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Series 7 by Chapter > Annuities and Variable Products > Flashcards

Annuities and Variable Products Flashcards

1
Q

What is the tax implication of the death benefit on a variable annuity?

A

Any amount above the contract’s basis is taxable to the beneficiary.

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2
Q

In an non-qualified annuity, how is a single distribution taxed?

A

Earnings first (LIFO)

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3
Q

What payout option requires the insurance company to provide payments for as long as one of two people remain alive?

A

Joint and Last Survivor

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4
Q

What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years?

A

Straight-Life with Period Certain

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5
Q

Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?

A

Non-Qualified

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6
Q

What is the benefit of the Straight-Life payout option to the annuitant?

A

This option provides the highest monthly income.

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7
Q

What annuity does not protect an investor against inflation?

A

Fixed (guaranteed) contracts are not a good hedge against inflation.

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8
Q

In a non-qualified annuity, how is a return of capital taxed?

A

Tax-free, since it is part of the client’s basis

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9
Q

What will not affect the rate of return on a variable annuity during the accumulation period?

A

The beneficiary designation

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10
Q

Can a variable life policy’s death benefit grow over time?

A

Yes. If the account performance is positive, the benefit will increase.

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11
Q

What technique can be used to roll assets from one annuity into another without taxation?

A

A 1035 Exchange

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12
Q

Is the death benefit of an annuity included in the estate of a deceased client?

A

Yes. Additionally, any amount over the cost basis may be taxable to the beneficiary.

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13
Q

True or False: Performance must be negative for a variable annuity’s payment to fall.

A

False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.

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14
Q

What is a 1035 Exchange?

A

A tax-free exchange of one annuity for another. These exchanges are allowed under Section 1035 of the Tax Code.

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15
Q

In a qualified annuity, how is the payout taxed?

A

The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.

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16
Q

If performance in a given period is greater than the AIR, the next payment will ___________.

A

If performance in a given period is greater than the AIR, the next payment will increase.

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17
Q

At annuitization (payout), accumulation units are exchanged for __________ units.

A

At annuitization (payout), accumulation units are exchanged for annuity units.

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18
Q

The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.

A

The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity.

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19
Q

What two types of securities registrations would allow an individual to offer variable annuities?

A

Series 6 or Series 7

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20
Q

If performance in a given period is below the AIR, the next payment will ___________.

A

If performance in a given period is below the AIR, the next payment will decrease.

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21
Q

Is switching between annuity sub-accounts taxable?

A

No

22
Q

Is a fixed annuity a security?

A

No, but variable contracts (e.g., variable annuities or variable life insurance) are considered securities.

23
Q

Who assumes the investment risk in a variable insurance contract?

A

The client

24
Q

True or False: Firms may NOT use proprietary names when selling variable contracts.

A

False. Proprietary names are permitted as long as the policy is described as either variable life or variable annuity.

25
Q

A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.

A

A variable annuity would be most suitable for a client who is seeking capital appreciation over a long period.

26
Q

_________________ is the payout option that provides payments for the annuitant’s whole life and will cease at death.

A

Straight-Life is the payout option that provides payments for the annuitant’s whole life and will cease at death.

27
Q

Are variable life policies subject to IRS early withdrawal penalties?

A

No, but variable annuities would be subject to the penalty.

28
Q

True or False: The AIR is a guaranteed minimum rate of return.

A

False. The AIR is a benchmark rate that is not guaranteed.

29
Q

Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?

A

Qualified

30
Q

Ann invests $15,000 in a non-qualified annuity. At age 64, she withdraws all $22,000. What’s Ann’s basis; what’s taxed?

A

Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

31
Q

At annuitization (payout), what will determine the annuitant’s payment?

A

A fixed number of annuity units with a fluctuating value per unit

32
Q

Which type of annuity is considered a security, fixed or variable?

A

Variable

33
Q

True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.

A

True

34
Q

Prospectus delivery is required for all ___________ insurance contracts.

A

Prospectus delivery is required for all variable insurance contracts.

35
Q

What licenses are required for an agent to sell variable annuities or variable life?

A

Both a life insurance license and FINRA Series 6 or 7 license is required

36
Q

Which is more expensive to own, a variable annuity or a mutual fund?

A

A variable annuity, since it typically has greater expenses due to the death benefit and mortality expenses

37
Q

Which annuity provides a fixed, guaranteed minimum rate of return?

A

A fixed annuity

38
Q

An annuity client contributed $100,000 which has grown to $200,000. If the client dies, what is her death benefit?

A

$200,000. The death benefit on an annuity is the greater of the contribution or the account value.

39
Q

If performance in a given period equals the AIR, the next payment will __________________.

A

If performance in a given period equals the AIR, the next payment will remain constant.

40
Q

Are life insurance death benefits taxable?

A

No. Death benefits are received tax-free.

41
Q

Identify the acronym: AIR

A

Assumed Interest Rate

42
Q

In a Non-Qualified Annuity, how is the payout taxed?

A

Only the earnings portion is subject to tax as ordinary income

43
Q

The money invested in a variable annuity is used to buy _____________ _____.

A

The money invested in a variable annuity is used to buy accumulation units (similar to mutual fund shares).

44
Q

In a non-qualified annuity, how is the payout taxed?

A

Only the earnings portion is subject to tax as ordinary income

45
Q

May loans be taken against variable life policies?

A

Yes, for a portion of the contract’s cash value (often 85%)

46
Q

What written documentation is required when recommending a 1035 exchange of a variable annuity?

A

Whether the client has completed a 1035 exchange in the past 36 months

47
Q

Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis; what’s taxed?

A

Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.

48
Q

What is the effect of an outstanding loan at the death of the insured?

A

The death benefit will be reduced by the loan amount.

49
Q

True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.

A

True

50
Q

Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?

A

Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market

51
Q

Does a variable life policy have a guaranteed minimum death benefit?

A

Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy’s face).

Series 7 by Chapter (24 decks)

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