UNIT 02.02-001

Question 1

A client who purchased a variable life insurance policy is not pleased with his decision. Within the first 24 months of issue, the owner has the right to

Answer 1

convert the policy into a whole life policy using the original policy issue date.

A unique feature of variable life insurance is the ability to convert or exchange the policy into a whole life policy as of the original policy issue date for a period of no less than 24 months (two years) from the date of issue. For those insurance companies that do not offer whole life policies, the prospectus will indicate the available exchange policy, frequently universal life.

Question 2

Upon annuitization of variable annuities, holders receive the LARGEST MONTHLY PAYMENTS under which of the following payout options?

______ life

Answer 2

Straight life

A straight life payout provides the investor with the largest payments when the contract is annuitized. Cashing in, of course, cannot be done if the contract is annuitized.

Question 3

During a recession, payments from a VARIABLE annuity will most likely

Answer 3

decrease

Variable annuity contracts make annuity payments that vary with the value of securities in the separate account. Most securities held in the separate account are based on the performance of the investments in the stock market. During recessionary periods, stock market values tend to decrease; therefore, payments under a variable annuity contract are likely to decrease.

Question 4

The 1035 provision may be used to transfer funds from one policy to another in each of the following instances except

Answer 4

variable annuity to life insurance policy.

The 1035 exchange provision applies to transfers from fixed policies to variable policies and vice versa, but it may not be used to transfer from an annuity to a life insurance policy.

Question 5

All of the following statements regarding contract exchanges under Internal Revenue Code Section 1035 are true except

Answer 5

under Section 1035, an exchange can occur tax free only if it is made between policies of the same company.

Under Internal Revenue Code Section 1035, to accomplish a tax-free exchange, the approved policies do not have to be issued by the same company.

—TRUE—
policyholders can exchange a variable life policy for another variable life policy of a different company without generating any tax consequences.

permanent life insurance can be exchanged for an annuity contract without generating any tax consequence.

a fixed annuity policyholder cannot use a transfer under Section 1035 to exchange it for a life insurance policy.

Question 6

During a particular valuation period of the accumulation phase of an annuity, if the separate account has a POSITIVE investment performance rate, the value of the accumulation unit will

Answer 6

go up.

During the accumulation phase, the value of an accumulation unit changes as the current market value of the securities in the portfolio of the separate account changes. When the separate account becomes worth more, the value of the accumulation unit is worth more.

Question 7

Which of the following statements is true regarding the ANNUITY UNITS during the ANNUITIZATION period of a variable annuity contract?

The NUMBER OF UNITS _________, but the VALUE of each unit _________.

Answer 7

The NUMBER OF UNITS remains the SAME, but the VALUE of each unit CHANGES.

During the PAYOUT PHASE of variable annuities, the number of annuity units will remain the same, but the value of each unit will vary. It is important to remember that an ANNUITY UNIT is NOT the same as an ACCUMULATION UNIT.

Question 8

A variable annuity characteristic that contractually guarantees payments for life is the ________ guarantee.

Answer 8

the mortality guarantee.

The company assumes the mortality risk by guaranteeing payments for life, though the payments are not guaranteed as to amount.

Question 9

An individual who purchased an SPDA 20 years ago with an investment of $100,000 has passed the age of 59½ and is considering annuitizing his account.

At the time of the investment, the account was credited with 10,000 accumulation units.

The account is now valued at $400,000. If the annuity is annuitized, how many annuity units will be used to calculate the monthly check?

Answer 9

10,000 units

When an annuity is annuitized, the accumulation units are replaced with annuity units. Because this annuity was funded with a single premium that purchased 10,000 units, no additional units have been purchased. Therefore, when annuitized, it will have 10,000 annuity units.

Question 10

When comparing bonus or enhancement annuities with other annuities, which of the following statements are true?

Bonus variable annuities tend to have ______ ANNUAL FEES.

Bonus variable annuities generally have _____ SURRENDER CHARGE PERIODS.

Answer 10

Bonus variable annuities tend to have HIGHER ANNUAL FEES.

Bonus variable annuities generally have LONGER SURRENDER CHARGE PERIODS.

As the old saying goes, “you don’t get something for nothing.” In exchange for the up-front bonus, there is generally a longer surrender charge period, as well as somewhat higher fees.

