Chapter 11 Basics of Life Insurance and Variable Annuities

Question 1

Variable Annuities are considered to be

Answer 1

securities and not a form of insurance but are generally offered by insurance companies. A delivery of a prospectus MUST be delivered at the time of the product.

Question 2

Accumulation Unit

Answer 2

(pay in period) - used to determine the contract owners (investor) interest in the SEPRATE Account.

a. The value of theses units is determined by the value of the Securities in the separate account and is not determined by mortality tables.

b. Earning are tax deferred until annuity payments begin

c. During the accumulation period , contract owner can withdraw the cash surrender value contract , although penalties ( surrender charges) may be incurred.

Question 3

Annuity Unit

Answer 3

( Pay out period) - determines the amount of each payment to the annuitant. Changes in the value are related to the value of Securities in the Separate Account, Not DJIA and not cost of living index.

Question 4

Annuitization

Answer 4

When the annuity owner selects a payout option, accumulation units are exchanged for annuity units. The value of accumulation units is used to determine the number of annuity units issued. The number of annuity units will be determined by multiplying the number of accumulation units by the net asset value(NAV) per unit in the Separate account.

a. will pay out a fixed number of units each month.
b. On the Annuity date, an interest rate is used to determine the payout. Its called the Assumed Investment Rate(AIR), which is not guaranteed.
c. The AIR is a hurdle rate, meaning the rate the insurance company has to receive to cover their costs and profits. Any rate of return above the hurdle or AIR goes to the annuitants, therefore the annuity value will increase if the actual return exceeds the AIR

Question 5

Sales Charge Breakpoints

Answer 5

for investments in Variable Annuities are based on the total amount invested in the annuity.

Question 6

Rider

Answer 6

A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy to provide additional coverage. Riders tailor insurance coverage to meet the needs of the policyholder. Riders come at an extra cost—on top of the premiums an insured party pays.

Question 7

Administrative expenses

Answer 7

compensation that is paid to the issuer of the annuity contracts for services such as recordkeeping, accounting, computation of daily unit values.

Question 8

Annuitant

Answer 8

the individual who will receive annuity payments from a contract. Also called the contract holder or Annuity Holder

a. must receive a prospectus at the time of purchase, through hard copy or email.
b. must receive a Statement of Additional Information, if requested by the contract holder.
c. has a choice of investments, therefore this is called investment risk.
d. The annuitant bears the risk, NOT the insurance company
e. has a possible hedge against inflation if the annuity units keep up with inflation
f. has the right to vote for members if the Board of Managers and to change the investment objectives of the Separate Account. Proxies are sent to contract owners so they can exercise their right to vote.

Question 9

Annuity

Answer 9

a contract for a series of periodic payments to be made for the life of the annuitant. Annuities are frequently used as a retirement vehicle and can be purchased by individuals or employers as part of a pension plan.

Question 10

Brokerage Fee-

Answer 10

is a fee charged by broker/dealers handling Separate Account portfolio transactions. The fees are deducted from the Separate Account.

Question 11

Disability Waiver of Premium Benefits-

Answer 11

is an optional benefit with separate charges that a contract holder can purchase to ensure that premium payments will be made in the event of disability.

Question 12

Expense risk Charge

Answer 12

is a charge which an issuer can make for guaranteeing the maximum level of expenses it will incur in administering the contract.

Question 13

General Account

Answer 13

is a limited investment account established by insurance companies basically for investments to be made from insurance premiums paid. The general account is limited by laws as to what types of investments can be made in the account.

Question 14

Investment Management Fee

Answer 14

is the fee paid to oversee or manage the portfolio of securities in the Separate Account. This fee is based on the average daily net assets in the separate account.

Question 15

Minimum Death Benefit

Answer 15

is a charge for the provision that either the original investment or current value of the contract, whichever is higher, will be paid upon death during the accumulation period.

Question 16

Mortality Risk Charge

Answer 16

is a charge for the risk the issuer takes in guaranteeing payments to annuitants for life, to cover the possibility of the increasing longevity of the annuitants.

Question 17

Redemption or Surrender fee

Answer 17

is a charge for the liquidation or surrender of the contract during the accumulation period .

Question 18

Sales Charge or Sales Load

Answer 18

are charges to investors when purchase payments are made on a mutual fund or variable annuity investment. Sales Charges on variable annuities must be “ fair and reasonable”

Question 19

Separate Account

Answer 19

is an account established by an insurance company to hold the investment portfolio which supports the variable contract issued by the insurance company. It is separate from the insurance general account. Also called a sub account or investment account.

Question 20

Variable Annuity

Answer 20

is an annuity in which the account value and the periodic payments fluctuate based on the value of a investment portfolio underlying the separate Account that is selected by the annuitant.

a. Registered though the SEC
b. Regulated under the Securities Act of 1933

Question 21

Periodic Payment Deferred Annuity

Answer 21

allows investor to make monthly, quarterly, semi-annual or annual payments over a period of time at a fixed sale load.

Question 22

Single Payment Deferred Annuity

Answer 22

allows investors to make a lump sum purchase and defer the receipt of payments to a later date.

Question 23

Single Premium Immediate or Lump Sum Purchase

Answer 23

investors make one lump sum purchase and immediately begin to receive benefit payments( payments are NOT deferred)

Question 24

Life Annuity

Answer 24

investors receive regular payments until death, regardless of the investors sex or how long the investor lives

Question 25

Life Annuity -Period Certain

Answer 25

the investor will receive regular payments until death, but if the investor dies, payments would continue to be paid to the beneficiary for the remainder of a pre-determined period( ex ten years)

Question 26

Joint and Last Survivor Annuity

Answer 26

Regular payments are made to a couple and would continue to be paid until both persons die.

Question 27

Unit Refund Annuity

Answer 27

The investor or beneficiary is guaranteed the payment of set number of units( not a fixed number of dollars)

Question 28

Installments for a Period Claim

Answer 28

the investor receives a payments for a designated period and payments are then halted whether or not the investor is still living. If the investor dies prior to installment completion , their beneficiary would receive the balance of the annuitants instalments. This is NOT an annuity payout.

Question 29

Installments for a fixed amount-

Answer 29

the investor receives a fixed amount set in the contract, until the account is extinguished. This is NOT an Annuity payout.