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If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? The growth portion is taxed as ordinary income. In the first year, you decide to withdraw $50,000. A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of sub accounts. Based on the client's profile, which of the following would be the best recommendation? Distributions from nonqualified variable annuities are: Your 55-year-old client owns a nonqualified variable annuity. Money in a variable annuity is invested in a fundlike a mutual fund but one open only to investors in the insurance companys variable life insurance and variable annuities. When the annuitization option is selected, each payment represents both capital and earnings. Reference: 12.3.2.1 in the License Exam. & securities licenses. The customer, in the accumulation stage of the annuity, is holding accumulation units. A variable annuity's separate account is: The separate account is used for both variable life insurance and variable annuity investments. by jmacewe, Variable annuities are riskier than fixed annuities because the underlying investments may lose value. In this case, the investor is taking a lump-sum distribution before reaching age 59- and must pay an additional 10% penalty on the taxable amount. Your answer, waiver of premium, was correct!. While variable annuities have greater potential for earnings, since their interest rate rises and falls with their underlying investments, they can lose money. The accumulation period of a variable annuity may continue for many years. Flexible premium annuities are only deferred annuities; that is, they are designed to have a significant period of payments into the annuity plus investment growth before any money is withdrawn from them. The time period depends on how often the income is to be paid. Some fixed annuities credit a higher interest rate than the minimum, via a policy dividend that may be declared by the companys board of directors, if the companys actual investment, expense and mortality experience is more favorable than was expected. If an annuitant lives longer than expected, the ins. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. Which is it? Guaranteed Lifetime Annuity: How They Work, When They Pay You, Life Annuity: Definition, How It Works, Types, This is also generally true of retirement plans. The annuity has grown to value of $60,000. How Are Nonqualified Variable Annuities Taxed? Therefore, variable annuities must be registered with the state insurance commission and the SEC. A)the number of annuity units becomes fixed when the contract is annuitized. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. The separate account is NOT likely to invest in: The earnings on dollars invested into a variable annuity accumulate tax-deferred, which is why variable annuities are popular products for retirement accumulation. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. co. actuaries. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero Variable annuities grow tax-deferred, so you dont have to pay taxes on any investment gains until you begin receiving income or make a withdrawal. Reference: 12.3.3 in the License Exam. VAs, blue chip mutual fund portfolios, ETFS & ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client. Who assumes the investment risk in a variable annuity contract? Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. A)I and IV. 4.5 Variable Products Flashcards | Chegg.com must provide full and fair disclosure. A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. B)part earnings and part cost basis B)reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. The # of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. "Variable Annuities: What You Should Know," Page 6. The fund has a particular investment objective, and the value of the money in a variable annuityand the amount of money to be paid outis determined by the investment performance (net of expenses) of that fund. Variable Annuities: A Good Retirement Investment? Deferred annuities, also referred to as investment annuities, are available in fixed or variable forms. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. have investment risk that is assumed by the investor All of the following statements regarding variable annuities are true EXCEPT: Her intent was to use the funds for the down payment on a house after graduation. C)annuity units. Fixed Annuity, Retirement Annuities: Know the Pros and Cons. C)II and IV. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. \hspace{5pt}\text{Capital}&\text{Credit}&&\\ The amount that is paid doesnt depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if its a fixed annuity) an interest rate that the insurance company believes it can support for the length of the payout period. A)unsuitable because the return on something as conservative as a variable annuity tends to be low. C)the number of annuity units is fixed, and their value remains fixed. A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant. A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as. In recent years, annuity companies have created various types of floors that limit the extent of investment decline from an increasing reference point. D)partially a tax-free return of capital and partially taxable. Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example, Present Value of an Annuity: Meaning, Formula, and Example, Future Value of an Annuity: What Is It, Formula, and Calculation, Calculating Present and Future Value of Annuities, Annuity Table: Overview, Examples, and Formulas, Present Value Interest Factor of Annuity (PVIFA) Formula, Tables. The holder of a VA receives the largest monthly payments under which of the following payout options? C)Keogh plans. D)II and III. You have created 2 folders. All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: a. the return to investors is dependent on the performance of the securities in the underlying portfolio b. the investment company act of 1940 is the regulating legislation c. