[B]The holders may vote to change investment objectives. For a retired person, which of the following investments would provide the greatest protection against inflation? 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. A)variable annuities may only be sold by registered representatives. What Are Ordinary Annuities, and How Do They Work (With Example)? The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. 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. Fixed vs. Variable Annuities: Key Differences - Yahoo Finance How a Fixed Annuity Works After Retirement. 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a risk that the account will fall in value C)A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. Many annuity companies offer a variety of investment options. B)Fixed annuity contract with a discussion regarding timing risk Based on the client's profile, which of the following would be the best recommendation? contract. The following annuities are available in fixed or variable form: 1. The customer, in the accumulation stage of the annuity, is holding accumulation units. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. 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. There are many categories of annuities. Since the client is older than 59 at the time of distribution, the additional 10% penalty tax is not incurred. C)III and IV All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. The accumulation unit's value is used to calculate the total value of the account. She will receive the annuity's entire value in a lump-sum payment. 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. co. products that should be purchased primarily for the ins. To prevent this situation individuals can buy a guaranteed period with the immediate annuity. A)defined contribution plans. d. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. In a variable life annuity with 10-year period certain, a contract holder receives: All of the following statements about variable annuities are true EXCEPT: Your answer, a minimum rate of return is guaranteed., was correct!. An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. Carefully look at your options when choosing an annuity. \hspace{5pt}\text{Asset}&&\text{Credit}&\\ A policyholder will make a lump sum payment or a series of payments in exchange for a guaranteed amount of income. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Fixed annuities. Once annuitized, the number of annuity units does not vary. 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. D) a VA contract is subject to fluctuating values due to market fluctuations in the underlying separate accounts. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. D)II and III. D)0. Many investments are taxed year by year, but the investment earningscapital gains and investment incomein annuities arent taxable until the investor withdraws money. U.S. Securities and Exchange Commission. must provide full and fair disclosure. Question #13 of 48Question ID: 606822 A)II and III Are you having trouble answering the question All of the following are characteristics of a variable annuity, except:? Your client owns a variable annuity contract with an AIR of 4%. Question #36 of 48Question ID: 606805 Question #43 of 48Question ID: 606809 A separate account will invest in a number of different securities. What Are the Risks of Annuities in a Recession? A client has purchased a nonqualified variable annuity from a commercial insurance company. The most suitable option and one considered effective for married couples is a single joint and last survivor contract. 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. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). B)a minimum rate of return is guaranteed. A guaranteed lifetime annuity promises to pay the owner an income for the rest of their life. Your answer, The policyowner., was correct!. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? A customer, who has contributed to an IRA and to an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. 8. B. separate account may consist of mutual funds. b. C)such an annuity is designed to combat inflation risk. "Variable Annuities: What You Should Know," Page 3. withdraw funds without any tax consequences. 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). Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? In recent years, annuity companies have created various types of floors that limit the extent of investment decline from an increasing reference point. Often used for retirement planning purposes, it is meant to provide a regular (monthly, quarterly, annual) income stream, starting at some point in the future. A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as. Reference: 12.3.1 in the License Exam, Question #30 of 48Question ID: 606833 6. C)earnings only and taxable Question #22 of 48Question ID: 606803 D. a majority vote from the shareholders is required to change the investment objectives. A)an accounting measure used to determine the contract owner's interest in the separate account. SIE Practice Exam #2 (score 93%) Flashcards | Quizlet The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. C)I and IV. This tax deferral is also true of 401(k) s and IRAs; however, unlike these products, there are no limits on the amount one can put into an annuity. A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. 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. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. D)all return of cost basis and nontaxable, Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. (The exception is the fixed income annuity, which has a moderate to high payout that rises as the annuitant ages). D)I and II. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. & securities licenses. Can I Borrow from My Annuity for a House Down Payment? The payout compared to last month's payout. holder dies sooner than expected, the ins. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. The remainder of the premium is invested in the separate account. Deferred annuities A deferred annuity is designed to collect premiums and accrue investment income over an extended period for payout at a later timefor example, when an individual retires. Introducing Cram Folders! holder dies sooner than expected. You have created 2 folders. A customer has a nonqualified variable annuity. The payout compared to the initial payout upon annuitization. "Variable Annuities: What You Should Know," Page 10. Variable annuity salespeople must register with all of the following EXCEPT: Second, equity-indexed annuities don't typically include reinvested dividends when calculating index. 