Chapter 15 Annuity and Direct Participation

Question 1

Fixed versus Variable

Payout \_\_\_
Considered a security?
What type of account ? General or Separate
Who regulates
requires prospectus?

Answer 1

Fixed Annuity: Variable Annuity:
Guaranteed payout Variable payout
Not considered a security Considered a security
General Account Separate Account
Regulated by states Regulated by SEC/FINRA
No prospectus required Prospectus required

Question 2

Annuity contract sub accounts are valued in units, not share

Accumulation units X NAV = Contract Value

Answer 2

s

Question 3

1035 Exchange
Provision in the tax code which permits the direct transfer of one annuity contract for another without creating a taxable event

No check issued to client

Charges from insurance company may be levied

Answer 3

Justifications:

Circumstances or investment goals change

Dissatisfied with insurance company

Red Flag Alert:

Frequent 1035 Exchanges may be an indication of churning

Question 4

DPPs –Introduction
Direct Participation Program

Definition:

A business venture designed to pass through both income and losses to investors

Examples: Limited Partnerships, General Partnerships, Subchapter S Corporations, and Joint Ventures

Answer 4

Those considering DPPs as a potential investment should:

Have liquidity in other investments

Have a need for both present and future tax benefits

Be aware of the risks involved

Be able to tie up funds for a long period of time

Question 5

Subscription Agreement
Suitability determination is accomplished via this document and will state the following:

Purchaser has read the prospectus (or offering memorandum) and understands the risks

Purchaser has met the net worth, income and suitability requirements

To whom the check is made payable

Answer 5

Limited Partners are not accepted until the General Partner signs

Question 6

1. In a fixed annuity what happens

Answer 6

• insurance co assumes investment risk
• ins co makes the investment
• ins co guarantees a min annual return
• ins co invests owners net payments in a general account

NOT invest the contract owners net payments in a separate account

Question 7

15-2 old lady should purchase a what type of annuity to protect against inflation

Answer 7

variable annuity

Question 8

15-3 Fluctuations in the value of a variable annuity will correspond with the fluctuation in the

Answer 8

Value of the securities held in the separate account of the annuity

Question 9

15-4 Advantages of variable annuity against fixed are

Answer 9

• protection over inflation

- Ability to vote regarding changes in investment policy and elect invest managers

Question 10

15-5 Value of annuity owner’s account during the accumulation period is

Answer 10

I the amount of money that the contract owner pays into annuity
II performance of the portfolios that make up the subaccounts

NOT
performance of ins cos stock in market
not AIR (annuity’s assumed IR)

Question 11

For a variable annuity, Assumed Interest Rate (AIR) is:

Answer 11

c. A bench mark rate of return that an insurance company uses to determine the annuitant’s payout

Question 12

15-7 A grandpa wants to buy an annuity for son 45 and grandson 15 what is best

Answer 12

b. joint and last survivor annuity

in this option benefit payments are made to both people in joint account then to the survivor, as long as the survivor lives

Question 13

A loss from a limited partnership is passed through to a limited partner.

on the limited partner’s tax return this loss is

Answer 13

b. is considered a passive loss and may only be deducted against passive income

Question 14

Sources of risk in a limited partnership are all EXCEPT

a. possible loss of capital
b. management ability of general partner
c. change in tax laws and gov reg
d. unlimited liab

Answer 14

d. unlimited liab

Question 15

15- 10 A limited partnership investing in raw land would be most interested in :

Answer 15

c. Long-term capital gain due to appreciateion