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made d. the . A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 1. a VA guarantees an earnings rate of return, 2. a VA does not guarantee an earnings rate of return, 4. a VA does not guarantee payments for life. An annuity is an insurance product that promises to pay out income at a future date based on invested funds. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. All Rights Reserved. Distribution can take place before or during any solicitation for sale. Must precede every sales presentation. They can be classified by: An annuity can be classified in several of these categories at once. It may decrease in value. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? D)the rate of return is determined by the underlying portfolio's value. C)insurance companies keep variable annuity funds in separate accounts from other insurance products. the state banking commission. With a fixed annuity, by contrast, the insurance company assumes the risk of delivering whatever return it has promised. required to be located off of the company's premises. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. The # of annuity units is fixed at the time of annuitization, 4. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. A client has purchased a nonqualified variable annuity from a commercial insurance company. Question #25 of 48Question ID: 606819 The annuity unit's value represents a guaranteed return. How Good of a Deal Is an Indexed Annuity? Question #1 of 48Question ID: 606828. Universal variable life policies are ins. A)II and III. The accumulation unit's value is used to calculate the total value of the account. A) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children, D) Age 56, available cash to invest, makes the max retirement plan contributions to an existing IRA & 401K plan. D. a majority vote from the shareholders is required to change the investment objectives. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. [C]The portfolio is professionally managed. VA contracts must be sold by prospectus due to the characterization of the separate accounts as securities, which must be registered under the Securities Act of 1933 & the Investment Co. Act of 1940. A)the state banking commission. CAV would consider the date from which interest begins to accrue on the bond (the dated date), the bond's maturity date, and the bonds original offering yield. These include white papers, government data, original reporting, and interviews with industry experts. Variable Annuities. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? D)variable annuities offer the investor protection against capital loss. What Are the Biggest Disadvantages of Annuities? Options. C)II and IV. B) a VA contract is not required to be sold by prospectus because it is an ins. \text{Income statements accounts:}&&&\\ Your 65-year-old client owns a nonqualified variable annuity. Premiums made into the annuity purchase accumulation units, c. The separate account provides for a guaranteed minimum return, d. Each month the payment will increase, decrease, or remain the same as the previous months payment based on the actual return as compared to the assumed interest rate (AIR). A)number of annuity units. Your customer, still working, informs you that she will be funding a variable annuity you have recommended from 2 sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another variable annuity that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. A prospectus for a variable annuity contract: If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? C)the yield is always higher than bond yields. Single premium annuities A single premium annuity is an annuity funded by a single payment. Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities. If an ins. Typically, they allow one withdrawal each year during the accumulation phase. a variable annuity guarantees an earnings rate of return. The separate account is used for both variable life insurance and variable annuity investments. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. d. regulated under both securities and insurance laws. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. There are two elements that contribute to the value of a variable annuity: the principal, which is the amount of money you pay into the annuity, and the returns that your annuitys underlying investments deliver on that principal over the course of time. The accumulation unit's value is used to calculate the total value of the account. Reference: 12.1.2.1.1 in the License Exam. Among annuities, variable annuities differ from fixed annuities, which provide a specific and guaranteed return. The separate account is NOT likely to invest in: Your answer, municipal bonds., was correct!. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. All of the following are traits of a Fixed Annuity, except:AThe purchasing power of a fixed dollar benefit amount decreases as the cost of living increasesBThe insurer's general account assets guarantee the fixed annuity contractCThe insurer bears any investment riskDThe actual rate of interest credited will be based on the state-published The offers that appear in this table are from partnerships from which Investopedia receives compensation. A)II and IV. Fixed annuities typically earn at a lower, stable rate. In deciding whether to put money into a variable annuity versus some other type of investment, its worth weighing these pros and cons. continues payments as long as one annuitant is alive. Your email address will not be published. C. variable annuities will protect an investor against capital loss. Azanswer team is here with the correct answer to your question. Your client owns a variable annuity contract with an AIR of 4%. A customer has a nonqualified variable annuity. Reference: 12.1.2 in the License Exam. People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. He makes the following four statements, all of which are true EXCEPT As with all tax-deferred accounts, muni bonds are not appropriate investments because interest earned on munis is already tax exempt at the federal level. