Chapter 24 (2 Questions from this Unit)

Question 1

annuity

Answer 1

a contract between an individual and a life insurance company, usually purchased for retirement income.

Question 2

fixed annuity

Answer 2

1. guarantees a fixed rate of return
2. the payout is determined by the account’s value and the annuitant’s life expectancy based on mortality tables
3. A fixed annuity payout remains constant throughout the annuitant’s life
4. not an investment in and of itself
5. Investment risk assumed by insurance company
6. Portfolio of fixed-income securities and mortgages
7. Insurance and securities regulation

Question 3

Variable Annuitiy

Answer 3

1. monthly payout varies
2. money deposited in a variable annuity is directed into one or more subaccounts of the company’s separate account
3. Investment risk assumed by annuitant
4. Portfolio of equities, debt, money market instruments
5. Resistant to inflation
6. Insurance and securities regulation
7. A variable annuity offers an investor the opportunity to have tax-deferred participation in the equity markets, albeit with expenses that are generally higher than for a mutual fund with a similar objective.

Question 4

separate account

Answer 4

The contributions that investors make to a variable annuity are kept in a separate account from the insurance company’s general funds

Question 5

True or False: Both mutual funds and variable annuities are redeemable by the issuer

Answer 5

True

Question 6

True or False: A fixed index annuity is not a security and does not require a securities license to be able to sell it.

Answer 6

True

Question 7

Index Annuity

Answer 7

sometimes called an equity index annuity or a fixed index annuity:
1. Unlike a traditional fixed annuity, an index annuity credits interest to the owner’s account using a formula based on the performance of a particular stock index such as the S&P 500
2. If the index does well, the annuitant is credited with a specified percentage of the growth of the index—typically 80% or 90% of the growth. This is known as the participation rate
3. Has a Cap Rate- Typically around an 8% cap
4. Longer surrender charge periods

Question 8

participation rate

Answer 8

a specified percentage of growth, typically 80% or 90% of the growth credited to an annuitant owning an Index Annuity (equity index annuity/Fixed Index Annuity)

Question 9

Index Annuity Growth Credit: Annual Reset

Answer 9

the interest to be credited to the account is computed by comparing the index value at the end of the year to the value at the beginning of the year (hence the term annual). Annual reset generally has a lower participation rate than point-to-point.

Question 10

Index Annuity Growth Credit: High-water mark

Answer 10

the highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year. This option can provide the greatest gain.

Question 11

Index Annuity Growth Credit: Point-to-point

Answer 11

the interest is computed based on the value of the index at the end of the contract compared to the beginning.

Question 12

Index Annuity Growth Credit: Averaging

Answer 12

The most common is a monthly average, and this can be the best option when markets are expected to be highly volatile.

Question 13

Cap Rate

Answer 13

Index annuities have a cap on the amount a rate can return (cap rate depends on specific product details) usually around 8%

Question 14

True or False: When withdrawing funds from an annuity, there are no tax consequences

Answer 14

FALSE: During the accumulation period, taxes on earnings are deferred so when that money finally comes out, the IRS wants its cut
-if the money comes out too early, just as with retirement plans, there is the possibility of a 10% tax penalty.

Question 15

True or False: When withdrawing funds from an annuity, there are tax consequences

Answer 15

True

Question 16

single-premium deferred annuity

Answer 16

may be purchased with a single lump-sum investment (with payout of benefits deferred until the annuitant elects to receive them).

Question 17

Periodic Payment Deferred Annuity

Answer 17

allows a person to make periodic payments. The contract holder can invest money on a monthly, quarterly, or annual basis (with payout of benefits deferred until the annuitant elects to receive them).

Question 18

Accumulation Stage

Answer 18

The pay-in period for a deferred annuity. During the accumulation stage of an annuity contract, the contract terms are flexible. An investor who misses a periodic payment is in no danger of forfeiting the preceding contributions

Question 19

True or False: there is no accumulation period for an immediate annuity

Answer 19

True

Question 20

True or False: The contract holder can terminate the contract at any time during the accumulation stage, although the contract holder is likely to incur surrender charges on amounts withdrawn in the first 5 to 10 years after issuance of the contract.

