Types of Annuities Flashcards by Liliana Benavides | Brainscape An investor who purchases a fixed annuity contract assumes purchasing-power risk. B)reevaluate whether the recommendation for the VA contract is still suitable based on the clients proposed funding of the investment. Question #31 of 48Question ID: 606836 Reference: 12.3.1 in the License Exam. John is the annuitant in a variable plan, and Sue is the beneficiary. 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. A)II and IV. C) suitable due to the death benefit features of a variable annuity. Your client owns a variable annuity contract with an AIR of 4%. 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. For example, individuals can invest in a fixed annuity that credits a specified interest rate, similar to a bank Certificate of Deposit (CD). Thanks for choosing us. 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. Moreover, annuity benefits that pass to beneficiaries dont go through probate and arent governed by the annuity owners will. Distributions to the annuitant will fluctuate during the payout period. In other words, the money in a fixed annuity will grow and will not drop in value. 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? The number of annuity units is fixed at the time of annuitization. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. The nature of the securities invested in - bonds and growth stocks - makes it necessary that sales reps and their principals be licensed in securities as well as insurance. The accumulation unit's value is used to calculate the total value of the account. A)the yield is always higher than mortgage yields. Chapter 4: Annuities Flashcards | Chegg.com Reference: 12.3.3 in the License Exam. Please select the correct language below. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation. Her intent was to use the funds for the down payment on a house after graduation. Explaining What have been the major population changes since the first census in 1790? D)Variable annuity contract with a discussion regarding legislative risk, A VA with its investments in the separate account subject to market risk would not align with the customer's objective. Brainstorm a list of criteria by which you would select and prioritize projects. a variable annuity does not guarantee payments for life. Universal variable life policies are ins. Reference: 12.1.2.1.1. in the License Exam. Annuities | FINRA.org For each of the items (a) A)There is no tax as the withdrawal is considered return of capital. Your customer in his early 30s has received a modest inheritance from a relative. Future annuity payments will vary according to the separate account's performance. regulated under both securities and insurance laws. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A)Fixed annuity contract with a discussion regarding purchasing power risk A) Is required by the Securities Act of 1933, 4. If the owner of a variable annuity dies during the accumulation period, any death benefit will: Your answer, be paid to a designated beneficiary., was correct!. D)II and III. Your answer, The entire $10,000 is taxable as ordinary income., was correct!. D)suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract, Based on the information given in the question, the VA recommendation would not be suitable. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. Universal variable life policies A)number of annuity units. C) The entire amount is taxed as ordinary income, because it is not life insurance. Reference: 12.1.2 in the License Exam. C)the yield is always higher than bond yields. B.The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Variable Annuity: Definition and How It Works, Vs. Fixed Annuity 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. 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. B)part earnings and part cost basis Question #18 of 48Question ID: 606827 C. variable annuities are classified as insurance products. Changes in payments on a variable annuity correspond most closely to fluctuations in the: Once a customer annuitizes a variable annuity, which of the following statements are TRUE? D)the state insurance department. co. products that should be purchased primarily for the ins. B. variable annuities offer the investor protection against capital loss. The entire amount is taxed as ordinary income. 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. 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. C)annuity units. Which of the following statements regarding variable annuities are TRUE? Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. 2. The entire amount is taxed as ordinary income. Azanswer team is here with the correct answer to your question. How a Fixed Annuity Works After Retirement. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Which of the following recommendations would BEST meet the customer profile? An investor who has purchased a nonqualified variable annuity has the right to: The following annuities are available in fixed or variable form: 1. Therefore, ordinary income taxes will apply to the entire $10,000. C)It will be higher. How is the distribution taxed? A)the number of annuity units becomes fixed when the contract is annuitized. Variable annuities were introduced in the 1950s as an alternative to fixed annuities, which offer a guaranteedbut often lowpayout during the annuitization phase. The payout compared to the initial payout upon annuitization. Variable annuity salespeople must register with all of the following EXCEPT: Variable annuity salespeople must be registered with FINRA and the state insurance department. 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. Question #28 of 48Question ID: 606821 In a joint-and-last-survivor option, the annuity payment is made jointly to both parties while both are alive. Question #22 of 48Question ID: 606803 Chapter 12: Variable Annuities Flashcards | Quizlet In deciding whether to put money into a variable annuity versus some other type of investment, its worth weighing these pros and cons. The annuity unit's value represents a guaranteed return. Investopedia does not include all offers available in the marketplace. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. b. 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. D)I and III. Equity-Indexed Annuity: How They Work. and Their Limitations - Investopedia A)It will stay the same. Variable Annuities | Investor.gov But again, the need to designate beneficiaries is not an issue for this annuitant. Once a variable annuity has been annuitized: Sub accounts and mutual funds are conceptually identical, but sub accounts don't have ticker symbols that investors can easily type into a fund tracker for research purposes. Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. 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. Question #33 of 48Question ID: 606832 Surrender fees and penalties for early withdrawal. D)Joint and last survivor annuity. Anthony Battle is a CERTIFIED FINANCIAL PLANNER professional. 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. Variable annuity salespeople must register with all of the following EXCEPT: A) FINRA. B)Capital gains taxation on the earnings withdrawn in excess of the owner's basis. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock indexusually computed as a fraction of that indexs total return. If the customer takes a withdrawal of $10,000, what are the tax consequences? As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level. co. will have to continue payments longer than expected. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio. is required by the Securities Act of 1933. 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. This recommendation is: A) suitable due to the relative safety of the investment. Question #38 of 48Question ID: 606798 A customer has an investment objective of keeping pace with inflation while assuming moderate risk. C)such an annuity is designed to combat inflation risk. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. Fixed annuities, on the other hand, provide a guaranteed return. 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? The annuity has grown to value of $60,000. A)IPO. If the customer takes a withdrawal of $10,000, what are the tax consequences? Investopedia requires writers to use primary sources to support their work. Your 65-year-old client owns a nonqualified variable annuity. The fees on variable annuities can be quite hefty. You can learn more about the standards we follow in producing accurate, unbiased content in our. Question #16 of 48Question ID: 606807 D)It cannot be determined until the April return is calculated. Who assumes the investment risk in a variable annuity contract? 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. An annuity may be purchased under all of the following methods EXCEPT: Your answer, periodic payment immediate annuity., was correct!. There are many categories of annuities. The most popular type of variable annuity is a deferred annuity. 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. Balancesheetaccounts:AssetLiabilityOwnersequity:CapitalDrawingIncomestatementsaccounts:RevenueExpenseIncreaseCreditCreditCreditDecreaseCredit(j)CreditNormalBalanceDebit. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. 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. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. Find out how you can intelligently organize your Flashcards. B) Any tax due is deferred. If he wants to purchase an annuity and start receiving payments now, what would you suggest? A)III and IV. used to escrow late or otherwise delinquent premium payments. Mortality assumptions are based on life expectancy or mortality tables prepared by ins.