Ch 9: Insurance Co Products Flashcards

Question

annuitization

Answer 1

annuitized payouts are typically made MONTHLY and are taxed according to an EXCLUSION RATIO. Each monthly payment consists of principal + earnings. principal = return of the cost basis. (that is not subject to taxes; it's simply getting your original investment back) balance of the payment is the deferred earnings; that is what will be taxed! exclusion ratio = the % of each monthly payment that is taxable

Answer 2

is a tax-free exchange between like contracts. IRS allows annuity and life insurance policyholders to exchange their policies without tax liability. This provision applies to transfers of cash vales from: - annuity for annuity - life to life - life to annuity - NOT annuity to life insurance policy transfer

Answer 3

the registered rep emphasizes the tax-free nature of the exchange without pointing out possible disadvantages. Those include: - possible surrender charges on the old policy - a new surrender charge period on the new policy - and possible loss of a higher death benefit that existed on the old policy

Answer 4

contributions to these annuities are made with PRETAX DOLLARS. That meant he investor's cost basis is 0. Therefore, with any withdrawal, everything is taxed as ordinary income. If the investor has NOT reached age 59.5, the additional 10% tax penalty applies

Answer 5

FINRA rule does NOT place a max sales charge on variable annuities. Mutual funds DO have max load of 8.5% of the offering price.

Answer 6

FINRA is concerned that the sale if variable life insurance is not misrepresented. Although legally defined as a security, it CANNOT BE SOLD SOLELY ON THAT BASIS. Suitability of a recommendation for variable life, remember these 3 points: - there must be a life insurance NEED - the applicant must be comfortable with the separate acct and the fact that the cash value is NOT guaranteed - the applicant must understand the variable death benefit feature

Answer 7

rule APPLIES TO RECOMMENDED PURCHASES and exchanges of deferred (not immediate) variable annuities and recommended initial subaccount allocations. This rule does NTO apply to reallocations among subaccts made or to funds paid after the initial purchase or exchange of a deferred variable annuity. In other words, ONCE THE INVESTOR HAS MADE THE INITIAL SUBACCT DECISIONS HAVE BEEN MADE, LATER CHANGES ARE NOTTT COVERED BY THE RULE! The rule makes the obv statem that NO MEMBER/PERSON ASSOCIATED WITH A MEMBER SHHALL RECOMMEND TO ANY CUSTOMER THE PURCHASE/EXCHANGE OF A DEFERRED VARIABLE ANNUITY UNLESS THE MEMBER OR PERSON ASSOCIATED WITH A MEMBER HAS A REASONABLE BASIS TO BLEIVE THAT IT IS SUITABLE.

Answer 8

recommending that a client take a home equity loan and use the proceeds to fund this purchase of a deferred variable annuity

Answer 9

ruue specifies that, to be considered suitable, there is a reasonable basis to believe that: - customer has been informed of various features of deferred variable annuities (ie. potential surrender period and surrender charge) which may include: potential tax liability (if customers sell/redeem deferred variable annuities before reaching the age of 59.5), mortality and expense fees, investment advisory fees, potential charges for and features of riders, insurance and investm components of deferred variable annuities, and market risk - customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit, and - the particular deferred variable annuity as a whole, the underlying subaccts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable for a particular customer based on the info required in the rule

Answer 10

switch from an existing contract to a new one. It's mandatory that registered reps and their supervisors evaluate the suitability of the exchange in light of the investor's financial condition, objectives, and pros and cons of switch some of the negative conditions to be aware of are: - surrender charges imposed by insurance co - beginning of a new surrender period - possible reduction in death benefit - how the expenses fo the new contract compare with those fo the old contract, and - the benefits included in the new contract may not be needed by the purchaser

Answer 11

1 of the factors in determining if the exchange is suitable is taking into consideration whether the costumer has had another deferred variable annuity exchange within the preceding 36 months. It's also required that the member mUST HAVE REASONABLE EFFORTS TO ASCERTAIN WHETHER THE CUSTOMER RHAS HAD AN EXCHANGE AT ANY OTHER BROKER-DALER WITHIN THE PRECEDING 36 MONTHS. An inquiry to the customer asking whether the customer has had an exchange at another BD within 36 months would count as "reasonable effort." Members must document this in writing both the nature of the inquiry and the response of the customers.

Answer 12

variable life insurance contract allows insured to borrow against the cash value that has accumulated in the contract. BUT certain restrictions exist. Usually, the insured may only borrow a % of the cash val use. Th minimum % that must be made available is 75% after the policy has been in force for 3 yrs.

Answer 13

- minimum of 75% of the cash value must be available for policy loan after the policy has been in force 3 yrs - the insurer is never acquired to loan 100% of the cash value. full cash value is obtained by surrendering the policy to the insurer - if the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan - if the insured surrenders the contract with a loan outstanding, cash value is reduced by the amount of the loan

Answer 14

a unique feature of variable life insurance is the ability for the insured to have a change of heart! you have the right to exchange a variable life insurance contract for a form of permanent insurance issued by the co. with comparable benefits (usually whole life). The length of time this exchange privilege is in effect varies from co to co, but UNDER NO CIRCUMSTANCES MAY THE PERIOD BE LESS THAN 24 MONTHS (FEDERAL LAW). exchange is allowed without evidence of insurability. If contract is exchanged, the new permanent policy has the same contract date and death benefit as the minimum guaranteed in the variable life insurance contract. Premiums equal the amts guaranteed in the new permanent contract (as if it were the original contract)

Answer 15

- the contract exchange provision must be available for a minimum of 2 yrs - no medical underwriting (evidence of insurability) is required for the exchange - the new policy is issued as if everything were retroactive. That is, the age of the insured as if the original date is the age used for premium calculations for the new policy

Answer 16

SALES CHARGES ON A FIXED-PREMIUM VARIABLE LIFE CONTACT MAY NOT exceed 9% of the payments to be made over the life of the contract. Contract's life (for purposes of the charge) is a max of 20 yrs.

Answer 17

insurer must extend a free-look period to the policy-owner fo r45 days from the execution of the application, or for 10 days from the time the owner receives the policy (whichever is long). During the free-look period, the policy-owner may terminate the policy and receive all payments made. the refund provisions extend for 2 yrs from issuance of the policy. IF within the 2 yr period, the policy-owner terminates participation int he contract, insurer must REFUND THE CONTRACT'S CASH VALUE (VALUE CALCULATED AFTER THE INSURER RECEIVES THE REDEMPTION NOTICE) PLUS a % of sales charge deducted. After the 2-yr period has lapsed, only the cash value need to be refunded, the insurer retinas all sales charges.

Answer 18

- max sales charge over the life of the contract is 9% - policy-owner who wants a refund within 45 days receives all money paid - from 45 days to 2 yrs, there is a partial refund of sales charge - after a variable life policy has been in effect for 2 yrs, the surrender value of the policy is the cash value; there is NO sales charge refund

Ch 9: Insurance Co Products Flashcards

(42 cards)