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. Your answer, Variable annuity., was correct!. Variable Annuities Flashcards | Quizlet However, it does guarantee payments for life (mortality). A)It will stay the same. Who assumes the investment risk in a variable annuity contract? Your answer, Variable annuities., was correct!. SIE Final #2 Flashcards | Quizlet D)II and III. For example, an individual might buy a nonqualified single premium deferred variable annuity. They are also riddled with fees, which can cut into profits. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. D)each annuity unit's value is fixed, but the number of annuity units varies with time. All of the following are characteristics of a variable annuity, except There are also immediate annuities, which begin paying income right away. She may choose to receive monthly payments for the rest of her life. Reference: 12.3.1 in the License Exam. Question #41 of 48Question ID: 606801 An investor who purchases a fixed annuity contract assumes purchasing-power risk. Annuities are complicated products, so that may be easier said than done. Required fields are marked *. D)accumulation units. Which of the following are defined as securities? A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Usually the term annuity relates to a contract between an individual and a life insurance company. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun. The growth portion is subject to a 10% penalty. A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. Question #45 of 48Question ID: 606795 The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. All of the following characteristics are shared by both a mutual fund and a variable annuity's separate account EXCEPT: Your answer, the payout plans provide the client income for life., was correct!. Immediate annuities An immediate annuity is designed to start paying an income one time period after the immediate annuity is bought. The downside was that the buyer was exposed to market risk, which could result in losses. C)Growth mutual funds Annuities are financial products intended to enhance retirement security. 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%. Are There Penalties for Withdrawing Money From Annuities? An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: B) the yield is always higher than bond yields, C) the yield is always higher than mortgage yields, D) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. D)Variable annuity. \hspace{5pt}\text{Revenue}&\text{Credit}&(j)&\\ D)I and IV. Introducing Cram Folders! An investor owning which of the following variable annuity contracts would hold accumulation units? B)each annuity unit's value varies with time, but the number of annuity units is fixed. D) The investment risk is shared between the insurance company and the policyowner. D)suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase. The entire amount is taxed as ordinary income. Reference: 12.3.3 in the License Exam. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. 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. Her agent recommended she choose a variable annuity as a safe haven for the funds. C)annuity units. B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Distributions from nonqualified variable annuities are: Your 55-year-old client owns a nonqualified variable annuity. U.S. Securities and Exchange Commission. B)I and III. The pooling is unique to annuities, and its what enables annuity companies to be able to guarantee a lifetime income. B)I and IV. Flexible premium annuities A flexible premium annuity is an annuity that is intended to be funded by a series of payments. A)Corporate debt securities A)accumulation shares. 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. For a retired person, which of the following investments would provide the greatest protection against inflation? by jmacewe, Investopedia requires writers to use primary sources to support their work. Registration with FINRA is de factor registration with the SEC; no registration is required by the state banking commission. Question #38 of 48Question ID: 606798 Fixed period annuities A fixed period annuity pays an income for a specified period of time, such as ten years. The separate account performance compared to an assumed interest rate. Deferred annuities A deferred annuity is designed to collect premiums and accrue investment income over an extended period for payout at a later timefor example, when an individual retires. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. The following are all characteristics of variable annuities EXCEPT: [A]The investment portfolio contains insurance protections against losses. Reference: 12.1.2 in the License Exam. B)mutual fund units. Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies. C)number of accumulation units. Distribution can take place before or during any solicitation for sale. Based only on these facts, the variable annuity recommendation is The number of annuity units is fixed at the time of annuitization. If you die before the payout phase, your beneficiaries may receive a. Her intent was to use the funds for the down payment on a house after graduation. C)Money market fund. "Variable Annuities: What You Should Know," Page 6. This factor is used to establish the dollar amount of the first annuity payment. Under the terms of the plan, money paid into the annuity is not included in taxable income for the year in which it is paid. In addition, you can withdraw 10% of your contract value each year free of surrender charges. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. D)I and III. A)Fixed annuity contract with a discussion regarding purchasing power risk Future annuity payments will vary according to the separate account's performance. 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. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. Reference: 12.2.1 in the License Exam. D)variable annuities offer the investor protection against capital loss. a. the state banking commission. IncreaseDecreaseNormalBalanceBalancesheetaccounts:AssetCreditLiabilityCreditOwnersequity:CapitalCreditDrawingIncomestatementsaccounts:RevenueCredit(j)ExpenseCreditDebit\begin{array}{lccc} Reference: 12.3.4 in the License Exam, Chapter 16: U.S. Government and State Rules a, Chapter 17: Other SEC and SRO Rules and Regul, Chapter 15: Ethics, Recommendations, and Taxa, Chapter 13: Direct Participation Programs, Fundamentals of Financial Management, Concise Edition, Joe B. Hoyle, Thomas F. Schaefer, Timothy S. Doupnik, Carl Warren, James M Reeve, Jonathan E. Duchac. