Brainstorm a list of criteria by which you would select and prioritize projects. the state insurance commission. A fixed annuity is a contract between the policyholder and an insurance company. They can be classified by: An annuity can be classified in several of these categories at once. the state banking commission. C)not suitable because a lifetime income rider is only for someone who is already retired Your 65-year-old client owns a nonqualified variable annuity. The customer, in the accumulation stage of the annuity, is holding accumulation units. The growth portion is taxed as ordinary income. The accumulation unit's value is used to calculate the total value of the account. Question #35 of 48Question ID: 606810 The separate account performance compared to last month's performance. C)such an annuity is designed to combat inflation risk. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. Only variable annuities have payout plans that provide the client income for life. Chapter 12: Variable Annuities. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. A)II and IV. If this client is in the payout phase, how would his April payment compare to his March payment? For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? Variable annuities offer the possibility of higher returns and greater income than fixed annuities, but theres also a risk that the account will fall in value. Question #37 of 48Question ID: 606817 Deferred annuities, also referred to as investment annuities, are available in fixed . contract. regulated under both securities and insurance laws. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. used for the investment of funds paid by contract holders. Please sign in to share these flashcards. Who assumes the investment risk in a variable annuity contract? B)Two-thirds of the withdrawal is taxable as ordinary income. 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. A variable annuity is both an insurance and a securities product. When the second party dies, all payments cease. A)the number of annuity units becomes fixed when the contract is annuitized. C)number of accumulation units. The entire amount is taxed as ordinary income. An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. Future annuity payments will vary according to the separate account's performance. A separate account will invest in a number of different securities. D)variable annuities offer the investor protection against capital loss. Life annuity has the largest payout because less risk is assumed by the insurance company. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. The offers that appear in this table are from partnerships from which Investopedia receives compensation. 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. [C]The portfolio is professionally managed. Reference: 12.1.2.1.1 in the License Exam. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? 7. \hspace{5pt}\text{Drawing}&&&\\ D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. C)with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually Reference: 12.2.1 in the License Exam. An investor owning which of the following variable annuity contracts would hold accumulation units? Introducing Cram Folders! 4. For a retired person, which of the following investments would provide the greatest protection against inflation? People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. D)I and III. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. A)each annuity unit's value and the number of annuity units vary with time. A)exempt from taxes If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: Your answer, accumulation units., was correct!. All of the following statements concerning a variable annuity are correct EXCEPT: In March, the actual net return to the separate account was 8%. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. The most popular type of variable annuity is a deferred annuity. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? C)3800. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. The growth of the annuitys value and/or the benefits paid does not depend directly or entirely on the performance of the investments the insurance company makes to support the annuity. Weight the criteria. D. a majority vote from the shareholders is required to change the investment objectives. a variable annuity guarantees payments for life. A)not suitable Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. have investment risk that is assumed by the investor Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Contributions to a nonqualified variable annuity are not tax deductible. D)variable annuities. 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)annuity units. You can buy an annuity with either a lump sum or a series of payments, and the accounts value will grow accordingly. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. 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). The number of accumulation units is always fixed throughout the accumulation period. C)the yield is always higher than bond yields. C) The entire amount is taxed as ordinary income, because it is not life insurance. C)the invested money will be professionally managed according to the issuers' investment objectives. Can I Borrow from My Annuity for a House Down Payment? Reference: 12.1.1 in the License Exam. C)III and IV. A) Two-thirds of the withdrawal is taxable as ordinary income. Variable annuities are designed to combat inflation risk. C) a VA contract does not guarantee any type of return. &\textbf{Increase}&\textbf{Decrease}&\textbf{Normal Balance}\\ Please select the correct language below. Azanswer team is here with the correct answer to your question. As with most retirement account options, withdrawals before the age of 59 will result in a 10% tax penalty. D)I and IV, Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. D)II and IV. Variable Annuitization is an annuity option where income payments received by the policyholder vary based on the investment performance of the annuity. 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. used to escrow late or otherwise delinquent premium payments. These contracts cover both lives and will continue to make payments until the last spouse dies. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. First, they are complicated, as insurers use different methods to calculate the index return. A variation of lifetime annuities continues income until the second one of two annuitants dies. A)variable annuities will protect an investor against capital loss. Reference: 12.3.4 in the License Exam. 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. Question #24 of 48Question ID: 606806 If an annuitant lives longer than expected, the ins. Reference: 12.3.3 in the License Exam. the VA recommendation would not be suitable. 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. 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 A client has purchased a nonqualified variable annuity from a commercial insurance company. 1. The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. Reference: 12.3.2.4 in the License Exam. A)Fixed annuity contract with a discussion regarding purchasing power risk How is the distribution taxed? The amount that is paid depends on the age of the annuitant (or ages, if its a two-life annuity), the amount paid into the annuity, and (if its a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected payout period. Investopedia requires writers to use primary sources to support their work. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. What Are the Risks of Annuities in a Recession? A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. An investor who purchases a fixed annuity contract assumes purchasing-power risk. U.S. Securities and Exchange Commission. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: Your client owns a variable annuity contract with an AIR of 4%. D)money market funds. guarantees payments for a certain period of time. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. A)defined contribution plans. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. 8. Reference: 12.1.2 in the License Exam. Required fields are marked *. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment. How a Fixed Annuity Works After Retirement. C)earnings only and taxable Many variable annuities invest the separate account in mutual funds. C)complete all paper work to purchase the annuity contract and obtain the clients signature immediately. D)with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed, With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. features they offer rather than as an investment. You have created 2 folders. Variable Annuities. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission. Question #38 of 48Question ID: 606798 Question #17 of 48Question ID: 606802 Her intent was to use the funds for the down payment on a house after graduation. FINRA. She may choose to receive monthly payments for the rest of her life. An accumulation unit in a variable annuity contract is: Your answer, an accounting measure used to determine the contract owner's interest in the separate account., was correct!. vote on proposed changes in investment policy.