Answer 20

True

Question 21

Accumulation Units

Answer 21

an accounting measure that represents an investor’s share of ownership in the separate account

Question 22

Immediate Annuity

Answer 22

purchased by depositing a single lump sum. The insurance company begins to pay out the annuity’s benefits immediately—usually within 60 days. Unlike deferred annuities, there is no accumulation stage, so there are no accumulation units. The deposit acquires annuity units only.

Question 23

Bonus Annuities

Answer 23

a “bonus” on top of the investor’s initial contribution of an additional percentage. Usually bonus annuities have surrender charges lasting longer than those without a bonus

Question 24

What does it mean to Annuitize a contract?

Answer 24

withdraw the accumulated funds periodically. Annuitizing occurs when the investor converts from the accumulation (pay-in) stage to the distribution (payout) stage

Question 25

Life Annuity/Straight Life/Pure Life

Answer 25

the payout is structured so that the annuitant receives periodic payments (usually monthly) until death. No added options or benefits exist; therefore, for a given amount of funds, this option provides the largest periodic payment.

Question 26

Life Annuity with Period Certain

Answer 26

an annuitant receives payments for life, with a certain minimum period guaranteed. If the annuitant dies before the period certain expires, payments continue to the annuitant's named beneficiaries for the period certain. If the annuitant lives beyond the period certain, payments continue until the annuitant's death.

Question 27

Joint Life with Last Survivor Annuity

Answer 27

With this option, the annuity covers two or more people, and the payout is conditioned on both (all) lives.

Question 28

Refund Annuity

Answer 28

Sometimes referred to as a unit refund annuity, under this settlement option, payments will continue after death of the insured until the full value of the initial premium (principal) has been returned. In some cases, the payment to the beneficiary will be a lump sum of cash, and in others, a series of monthly payments.

Question 29

Mortality Guarantee

Answer 29

Annuity companies guarantee payments for as long as annuitants live. If a change occurs in life expectancy and annuitants live longer than originally anticipated, the insurance companies assume the increased mortality cost—the mortality guarantee

Question 30

Annuity Units

Answer 30

a measure of value used only during an annuitized contract's payout period.

Question 31

Assumed Interest Rate (AIR)

Answer 31

a basis for determining distributions from a variable annuity. The rate, usually estimated conservatively, provides an earnings target for the separate account. if the actual earnings exceed the AIR, the annuity payments increase; if they fall short of the AIR, the payments decrease

Question 32

True or False: Contributions to an annuity that is not part of an employer-sponsored retirement plan (qualified annuities) are made with after-tax dollars (nonqualified).

Answer 32

True: all annuities are nonqualified unless stated to the contrary

Question 33

True or False: Random and full withdrawals from annuity contracts are taxed under the last in, first out (LIFO) method.

Answer 33

True: remember, all annuities are nonqualified unless stated to the contrary

Question 34

When does the 10% Early Withdrawal Penalty not apply (3 Exceptions)?

Answer 34

1. if funds are withdrawn after ages 59.5 2. withdrawn due to death or disability 3. if withdrawal is part of a life-income option plan with fixed payouts (If the contract is annuitized)

Question 35

True or False: Even when the distribution is from a nonqualified annuity, if it is made before the age of 59½, it is subject to the 10% additional tax (unless it meets one of the 3 exceptions)

Answer 35

True

Question 36

exclusion ratio

Answer 36

expresses the percentages of the annuity's value upon annuitization of contribution basis to the total.

Question 37

After the death of the annuitant, beneficiaries under a life and 15-year period certain option are subject to what?

Answer 37

ordinary income taxation on the amount of the payout that exceeds the cost basis based on the exclusion ratio

Question 38

True or False: Anytime there is an insurance product with the word variable in the name, it is a security. Otherwise, it is not.

Answer 38

TRUE!!!

Question 39

Term Insurance

Answer 39

is protection for a specified period, hence the description "term." Term insurance provides pure protection and is the least expensive form of life insurance. TEMPORARY, only pays death benefit if insured dies under term of coverage, do not accumulate cash value, level death protection, and new premiums always increase

Question 40

True or False: younger people with children are better off purchasing term insurance because the lower premiums allow significantly more protection. For those age 60 and older, the rates are generally prohibitive.

