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Series 7 > 9: INSURANCE COMPANY PRODUCTS (72) > Flashcards

9: INSURANCE COMPANY PRODUCTS (72) Flashcards

1
Q

If you have a qualified single premium deferred variable annuity, and you take money out before your 59:5, what is the tax penalty (%) for taking out your money too early

A

10%

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2
Q

[Variable annuities] Can the number of accumulation units rise during the accumulation period?

A

Yes

When additional units are being purchased

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3
Q

T/F: When a variable annuity contract is annuitized, the number of annuity units is fixed

A

True

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4
Q

T/F: Variable annuities can be used to combat inflation

A

True

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5
Q

T/F: A minimum rate of return is guarenteed on variable annuities

A

Falso

No min return guarentee, return depends on underlying portfolio

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6
Q

Annuitized payments from a variable annuity are viewed for tax purposes as part ____ and part ___

A

Annuitized payments viewed as:

Part earnings, part cost basis

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7
Q

Are the earnings from a variable annuity taxable?

A

Yes

but cost basis is returned tax free

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8
Q

T/F: the cost basis from a variable annuity is taxable upon withdrawal

A

False

The cost basis is returned tax freee

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9
Q

T/F: Unlike a deferred annuity, an immediate annuity skips the accumulation phase and begins paying either right away or within a year

A

True

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10
Q

T/F: Single-premium deferred annuities can be either fixed or variable

A

True

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11
Q

T/F: There’s no limit to how much you can invest in a single premium deferred annuity (SPDA)

A

True

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12
Q

T/F: Single-premium deferred annuities (SPDAs) require only a single lump-sum payment to fund the product.

A

True

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13
Q

T/F: Single-premium deferred annuities are good for individuals who have a long time before they need access to the funds they put into them

A

True

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14
Q

T/F: If you have both a traditional and roth IRA, you still can’t exceed the annual max amount ($6k) between the two of then combined

A

True

If two IRAs, the limit is still $6,000 total

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15
Q

T/F: Variable annuities always have a higher expense ratio than mutual funds

A

True

Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios

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16
Q

T/F: there is never any capital gains treatment with annuities.

A

True

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17
Q

T/F: The income you receive from an annuity is taxed at regular income tax rates, not long-term capital gains rates, which are usually lower.

A

True

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18
Q

T/F: The assumed interest rate (AIR) is the rate the insurance company assumes the separate account will earn during the payout period. [annuities]

A

True

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19
Q

If the seperate account of a variable annuity earns more that the assumed interest rate (AIR) what happens to next month’s payment amount?

A

Next months payment is increased

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20
Q

If the seperate account of a variable annuity earns less than the assumed interest rate (AIR) what happens to next month’s payments?

A

The payments are reduced

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21
Q

The Investment Company Act of 1940 requires that sales charges on a fixed-premium variable life contract may not exceed ____% of the payments to be made over the life of the contract.

A

not exceed 9% of payments to be made over life of contract

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22
Q

T/F: If the owner of a variable annuity dies during the accumulation period, any death benefit will be returned to the separate account.

A

False

If dies during the accumulation period, death benefit would be paid to a designated beneficiary

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23
Q

T/F: The basic death benefit offered by a variable annuity is a guarantee that after your death, the insurance company will pay your beneficiary at least the amount you put in

A

True

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24
Q

T/F: Contributions to a nonqualified annuity are made with the owner’s after-tax dollars

A

True

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25
Q

T/F: FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months

A

True

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26
Q

T/F: The assumed interst rate (AIR) is the annual rate of return required to maintain the level of annuity payments. [variable annuities]

A

True

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27
Q

Is there guaranteed income with an indexed annuity?

A

Y

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28
Q

Can your returns fluctuate in an indexed annuity?

A

Yes
you can get a base amount of guaranteed income. But another part of your income stream will depend on the performance of an index

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29
Q

Can your returns fluctuate in an indexed annuity?

A

Yes
you can get a base amount of guaranteed income. But another part of your income stream will depend on the performance of an index

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30
Q

[annuities] Straight life payout option

A

payments are disbursed as long as the annuitant it alive. Payments discontinue after the annuitant’s death and are not made to any beneficiary.

31
Q

T/F: annuity death benefits are usually paid lump sus

A

True

Usually lump sum

32
Q

When someone with an annuity dies and the proceeds go to the beneficiary, what are the beneficiarys taxes?