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. Reference: 12.1.2 in the License Exam, Question #23 of 48Question ID: 901858 B) Any tax due is deferred. A customer is receiving annuitized payments from a variable annuity. Variable annuities are designed to combat inflation risk. Once a variable annuity has been annuitized: People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. Uses in Investing, Pros, and Cons, Indexed Annuity: Definition, How It Works, Yields, and Caps, Joint and Survivor Annuity: Key Takeaways. Reference: 12.2.1 in the License Exam. C)100% tax deferred. What Are the Biggest Disadvantages of Annuities? Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. 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. C)the invested money will be professionally managed according to the issuers' investment objectives. Please sign in to access member exclusive content. Reference: 12.1.2 in the License Exam, Question #39 of 48Question ID: 721469 A universal variable life policy should be purchased primarily for its insurance features, not its investment features. C)suitable due to the death benefit features of a variable annuity. Which of the following are defined as securities? Value in separate account b. Accumulation units c. Death benefit d. Cash value Variable whole life policies have a guaranteed minimum death benefit. The separate account is used for both variable life insurance and variable annuity investments. 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. D)the state insurance department. c. The separate account provides for a guaranteed minimum return. These contracts come with high surrender charges. It is a variable annuity. A variable annuity is a security and must be registered with the SEC, not FINRA. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59-. In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: Your answer, mortality guarantee., was correct!. First, they are complicated, as insurers use different methods to calculate the index return. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. Though its stated return might not be as high as the other choices' potential returns, only a fixed annuity fits the objective and risk averse traits of his client. The growth of the annuitys value and/or the benefits paid may be fixed at a dollar amount or by an interest rate, or may grow by a specified formula. Annuities | FINRA.org The most important consideration in purchasing a VA is to be aware that benefit payments will fluctuate with the investment performance of the separate account. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., was correct!. For an insurance company, mortality risk turns out unfavorably if: A variable annuity's separate account is: If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action? If the owner of a VA dies during the accumulation period, any death benefit will: B) be paid to the issuing company to complete the plan, C) be paid to the designated beneficiary, D) be paid to any legal heirs as recognized by the annuitant's state of domicile. C) suitable due to the death benefit features of a variable annuity. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. C)It will be higher. These include white papers, government data, original reporting, and interviews with industry experts. The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. 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!. We weren't able to detect the audio language on your flashcards. D)partially a tax-free return of capital and partially taxable. 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. B)reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. 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. Question #47 of 48Question ID: 606813 An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. An accumulation unit in a variable annuity contract is: If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? When the first party dies, the annuity payment is made to the survivor. Question #40 of 48Question ID: 606800 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? What is the taxable consequence of this withdrawal to your client? PDF Variable Annuities: What You Should Know - SEC We'll bring you back here when you are done. However, at the end of the period certain the payments to the named beneficiary (the spouse) will stop. Dividing the funds available so as to fund 2 separate contracts, whether they be joint with last survivor or life income, would not be cost efficient for spouses. Chapter 12: Variable Annuities. In March, the actual net return to the separate account was 8%. 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. must be filed with FINRA. John is the annuitant in a variable plan, and Sue is the beneficiary. How to Navigate Market Volatility While Saving for Retirement, Variable Annuity: Definition and How It Works, Vs. Reference: 12.1.2 in the License Exam. 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. The separate account is NOT likely to invest in: Your answer, municipal bonds., was correct!. Most variable annuities are structured to offer investors many different fund alternatives. used for the investment of funds paid by contract holders. However, if you take a withdrawal during the contractssurrender period, which can be as long as 15 years, youll generally have to pay a surrender fee. Unit 12: Variable Annuities Flashcards | Chegg.com The following table summarizes the rules of debit and credit. D)I and III. Add to folder When the annuitization option is selected, each payment represents both capital and earnings. C)with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually 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. For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? 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. Distributions to the annuitant will fluctuate during the payout period. If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? required to be located off of the company's premises. Answer: B Of the 4 customer profiles, the individual already making the maximum retirement account contributions, with cash to invest, would be most suitable for a VA recommendation. B)I and IV. The growth portion is subject to a 10% penalty. If one purchases an annuity for a set price, the issuing company would invest the funds and hold them until they are supposed to be disbursed, generally based on the owner's age. Question #18 of 48Question ID: 606827 is required by the Securities Act of 1933.