Answer 40

True

Question 41

Whole Life Insurance (WLI)

Answer 41

Provides protection for the whole of life. Coverage begins on the date of issue and continues to the date of the insured's death, provided the premiums are paid. The benefit payable is the face amount, or face value, of the policy, which remains constant throughout the policy's life. The premium is set at the time of the policy's issue and it, too, remains level for the policy's life.

Question 42

WL cash surrender value

Answer 42

whole life insurance combines a death benefit with an accumulation, or a savings element. This accumulation, commonly referred to as the policy's cash surrender value

Question 43

WL Policy Loans

Answer 43

An insured may also borrow a portion of the cash value in the form of a policy loan, but this must be paid back (with interest) in order to restore policy values

Question 44

True or False: If the insured dies before the Whole life Policy loan has been repaid, any indebtedness will reduce the face amount of the policy accordingly—it will be subtracted from any death benefit.

Answer 44

True

Question 45

WL Policy Dividends

Answer 45

1) not the same as other security dividends 2) Policy Dividends from a Whole Life Insurance Policy are the return of excess premiums charged on the policy 3) These dividends are not taxable

Question 46

Universal Life

Answer 46

1) might pay higher interest rates (such as 8%, 10%, or even 12%) during inflationary times. 2) These policies also provide greater flexibility, because they allow policy owners to adjust the death benefits and/or premium payments based on their current needs assessment. 3) similar to a whole life policy in the sense that it has the same two components—death protection and cash value 4) However, instead of being fixed and guaranteed amounts, the death protection resembles one-year renewable term insurance, and the cash value grows according to current interest rates.

Question 47

-Premium payments are separated: the first is paid toward the insurance protection, the second is the remaining balance being used to build the cash value (with interest). -The policy owner may increase or decrease the death benefit during the policy term, subject to any insurability requirements. -Premium amounts may be changed as long as enough premium is paid to maintain the policy. This is why this type of life insurance is known as flexible premium life. In fact, it is even possible to skip premium payments as long as there is sufficient cash value in the policy to keep it in force. -The interest earned by the cash account will vary, subject to a guaranteed minimum. -This type of life insurance is not a security unless states that it is Variable

Answer 47

Characteristics of Universal Life

Question 48

Characteristics of Universal Life

Answer 48

-Premium payments are separated: the first is paid toward the insurance protection, the second is the remaining balance being used to build the cash value (with interest). -The policy owner may increase or decrease the death benefit during the policy term, subject to any insurability requirements. -Premium amounts may be changed as long as enough premium is paid to maintain the policy. This is why this type of life insurance is known as flexible premium life. In fact, it is even possible to skip premium payments as long as there is sufficient cash value in the policy to keep it in force. -The interest earned by the cash account will vary, subject to a guaranteed minimum. -This type of life insurance is not a security unless states that it is Variable

Question 49

Universal Life Interest Rates: Current Annual Rate

Answer 49

varies with current market conditions and may change every year.

Question 50

Universal Life Interest Rates: Contract rate

Answer 50

As the minimum guaranteed interest rate, and the policy will never pay less than that amount.

Question 51

Option A Death Benefit

Answer 51

Universal Life Death Benefit provides a level death benefit equal to the policy's face amount.

Question 52

Option B Death Benefit

Answer 52

Universal Life Death Benefit provides for an increasing death benefit equal to the policy's face amount plus the cash account. In terms of policy structure, this contract is more like a combination of level term insurance and increasing cash value than whole life insurance.

Question 53

Variable Life Insurance

Answer 53

in a variable life insurance (VLI) policy, the general account receives an amount equal to the actual cost of the life insurance, and the portion in excess of that is invested in a separate account BUT **The separate account has a number of subaccounts with varying objectives, giving the insured some choice from highly aggressive (think mostly common stock) to highly conservative (think bonds and money market instruments).*** The purpose is to let the customer assume some investment risk in an attempt to get inflation protection for the policy's death benefit.