A

> usually made lump sum
lump sum payment minus dead’s cost basis
then taxed at ordinary income tax rates in year received

33
Q

“free look period” where variable life insurance policy can be returned for full refund of all premiums

A

The longer of 45 days rafter the app is executed or 10 days after policy is delivered

34
Q

With regard to a variable annuity, all of the following may vary except

A)
value of annuity units.
B)
value of accumulation units.
C)
number of annuity units.
D)
number of accumulation units.
A

C) Number of annuity units

> # of annuity units never changes

“During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.”

35
Q

T/F: With regard to a variable annuity, number of accumulation units never changes

A

False
># of accumulation units changes
># of annuity units is the one that doesn’t change

36
Q

Suggesting that loans or drawing equity from a home to fund VA contracts have been targeted as abusive sales practices

A

True

>don’t suggest loan or draw equity from home to fund variable annuity contract

37
Q

T/F: One of the features of annuities, fixed and variable, is that there are no taxes during the accumulation phase. However, anytime money comes out of the account, whether when annuitized, surrendered voluntarily, or not (as in death), any earnings are subject to taxation.

A

True

> no taxes during accumulation phase
anytime money comes out of the account pay taxes

38
Q

A customer who has contributed to an IRA and an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. One of the following options would achieve that objective, but a suitability discussion regarding its risk should also occur. Which option is it?

A)
Variable annuity (VA) contract with a discussion regarding interest rate risk
B)
Variable annuity contract with a discussion regarding legislative risk
C)
Fixed-annuity contract with a discussion regarding purchasing power risk
D)
Fixed-annuity contract with a discussion regarding timing risk

A

C) fixed annuity, purchasing power

Explanation
A VA with its investments in the separate account subject to market risk would not align with the customer’s objective. Therefore, only a fixed annuity could be considered as suitable. However, a discussion should occur regarding the risks that are associated with a fixed annuity: purchasing power risk. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation.

39
Q

What is purchasing power risk regarding fixed annuities?

A

Risk that the fixed payment the annuitant receives loses purchasing power over time as a result of inflation.q

40
Q

T/F: When a variable life insurance policy is in force for min of 3 years, there’s a requirement to make the loan provision available

A

True

>

41
Q

When you own a variable life insurance policy that’s been in force for 3 years you can take out a loan of at least ___% of the computed cash value

A

75%

> at 3 year mark,

42
Q

How long after someone owns a variable life insurance policy before the loan provision is required to be made available?

A

3 years

> after 3 years, loan provision required

43
Q

T/F: Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. [variable annuities]

A

True

> best if anticipate lengthy retirement and making purchase when not yet retired

44
Q

T/F: _____ income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. [variable annuities]

A

Life income riders

Good if:

  • not retired at time of purchase
  • anticipating a lengthy retirement
45
Q

A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy.

How much of the withdrawal is taxable?

A

100%

Because it’s a qualified annuity, the entire withdrawal is taxable.

46
Q

A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is

A)
$18,000.
 B)
$25,200.
 C)
$16,450.
 D)
$11,750.
A

A) $18,000

> qualified annuity so entire withdrawal taxable
surrender value of $72k, cost basis of $0
$72k gets taxed at marginal rate of 25%
no extra 10% penalty since older than 59.5

Explanation
Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $72,000.

47
Q

If client surrenders SPDVA (single premium deferred variable annuity), he only pays marginal tax rate, and not an additional 10% penalty, if he is older than ____

A

59.5

> if older than 59.5, no extra 10% penalty

48
Q

A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy.

In this situation, the surrender value of $72k has a cost basis of ____

A

$0.00

49
Q

Your client owns a variable annuity contract with an annual interest rate (AIR) of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would her April payment compare to her March payment?

A)
It will stay the same.
 B)
It cannot be determined until the April return is calculated.
 C)
It will be higher.
 D)
It will be lower.
A

C) it will be higher

“Explanation
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.”

50
Q

T/F: When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or last-in, first-out)

A

True

> for partial withdrawal of annuity, earnings taken out first

51
Q

When a partial withdrawal is made from an annuity, what comes out first: cost basis or earnings?

A

J

52
Q

Variable annuities are designed to combat ____ risk.

A

Inflation

Combat inflation risk

53
Q

T/F: When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum.

A

True

> variable life insurance policy
exceed AIR, death benefit goes up
less than AIR, death benefit goes down

54
Q

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination?

Actual performance compared to the AIR affects the cash value of a variable life insurance policy

Actual performance compared to the AIR affects the death benefit of a variable life insurance policy

Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity

Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity

A)
I and III
 B)
II and IV
 C)
I and IV
 D)
II and III
A

B) II and IV

Explanation
When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.

