Annuities

Question 1

How are variable annuities priced?

Answer 1

Priced like a mutual fund

NAV + SC = POP

Question 2

Is there a maximum sales charge for variable annuities?

Answer 2

No

Unlike open end investment companies that have sales max charge of 8.5%

Question 3

What happens to earnings (dividends and capital gains) from a variable annuity

Answer 3

They are reinvested

All earnings in variable annuities are reinvested

Question 4

Do earnings in a variable annuity grow tax deferred?

Answer 4

Yes, grow tax deferred

Question 5

[Variable annuity taxes] - Lump sum withdrawal

Answer 5

• Cost-basis returned tax free

* All earnings above cost basis are taxed

Question 6

[Variable annuity taxes] - Random withdrawals

Answer 6

• Earnings are withdrawn first and are taxable
• After all earnings are withdrawn, cost basis is returned tax free

(Uses LIFO accounting method)

Question 7

[Variable annuity taxes] - Annuitized withdrawals

Answer 7

• Lifetime monthly payments
• Each payment is part earnings, part cost basis
• Earnings portion is taxed but cost basis is tax free

Question 8

Life only annuity

Answer 8

Monthly payments

Payments end with life of annuitant

Question 9

Period certain annuity

Answer 9

• Payments continue for a specified period, even if annuitant dies (protects heirs)
• If the annuitant outlives the period certain length, payments still continue till he dies

Question 10

Joint life with last survivor annuity

Answer 10

• Annuity on more than one life (usually spouses)

* Payments continue until the last annuitant dies

Question 11

[Variable annuities] Assumed interest rate

Answer 11

• Consecutive estimate of rate of return for investments in the separate account
• Each period, actual earnings of the account are compared with the AIR

(If performance in separate account is greater than AIR, payment for that month will be greater than last month)

Question 12

[Variable annuities] If the separate account’s performance is greater than the AIR, how will this months payments compare to last month

Answer 12

If separate account does better than AIR, payment will be greater than last month

Question 13

T/F: If performance in the separate account is greater than AIR, payments for that month will be greater than the previous month

Answer 13

True, if separate account outperforms AIR, payments will be greater than last
month

(If performance is the same as AIR, payments same as last month)

Question 14

What is the surrender period for annuities?

Answer 14

surrender period is the amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty.

> B share mutual funds and whole life insurance policies also have a surrender period

Question 15

T/F: The surrender period for annuities can run several years, and annuitants can incur significant penalties if invested funds are withdrawn before that period has expired.

Answer 15

True

> can be several years
can get bad penalties if withdraw b4 surrender period

Question 16

T/F: If you make additional investments or premium payments to the annuity, there could be a separate surrender period for each investment

Answer 16

True

Could be seperate surrender period for each investment

Question 17

Surrendering a single premium deferred variable annuity will subject the deferred growth (account value - cost basis) to the investor’s marginal income tax rate plus a penalty of __%

Answer 17

10%

Marginal income rate plus 10% penalty

Question 18

T/F: In a deferred variable annuity, the deferrred growth is taxable at the capital gains rate

Answer 18

False
Deferred growth taxable at marginal income tax rate

> plus 10% fee if before 59.5

Question 19

T/F: If someone surrenders a deferred variable annuity before age 59.5, the growth will be taxed at the marginal income tax rate plus an additional 15% fee

Answer 19

False

Growth taxed at income rate + 10% penalty

Question 20

Single premium deferred annuity

Answer 20

“A single-premium deferred annuity (SPDA) is an annuity established with a single payment featuring investment growth solely during the accumulation phase. That growth occurs on a tax-deferred basis until annuitization, at which time regular payments will begin.”

Question 21

T/F: If client takes all his money out of a qualified deferred variable annuity before 59.5, total liability is income tax + 10% penalty on the deferrred growth

Answer 21

False

Because qualified annuity, entire withdrawl is taxable/subject to fee

Question 22

If withdrawing money from qualified deferred variable annuity, what portion of the withdrawl is taxable?

Answer 22

The entire portion
since it’s qualified

> Entire withdrawl is taxble for qualified annuities

Question 23

T/F: When withrawing money from a single premium qualified deferred variable annuity, the entire portion is taxable at withdrawl.

Answer 23

True, entitre portion taxable