospectus (1933)
  5. Purchasing power risk
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5
Q

What is the main difference between a fixed and variable annuity?

A

Fixed has guaranteed capital return

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6
Q

What does the 1940 Investment Company Act say on variable annuities?

A

It is not included, but separate accounts are - most often they are unit investment trusts

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7
Q

What is Whole Life Insurance? What does it accrue and what can it be used for? What licenses does it need? Is it insurance or security?

A
  1. Designed to last until at least 100 years or the death of the insured, whichever occurs first
  2. Cash for loans for living expenses
  3. Insurance
  4. Insurance
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8
Q

What is Term Life Insurance? Does it let you accrue cash?

A
  1. Insurance protection for a specified period (least expensive form)
  2. Does not build cash balances
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9
Q

What is Variable Life Insurance? What is guaranteed? What does the other portion do? What happens if funds drop below investment amount? How often is valued reported? Is it a security or an insurance policy?

A
  1. Life insurance that bifurcates between some portion going to general insurance and the remaining portion going to separate account
  2. General account guarantees the minimum death benefit
  3. Separate account portion is the cash value
  4. You will get
  5. Separate account is calculated daily, cash value in variable life contract reported monthly
  6. Its both (im pretty sure)
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10
Q

What is the rule of fees related to variable annuities?

A
  1. There is no maximum sales charge - only that it is reasonable
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11
Q

What are the various options for purchasing an annuity?

A
  1. Lump-Sum Payment - Pay up-front
  2. Periodic Payment Deferred Annuity - invest over time
  3. Immediate Annuity - lump sum, benefits in 60 days

There is no such thing as a periodic payment immediate annuity

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12
Q

What are bonus annuities? What is the downside?

A
  1. Incremental value above your contribution in the beginning
  2. Surrender charges last longer
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13
Q

What are the different payment options? Largest to smallest monthly payout

A
  1. Life annuity (straight line or life only) - large payments, remaining money is lost if you die
  2. Life annuity with period certain - if person lives forever, they continue to get payments. If person dies within 2 years, the beneficiary gets 8 years of payments
  3. Joint Life with Last Survivor Annuity - if 1 person dies in a couple, the spouse gets cash flow for life
  4. Unit Refund Option - All capital received for the rest of life in payments
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14
Q

What is an accumulation unit? What is an annuity unit?

A

Represents the investors ownership (similar to NAV)

Annuity unit is a measure of value used during the annuitized contract’s payout period

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15
Q

What taxes are due during the Annuity Accumulation Stage?

A

All earnings are tax deferred so no taxes are due

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16
Q

How are random withdrawals taxed?

A

Random withdrawals are taxed by LIFO

Earnings are taxed at ordinary income - once those are gone, the original contribution is taken out tax free

17
Q

What happens during a lump-sum withdrawal?

A

If an investor takes a withdrawal before 59 1/2, earnings are taxed at ordinary income and there is an 10% additional tax penalty (its okay to use capital for death or disability or part of a life income option with fixed payments - you avoid the 10% here)

10% penalty will only apply to the earnings

18
Q

How do you tax during the payout phase? How often are payments made?

A

Payments are made monthly

Taxed according to an exclusion ratio - the cost basis is not taxed, the earnings are taxed

19
Q

What is a 1035 Exchange? What types are allowed? What is restricted?

A

Tax-free exchange between like contracts

Can do annuity to annuity, life to life, and life to annuity

20
Q

What are the 3 suitability considerations for variable life insurance?

A
  1. Must be a life insurance need
  2. Comfortable with separate account and that cash value is not guaranteed
  3. Must understand the variable death benefit feature
21
Q

What is an Assumed Interest Rate (AIR)? When is it adjusted?

A
  1. Net rate of investment return that must be credited to a variable policy to ensure that at all times the variable death benefit equals teh amount

If the account earns more than the AIR, the payment increases

We never fall below the minimum guarantee at issue

Annually

22
Q

What is the accumulation phase?

A

Period in which you contribute to an annuity

If you miss payments, you can lose the preceding contributions. Incur surrender charges

23
Q

What is the maximum sales load for variable contracts? What is the sales load for a mutual fund?

A

No maximum; must be reasonable

8.5%

24
Q

What is the maximum sales load for variable contracts? What is the sales load for a mutual fund?

A

No maximum; must be reasonable

8.5%

25
Q

What does the customer need to be aware of regarding deferred variable annuities?

A
  1. Potential tax penalty pre-59.5
  2. Mortality fees, investment fees, charges for and features of riders
  3. Benefits (tax deferred growth, annuitization)
  4. Structure, subaccount etc.
26
Q

What is the 36 month rule?

A

Before doing a 1035 exchange, the customer should have around 36 months of use before making that decision

27
Q

What are restrictions on policy loans?

A

75% minimum available after 3 years

Deducted from total payout if death benefit needed

28
Q

What is the variable life insurance contract exchange?

A
  1. Right to exchange a variable life insurance contract for a form of permanent insurance issued by the company with comparable benefits
  2. Period must be 2 years
  3. no medical underwriting needed
  4. new policy takes same age as the old one
29
Q

What are the sales charges on a fixed-premium variable life contract?

A
  1. May not exceed 9% of the payments over the life of the contract (20 year max)
30
Q

What is the free look period?

A

45 days from execution or 10 days from time the owner receives the policy (whichever is longer), policyholder can do whatever they want (45 days to two years, there is a partial refund)

31
Q

Withdrawals from variable annuities are taxed on what basis? Variable Life?

A

LIFO / FIFO

32
Q
A

Series 7 (9 decks)

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