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: the producer is responsible for providing the applicant a summary of coverage that includes all of the following EXCEPT. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. B)II and III. Reference: 12.1.2 in the License Exam. She may choose to receive monthly payments for the rest of her life. This withdrawal flexibility is achieved by adjusting the annuitys value, up or down, to reflect the change in the general level of interest rates from the start of the selected time period to the time of withdrawal. The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. What Are the Risks of Annuities in a Recession? used to escrow late or otherwise delinquent premium payments. The holder of a variable annuity receives the largest monthly payments under which of the following payout options? Under rebalancing, investors shift their investments periodically to return them to the proportions that represent the risk/return combination most appropriate for the investors situation. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: A)the client assumes the investment risk. Your answer, Purchasing power risk., was correct!. Investopedia does not include all offers available in the marketplace. 5. All of the following are characteristics of Variable Annuity contracts EXCEPT The possibility of higher returns and greater income than fixed annuities, but there's also a risk that the account will fall in value D) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59- years old. C)I and IV. B)I and IV. approve changes in the plan portfolio.3. Sub accounts and mutual funds are conceptually. They are also riddled with fees, which can cut into profits. If this client is in the payout phase, how would his April payment compare to his March payment? This recommendation is: The tax on this is $2,800 ($10,000 x 28%). Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Copyright 2023, Insurance Information Institute, Inc. Question #29 of 48Question ID: 606831 C) Life annuity with 10 year period certain. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. B)variable annuities are classified as insurance products. The investor purchased accumulation units. A registered representative recommends a variable annuity with an income rider to a client. Reference: 12.1.1 in the License Exam. He must ensure that the client, in addition to meeting suitability requirements, is aware of all of the following EXCEPT: A) a VA contract will provide a fluctuating monthly check upon the annuitization of the contract. However, they are protected by state guaranty associations in the event that the insurance company providing the product goes out of business. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. vote for the investment adviser.4. Reference: 12.1.4.1 in the License Exam. D)II and III. Immediate life annuity with 10-year period certain. holder lives longer than expected, 4. a life ins. What Are Ordinary Annuities, and How Do They Work (With Example)? She will receive the annuity's entire value in a lump-sum payment. The # of VA accumulation units can rise during the accumulation period when additional units are being purchased. Variable Annuity: Definition and How It Works, Vs. Fixed Annuity If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased. If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be MOST suitable? With variable annuities, the rate of returnand therefore the value of your investmentmight go up or down depending on the performance of the stock, bond and money market funds that you choose as investment options. D)I and III. You can tailor the income stream to suit your needs. Registration with FINRA is de factor registration with the SEC; no registration is required by the state banking commission. D)Variable annuity. a variable annuity does not guarantee an earnings rate of return. C)Life annuity. Annuities are financial products intended to enhance retirement security. Required fields are marked *. A)variable annuities may only be sold by registered representatives. However, a discussion should occur regarding the risks that are associated with a fixed annuity; purchasing power risk. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. C)100% tax deferred. Individuals are reducing their overall risk, because only part of the money is being put in each investment. Fixed vs. Variable Annuities: Key Differences - Yahoo Finance U.S. Securities and Exchange Commission. The accumulation period of a variable annuity may continue for many years. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. A separate account will invest in a number of different securities. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount. Please select the correct language below. Variable annuities are designed to combat inflation risk. D)I and III. Once a variable annuity has been annuitized: Question #18 of 48Question ID: 606827 What is her total tax liability? Annuities are similar to other forms of investing in that the owner invests money with the hope that it will gain in value, but annuities also come with higher fees than most mutual funds. D)I and II. 1. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). 1. have investment risk that is assumed by the investor, 3. can be sold by someone with only an insurance license, 4. are purchased primarily for their insurance features. An investor owning which of the following variable annuity contracts would hold accumulation units? Question #26 of 48Question ID: 606811 Reference: 12.3.2.4 in the License Exam. D)II and III. D)variable annuities. B. variable annuities offer the investor protection against capital loss. used for the investment of funds paid by contract holders. C)Mortality risk. Only variable annuities have payout plans that provide the client income for life. The earnings are taxable but the cost basis is returned tax free.