Question 54

True or False: Variable life policies provide policy owners with a minimum guaranteed death benefit

Answer 54

TRUE -The benefit may increase above this minimum amount depending on investment results but may never fall below.

Question 55

Flexible Premium Variable Life (Universal)

Answer 55

-flexible premiums (and thus a flexible death benefit) -Premiums are invested only in a separate account, and there is only a variable death benefit. -The insured has the option to increase, skip, or reduce premium payments, though he must maintain a minimum cash value, and the death benefit is adjusted appropriately.

Question 56

Scheduled (Fixed) Premium Variable Life

Answer 56

-A scheduled-premium (or fixed-premium) VLI contract is issued with a minimum guaranteed death benefit. -(The premiums for some variable life contracts are flexible; this is discussed next under variable universal life.) -A scheduled-premium VLI contract's death benefit is determined at issue, and evidence of insurability is required. -The premium is calculated according to the insured's age and sex and the policy's face amount (guaranteed amount) at issue. -Once the premium has been determined and the expenses have been deducted, the net premium is invested in the separate account's subaccount(s) the policyowner selects.

Question 57

The charges deducted from the gross premium are:

Answer 57

SAS: Sales load; Administrative fee; and State premium taxes. Any other charges, such as cost of insurance, expense risk fees, and investment management fees, are deducted from the net premium, which is invested in the separate account.

Question 58

Variable Life Insurance Death Benefit (consists of two parts)

Answer 58

1) a guaranteed minimum provided by the portion of funds invested in the general account and 2) a variable death benefit provided by those invested in the separate account.

Question 59

Variable Life Insurance Cash Value

Answer 59

The policy's cash values reflect the investments held in the separate account. Unlike the death benefit, the individual policy's cash value must be calculated at least monthly.

Question 60

death benefits on variable life policies are calculated________.

Answer 60

Annually.

Question 61

cash values on variable life policies are calculated __________.

Answer 61

Monthly.

Question 62

Separate Account Unit Values on variable life policies are calculated __________.

Answer 62

Daily.

Question 63

How long does a client need to wait before taking a loan on the cash value of their variable annuity?

Answer 63

3 Years of In-Force. Until a variable life policy is in force for a minimum of 3 years, there is no requirement to make the loan provision available. Once the 3-year mark is reached, that minimum becomes 75% of the computed cash value.

Question 64

Bob, age 60, has invested $17,000 in his nonqualified variable annuity over the years. The total value has reached $26,000. He wishes to withdraw $15,000 to send his son to college. What is his tax consequence on the withdrawal?

Answer 64

$9,000 is taxable; $6,000 is nontaxable: Nonqualified- $17K is invested in after tax dollars. that taxable $9,000 is taxable; $6,000 is nontaxable portion is considered to be withdrawn first in any lumpsum distribution (LIFO). Therefore the first dollars withdrawn are all taxable until the amount of withdrawal meets or exceeds the growth of the account. No 10% penalty bc bob is over 59 1/2 years old

Question 65

One of your customers owns an index annuity. The percentage of the index's return the insurance company credits to the annuity is determined by

Answer 65

the participation rate

Question 66

Life insurance is generally purchased to replace the lost income of the insured. A client wishing to purchase a policy with a level death benefit and level premium for as long as the premiums are paid would choose

Answer 66

a whole life policy.

Question 67

Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are ______.

Answer 67

flexible.

Question 68

Qualified

Answer 68

Pre Tax Dollars

Question 69

What type of premium life contract has discretionary timing and amount of premiums and performance of the separate account that directly affects the policy's cash value

Answer 69

Flexible Premium Variable Life Contract

Question 70

high-water crediting method

Answer 70

interest is calculated using the highest value of the index during the term. used when underlying index is volatile

Question 71

A variable life insurance plan may include a maximum sales charge of ____ over a period not to exceed _____ years.

Answer 71

9% over a period not to exceed 20 years

Question 72

variable annuity expenses are ______ than those of a mutual fund with similar objectives.

Answer 72

Higher

Question 73

One way in which universal life and variable life are similar is that both

Answer 73

permit loans against the cash value

Question 74

Surrender charges never apply in the case of _______.

Answer 74

a death benefit.