Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? For a retired person, which of the following investments would provide the greatest protection against inflation? Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? Most variable annuities are structured to offer investors many different fund alternatives. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. The holder of a VA receives the largest monthly payments under which of the following payout options? Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. Generally the most that creditors can access is the payments as they are made, since the money the annuity owner gave the insurance company now belongs to the company. Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short period of time is not suitable. In these regards, the low interest rate environment in the US market, in spite of the slight interest rate rise in 2017, has eroded the investment income of Use LEFT and RIGHT arrow keys to navigate between flashcards; Use UP and DOWN arrow keys to flip the card; An investor who has purchased a nonqualified variable annuity has the right to: 1. vote on proposed changes in investment policy.2. Question #14 of 48Question ID: 606823 If an investor has purchased an immediate variable annuity, which of the following statements best describe the investment? For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. Once annuitized, the number of annuity units does not vary. All of the following statements about variable annuities are true EXCEPT: If the customer takes a withdrawal of $10,000, what are the tax consequences? are purchased primarily for their insurance features The # of annuity units is fixed at the time of annuitization, 4. A variation of lifetime annuities continues income until the second one of two annuitants dies. All of the following statements concerning a variable annuity are correct EXCEPT: A) The fact that the annuity payment may increase or decrease. vote on proposed changes in investment policy. C)I and IV. You dont have to worry about it anymore. B)II and III. We also reference original research from other reputable publishers where appropriate. B)4200. Question #46 of 48Question ID: 606796 The investor purchased accumulation units. This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. C)number of accumulation units. B)Value of each annuity unit each month. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. approve changes in the plan portfolio.3. Copyright 2023, Insurance Information Institute, Inc. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased 2 years ago to fund the new contract and will forward the check as soon as he receives it. Your customer, still working, informs you that she will be funding a VA 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 VA that she recently purchased within the past 2 years without a lifetime income rider like the one you have recommended. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. Find out how you can intelligently organize your Flashcards. Because the client is older than age 59-, he does not pay 10% premature distribution penalty tax. Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. Who assumes the investment risk in a variable annuity contract? 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. . Distribution of dividends occurs during the accumulation period. You can learn more about the standards we follow in producing accurate, unbiased content in our. D)0. A fixed annuity is a contract between the policyholder and an insurance company. D)II and IV. used for the investment of funds paid by contract holders. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. There is no beneficiary in the event the annuitant dies. Variable annuity salespeople must register with all of the following EXCEPT: During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. C)Variable annuity contract with a discussion regarding interest rate risk The separate account performance compared to last month's performance. Question #37 of 48Question ID: 606817 Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. You can buy an annuity with either a lump sum or a series of payments, and the accounts value will grow accordingly. The fees on variable annuities can be quite hefty. Reference: 12.2.1 in the License Exam. A)I and IV. A)exempt from taxes 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. B. suitable regardless of funding sources, D. suitable is she has enough equity in the home to fund the VA without cashing out the other VA contract. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. C)the SEC. A)the state banking commission. D)It cannot be determined until the April return is calculated. Chapter 12: Variable Annuities. D)A variable annuity, Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. 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. A)each annuity unit's value and the number of annuity units vary with time. \end{array} C)with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually What is her total tax liability? A)Fixed annuities. Upon John's death during the accumulation period, Sue takes a lump-sum payment. When a variable annuity contract is annuitized, the number of annuity units is fixed. No other type of financial product can promise to do this. Carefully look at your options when choosing an annuity. D)I and III. Your 65-year-old client owns a nonqualified variable annuity. In addition, insurer charges ten percent penalty if insured withdraw before he or she turns to fifty nigh and six month or become disabled, unless return wit Current assumption insurance is used to act like a bank; policy holders can put a good amount of money in an account to earn interest. What Are the Risks of Annuities in a Recession? The number of annuity units is fixed at the time of annuitization. C)the invested money will be professionally managed according to the issuers' investment objectives. For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? a variable annuity does not guarantee an earnings rate of return. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. Your client owns a variable annuity contract with an AIR of 4%. An investor who has purchased a nonqualified variable annuity has the right to: Which of the following statements regarding variable annuities are TRUE? There are many categories of annuities. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: Your answer, changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices., was correct!. they have all the same characteristics as life insurance An Immediate Annuity is designed to provide each of the following features, EXCEPT: The creation of an estate Your client has a large sum of money to invest from the proceeds of the sale of his home. 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. B. separate account may consist of mutual funds. Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. Investopedia does not include all offers available in the marketplace. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. The value of accumulation and annuity units varies with the investment performance of the separate account. A)I and IV. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. All of the following statements regarding variable annuities are true EXCEPT: The remainder of the premium is invested in the separate account. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? \hspace{5pt}\text{Expense}&&\text{Credit}&\text{Debit}\\ Reference: 12.1.4.1 in the License Exam. Reference: 12.1.2 in the License Exam, Question #21 of 48Question ID: 606812 His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. A)the yield is always higher than mortgage yields. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. C)the number of annuity units is fixed, and their value remains fixed. Bear in mind that between the numerous feessuch as investment management fees,mortality fees, and administrative feesand charges for any additional riders, a variable annuitysexpenses can quickly add up. Fixed Annuity, Retirement Annuities: Know the Pros and Cons. How is the distribution taxed? 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. Distributions from nonqualified variable annuities are: Your 55-year-old client owns a nonqualified variable annuity. Question #47 of 48Question ID: 606813 B)I and IV. The number of accumulation units can rise during the accumulation period. Question #42 of 48Question ID: 606830 Nature of the underlying investment fixed or variable, Primary purpose accumulation or pay-out (deferred or immediate), Nature of payout commitment fixed period, fixed amount or lifetime, Premium payment arrangement single premium or flexible premium. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. A)equity funds. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? Your answer, The entire $10,000 is taxable as ordinary income., was correct!. A customer is receiving annuitized payments from a variable annuity. The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. B)variable annuities are classified as insurance products. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both insurance and securities licenses. For each of the items (a) used for the investment of funds paid by contract holders. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. In recent years, annuity companies have created various types of floors that limit the extent of investment decline from an increasing reference point. If this client is in the payout phase, how would his April payment compare to his March payment? This would not align with the couple's criteria for coverage as long as they both live. For an investor, which of the following is the most important factor in determining the suitability of a variable annuity investment? . People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. Reference: 12.1.4.1 in the License Exam. C)Money market fund. The growth portion is subject to a 10% penalty. guarantees payments for a certain period of time. You can tailor the income stream to suit your needs. Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? The separate account performance compared to an assumed interest rate. Single premium annuities are often funded by rollovers or from the sale of an appreciated asset. B)a minimum rate of return is guaranteed. "Variable Annuities: What You Should Know," Page 3. A)variable annuities will protect an investor against capital loss. All of the following are characteristics of a variable annuity, except. Required fields are marked *. Immediate life annuity with 10-year period certain. D)II and III. To prevent this situation individuals can buy a guaranteed period with the immediate annuity. An investor owning which of the following variable annuity contracts would hold accumulation units? The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. 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. 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. Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. The # of annuity units rises once annuitization begins. c. The separate account provides for a guaranteed minimum return. An individual retirement annuity is an investment vehiclesimilar to an individual retirement accountthat is offered by insurance companies. Question #1 of 48Question ID: 606828. Azanswer team is here with the correct answer to your question. 5. 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. D) There is no tax as the withdrawal is considered return of capital. A)not suitable Your answer, Variable annuities., was correct!. What Are the Biggest Disadvantages of Annuities? Question #35 of 48Question ID: 606810 Variable annuity salespeople must be registered with FINRA and the state insurance department.
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