Unit 24

Question 1

Principal differences of variable annuities from mutual funds (3)

Answer 1

1. Insurance company product
2. Units instead of shares
3. Some guarantees

Question 2

Longevity risk

Answer 2

The uncertainty that one will outlive their money

Question 3

Why IRS Section 1035 exchanges allow for

Answer 3

One annuity to be exchanged into another with tax consequences

Question 4

3 advantages of variable annuities over mutual funds

Answer 4

1. No age 73 restrictions
2. No contribution limits
3. No probate (Assets pass directly to beneficiary)

Question 5

Main disadvantages of variable annuities as compared to mutual funds (3)

Answer 5

1. Earnings taxed as ordinary income
2. Withdrawals prior to 591/2 equal 10% penalty
3. Most variable annuities carry a conditional deferred (surrender) sales charge

Question 6

When comparing mutual funds and variable annuities, what is true of expense ratio?

Answer 6

Higher for variable annunities

Question 7

The purchaser can be offered the following choices as to how growth in the underlying index will be credited in the form of interest to the account (4)

Answer 7

1. Annual reset
2. High-water mark
3. Point-to-point
4. Averaging

Question 8

Annual reset crediting method

Answer 8

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

Question 9

High-water mark crediting method

Answer 9

The highest value reached by the index between anniversary dates of the annuity is compared to the value at the beginning of the year (provides greatest gain)

Question 10

Point-to-point crediting method

Answer 10

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

Question 11

Single-premium deferred annuity

Answer 11

When annuity is purchased with a single lump-sum investment

Question 12

If an investor misses a periodic payment in the accumulation stage of an annuity, what happens?

Answer 12

Nothing, he is no danger of forfeiting previous contributions

Question 13

Immediate annuity

Answer 13

Contract where investor deposits lump sum and receives payout benefits immediately

Question 14

When annuitizing occurs

Answer 14

When investment converts from accumulation stage to distribution stage

Question 15

Straight life payout option

Answer 15

Annuitant receives periodic payments (usually monthly) until death, gives largest payment

Question 16

Life annuity with period certain

Answer 16

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.

Question 17

Joint Life with Last Survivor Annuity

Answer 17

Annuity that covers two people, usually married, paid as long as one of the annuitants is alive

Question 18

Refund Annuity

Answer 18

Payments will continue after death of the insured until the full value of the initial premium (principal) has been returned.

Question 19

Mortality Guarantee

Answer 19

Guarantees payout for as long as annuitant lives

Question 20

What any earnings withdrawals are taxed as

Answer 20

Ordinary income

Question 21

Are any contributions taxed?

Answer 21

No

Question 22

Synonym terms for whole life

Answer 22

Ordinary life, straight life

Question 23

If the policyowner decides to stop paying the premiums, the policyowner may… (3)

Answer 23

1. Surrender the policy for its cash value
2. Take a reduced paid-up policy where the death benefit is decreased and future premiums are no longer required
3. Take extended term insurance

Question 24

Current annual rate in universal life

Answer 24

Varies with current market conditions and may change every year

Question 25

Contract rate in universal life

Answer 25

Minimum guaranteed interest rate, and the policy will never pay less than that amount

Question 26

3 advantages of universal life

Answer 26

1. The ability to adjust the amount of premium payments 2. The ability to change the death benefit amount 3. When the cash value is sufficient, no premium payment is required

Question 27

Variable life insurance

Answer 27

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.

Question 28

Universal variable life insurance

Answer 28

type of variable life insurance with flexible premiums where premiums are invested in a separate account

Question 29

Charges deducted from the gross premium

Answer 29

1. Sales load 2. Administrative fee 3. State premium taxes

Question 30

How much of the cash value must be available for a policy loan after the policy has been in force for three years?

Answer 30

75%

Question 31

Is the insurer is required to loan 100% of the cash value from variable life policy loans

Answer 31

No

Question 32

When cash value is reduced by the amount of the loan, what happened

Answer 32

The insured surrendered the contract

Question 33

Unique feature of variable life insurance

Answer 33

Right to exchange a VLI contract for a form of permanent insurance issued by the company with comparable benefits (usually whole life)

Question 34

Two testable facts about contract exchange provision

Answer 34

1. The contract exchange provision must be available for a minimum of twenty-four months 2. No evidence of insurability is required for the exchange

Question 35

Contract holders receive one vote per what dollar amount of cash value

Answer 35

$100

Question 36

How long a variable life policy must be in force for before loan provision can be made available

Answer 36

3 years

Question 37

What describes the relationship between annuity units and their value during the payout period of a variable annuity?

Answer 37

Number of units remains constant, but unit value varies

Question 38

Which term policy always has the lowest initial premium

Answer 38

Annual renewable term

Question 39

Which policy generally offers no cash value and is not tied to the stock market

Answer 39

Term life insurance

Question 40

Variable annuity greatest strength and weakness

Answer 40

Strength: Potential to keep with inflation Weakness: Lack of guarantees

Question 41

What is guaranteed by a variable life policy

Answer 41

Minimum death benefit

Question 42

What annuitization guarantees

Answer 42

Income that will last for the client’s lifetime

Question 43

Maximum sales charge of a variable life insurance plan

Answer 43

9% averaged over 20 years