Chapter 12- Variable Annuitie 5-10 Questions

Question 1

Annuity (Non-Qualified retirement asset unless otherwise stated)

Answer 1

Life insurance product designed to provide supplemental income

Stream of income guarenteed for life

Make lump sum or deposits over time, then withdraw

Withdrawals are often taken in lump sum or randomly, though designed for life long

Right to vote on investment policy and for the investment advisor

Question 2

Fixed annuity

Answer 2

Pay premiums to insurance company, invested in company’s general account

Investor gets guaranteed payout, typically monthly

Insurance license is required to sell (but not a securities license)

Investment is not a Security because the insurer is the one at risk

Fixed income and real estate

Purchasing power risk is taken by annuitant as they are locking away money for future that may not earn a high enough return

Question 3

Variable annuity

Answer 3

Opportunity to keep pace with inflation

Investor takes on risk, product is a security

Sold with a prospectus, and by someone with insurance and securities licenses

Return based on actual performance

Invests in equities, debt, mutual funds (not money market funds)

Monthly payments may fluctuate

Account is invested in a separate account from insurer

Question 4

If an annuitant dies

Answer 4

During accumulation: full value of product is given to beneficiary plus any accumulation

Guaranteed total return of amount invested at minimum

No penalty for early withdrawls if beneficiary under 59 1/2

Still pay ordinary income taxes on distributions

Question 5

Similarities between mutual funds and variable annuities

Answer 5

The separate accounts of a variable annuity are regulated like a mutual fund

Variable universal life is also similar but should only be bought for insurance purposes just like a variable annuity

If variable annuity has portfolio built by insurance company, it falls under the Investment Company Act of 1940 as an open end Invest company

If portfolio management is passed to another party, it is a unit investment trust

Both have values calculated once a day, have a manager fee, and have voting rights on investment policy and adviser

Variable annuities have no maximum sales load

Question 6

Major differences between a variable annuity and mutual fund

Answer 6

Earnings of an annuity accumulate tax deferred as distributions just add shares to the account

Cannot receive distribution as cash

Tax liability is deferred

10% penalty for early withdrawals

Variable annuities offer income guarantees depending on how the contract is set up

Question 7

A variable annuity contract guarantees

Answer 7

A fixed mortality expense (or payout) and a fixed administrative expense that will not rise beyond a certain level

Question 8

Single premium deferred annuity

Answer 8

Purchased with a lump sum, payment of benefits is delayed to a later date

Question 9

Periodic payment deferred annuity

Answer 9

Investment over time

Payment at a later date

Question 10

Immediate annuity

Answer 10

Pay a lump sum

Payout commences within 30 days of purchase

No such thing as an immediate deferred annuity

Question 11

Two Phases of a variable annuity

Answer 11

Accumulation Phase: Growth

Annuity Phase: payout

Interest in the variable annuities is known as accumulation units or annuity units

Annuitization Phase : when the annuitant begins to take income

Annuity units are fixed upon annuitization beginning

Question 12

Annuitization of an annuity contract

Answer 12

Option of receiving a monthly income determined by the actuarial department

Accumulation units value is used to calculate the number of annuity units

A assumed interest rate (AIR) is assigned to the funds and is a conservative projection of performance over estimated life (only important during annuity phase

Monthly payment is considered to be up if the separate account performs better than the AIR

Question 13

When referring to annuities on a test, assume performance is in relation to

Answer 13

AIR, if the check is less then it was less than the return expected in the AIR calculation

Question 14

Three payout options of an annuity

Answer 14

1. Life income- Will generally give annuitant the largest payout because all payments stop upon the death of the annuitant
2. Life with Certain period- annuitant is guaranteed payments, but if annuitant dies a beneficiary will receive remaining payments. Usually 10 or 20 year options.
3. Joint Life with Last Survivor- Guarantees payment over remainder of two lives, usually husband and wife

Question 15

Guaranteed Minimum Withdrawal Benefits (GMWBs)

Answer 15

Regular payments but only until the periodic payments equal the principal required to be paid back

Should be noted that lifetime is not guaranteed

Question 16

Lifetime Withdrawal Benefit or Lifetime income

Answer 16

Annuitant will be unable to cash out of the account but will receive lifetime payments beyond the policy going to 0

Question 17

Which annuity type will pay the least per month

Answer 17

Joint life with last survivor because it is covering two people

Question 18

Taxation of Annuities

Answer 18

Usually after tax dollars used to fund the plan unless specified that it is employee sponsored

Investor cost basis is amount paid in, excess is taxed as ordinary income

Withdrawls before age 59 1/2 are subject to 10% tax

Each months payout is partly return of cost basis and earnings

Only earnings part is taxable

IRS requires all earnings are taken out first

ONLY ORDINARY INCOME NOT CAPITAL GAINS

Question 19

Suitability of a variable annuity

Answer 19

Should only be used for supplemental income, not a preservation of capital

Should be funded with cash, not getting out of another annuity as this may be termed as abusive

Should not be used for a specific lump sum in the future

No reason to place in an IRA because earnings are tax deferred

Not a suitable investment for a client wary of the stock market

Should be considered after all other retirement contributions are maxed out

Question 20

Variable life insurance

Answer 20

Protection for beneficiary in event of death

Invests premium into both company general account and separate account

Provides a floor minimum based on funds in the general account with separate account being upside

Never less than minimum guaranteed

Question 21

Waiver of premium

Answer 21

Allows premium to be forgiven or waived in event an individual becomes totally disabled

If in a qualified plan, the contributions used to purchase the waiver are taxable

Question 22

Tax deferred growth vehicles

Answer 22

Variable annuities

IRA… etc

Question 23

Variable life annuity guarantees payments for

Answer 23

Life

Question 24

Variable annuities must be registered with

Answer 24

The sec and the state insurance commission