55
Q

T/F: the investment portfolio of a variable annuity is professionally managed

A

True

> professionally managed

56
Q

T/F: Many variable annuities invest the separate account in mutual funds.

A

True

“Many variable annuities invest the separate account in mutual funds”

57
Q

Does a variable annuity guarantee payments for life?

A

Yes

“A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account.
However, it does guarantee payments for life (mortality).”

58
Q

A registered representative explaining variable annuities to a customer would be correct in stating that

a variable annuity guarantees an earnings rate of return.
a variable annuity does not guarantee an earnings rate of return.
a variable annuity guarantees payments for life.
a variable annuity does not guarantee payments for life.

A)
II and III
 B)
II and IV
 C)
I and III
 D)
I and IV
A

A) II and III

Explanation
A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. However, it does guarantee payments for life (mortality).

59
Q

T/F: A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present.

A

True

> element of risk must be present

60
Q

T/F: 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.

A

True

> to find current value, use accumulation units
not annuity units

“An annuity factor is taken from the annuity table, which considers, for example, the investor’s sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account’s performance.”

61
Q

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true?

She will receive the annuity’s entire value in a lump-sum payment.
She may choose to receive monthly payments for the rest of her life.
The accumulation unit’s value is used to calculate the total value of the account.
The annuity unit’s value represents a guaranteed return.

A)
I and III
 B)
I and IV
 C)
II and III
 D)
II and IV
A

C) II and III

Explanation
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. An annuity factor is taken from the annuity table, which considers, for example, the investor’s sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account’s performance.

62
Q

T/F: If you have a variable deferred annuity with several mutual funds to choose from, you can shift the money from one fund to another without having to pay taxes – as long as you don’t withdraw the money.

A

True

> can move to different mutual fund w/o paying taxes
but you can’t withdraw the money

63
Q

In something called a “1035 exchange”, you can make tax-free exchanges from one deferred annuity to another as long as you don’t withdraw the money in between.

A

True

> 1035 exchange
move from one deferred annuity to another w/o taxes

64
Q

T/F: One withdrawal option is to annuitize a deferred annuity, which means you convert the deferred annuity to a lifetime income stream. In that case, you’ll receive a portion of every payout as a tax-free return of principal, just as you would with an immediate annuity.

A

True

> annuitize deferred annuity
lifetime income stream
portion of the payouts count as principal and are tax free
just like immediate annuity

65
Q

T/F: For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.

A

True

> non qualified variable annuity
use after tax dollars for cost basis

66
Q

For a nonqualified variable annuity, would the cost basis after-tax dollars or pre tax dollars?

A

After tax dollars

“For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.”

67
Q

T/F: For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.

A

True

> non qualified variable annuity
use after tax dollars for cost basis

68
Q

When a person is calculating cost basis for a nonqualified variable annuity, the person is using

A)
the pretax dollars contributed.
 B)
the after-tax dollars contributed.
 C)
the dollars contributed minus any gains at the time of payout.
 D)
the earnings in excess of dollars contributed.
A

B) After tax dollars contributed

Explanation
For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.

69
Q

T/F: On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis

A

True

>excess cost basis taxed at ordinary income rate

70
Q

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are

A)
partially a tax-free return of capital and partially taxable.
 B)
100% tax free.
 C)
100% taxable.
 D)
100% tax deferred.
A

A) partially a tax-free return of capital and partially taxable.

> Investor already paid tax on contributions
but earnings were tax deferred

“The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.”

71
Q

If you take a lump sum distribution from a non qualified annuity before age ____, you have to pay an additional %10 fee on the taxable amount (growth portion)

A

59.5

> if before 59.5, pay extra %10 fee

72
Q

An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is

A)
the yield is always higher than mortgage yields.
B)
the yield is always higher than bond yields.
C)
the safety of the principal invested.
D)
changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices.

A

D) cost of living

Explanation
Because common stocks are not fixed-dollar investments, they have the opportunity to keep pace with inflation.

73
Q

Variable annuity salespeople must register with all of the following except

A)
FINRA.
 B)
the SEC.
 C)
the state banking commission.
 D)
the state insurance department.
A

C) state banking commission

Explanation
Variable annuity salespeople must be registered with FINRA and the state insurance department. Registration with FINRA is de facto registration with the SEC. No registration is required by the state banking commission.

74
Q

On the exam, unless stated to the contrary, every annuity is ___

A

Non qualified

On the exam, unless stated to the contrary, every annuity is nonqualified

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