Question 11

A nonqualified variable annuity valued at $400,000 is annuitized, and the annuitant received $220,000 in payments until his death. At his death, if his spouse received a lump-sum payment of $180,000, this example illustrates

a ____ ____ annuity.

Answer 11

a unit refund annuity.

When the unit refund option is chosen, the insurer guarantees, at minimum, to distribute the amount of money that funded the annuity. At the annuitant’s death, if the guaranteed amount has not been fully distributed, the survivor receives the balance of the account—typically, in a lump-sum payment.

Question 12

In a variable annuity, the risk of a fluctuating market is borne by

Answer 12

the annuitant.

As the stock market fluctuates, so will the monthly payments to the annuitant.

Question 13

In promoting a variable life insurance contract to a customer, which of the following statements would be permissible?

This product gives you the possibility of a greater _______ in exchange for accepting investment ______.

Answer 13

This product gives you the possibility of a greater death benefit in exchange for accepting investment risk.

Variable life insurance may be sold only as an insurance device, not as a retirement device. Under Section 1035, insurance may be exchanged for an annuity without adverse tax consequences, but not the reverse.

Question 14

Which of the following types of annuity contracts could your customer not purchase?

Single payment deferred annuity

Single payment immediate life annuity

Periodic payment immediate life annuity

Periodic payment deferred annuity

Answer 14

Periodic payment immediate life annuity

Periodic payment annuities may be purchased only on a deferred basis. Annuitization and regular payments into an annuity may not occur simultaneously.

Question 15

Your client is interested in some of the tax ramifications of investing in variable annuities. You could tell her that

PARTIAL WITHDRAWALS from nonqualified plans are taxed on a _____ (____ in, ____ out) basis.

if she is dissatisfied with one company, Section ____ of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed.

Answer 15

partial withdrawals from nonqualified plans are taxed on a LIFO (last in, first out) basis.

if she is dissatisfied with one company, Section 1035 of the Internal Revenue Code will permit her to liquidate one variable annuity and place the funds into a different one without being taxed.

Withdrawal from an annuity is taxed on a LIFO (last in, first out) basis. Section 1035 permits investors to change from one annuity to another without tax, as long as the transfer is not directly to the investor. The customer should also be warned that there may be penalties imposed by the insurance company for early withdrawal.

Question 16

Your 75-year-old customer has read many articles about variable annuities and would like you to choose one that would be appropriate for his $100,000 investment. Your customer has a well-diversified investment portfolio and is not currently in need of additional income. The most appropriate response to your customer’s request in this situation is that

Answer 16

a variable annuity is probably not a suitable investment choice because of your investor’s age and the contingent deferred sales charges that apply on withdrawals.

Although deferred growth is very attractive for many investors, the advanced age of this investor is a red flag. Seniors generally should maintain investment liquidity, which is not accomplished through a variable annuity because of contingent deferred sales charges that often continue for five to seven years.

Question 17

When discussing the benefits of a Section 1035 exchange with a client, it would be appropriate to point out that the main benefit is

Answer 17

tax savings.

Section 1035 of the Internal Revenue Code permits the exchange of one annuity for another without incurring any current tax liability. In other words, the earnings continue to be deferred until the money is actually withdrawn.

Question 18

As a new securities product, variable life insurance must be registered under

Answer 18

the Securities Act of 1933.

Because of the separate account, these contracts must be sold with a prospectus and, therefore, be registered under the Securities Act of 1933.

Question 19

An individual purchasing a FLEXIBLE PREMIUM VARIABLE LIFE contract should know which of the following?

TIMING AND AMOUNT of premiums generally are _________.

The performance of the separate account directly affects the policy’s ________.

Answer 19

TIMING AND AMOUNT of premiums generally are DISCRETIONARY.

The PERFORMANCE OF THE SEPARATE ACCOUNT directly affects the policy’s CASH VALUE.

A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met.
Depending on the policy, the face amount (death benefit) is recalculated each year.
It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed.
If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.

Question 20

In a VARIABLE LIFE ANNUITY with 10-year period certain, a contract holder receives a minimum of 10 years of ________ payments, followed by additional _________ payments for ____.

Answer 20

a minimum of 10 years of variable payments, followed by additional variable payments for life.

The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop.