Ch 19

Front 1

Who issues annuity contracts?

Back 1

life insurance companies

Front 2

When the annuity contract holder first buys the contract they either pay a lump sum called a ______ _______ or pay a series of installment payments called a _______ ______.

Back 2

Single premium = lump sum

Periodic premium - series of installment payments

Front 3

There are two types of annuities:

which type pays the same determined dollar amount each period?

Which type pays a fluctuation dollar amount each period and why?

Back 3

Fixed annuity - pays a predetermined dollar amount (not considered a security)

Variable annuity - fluctuating dollar amount each period because it is based on value of the securities in the separate account of the insurance company issuing the variable annuity (is considered a security based on a fixed portfolio)

Front 4

What type of annuity contracts are considered a security?

Back 4

Variable - based on the separate account of the insurance company that is set up as a fixed portfolio of securities and there or keeps up with the current market providing a hedge against inflation but also is more riskier than a fixed annuity

Front 5

Describe the separate account used by insurance companies for variable annuities?

Back 5

Managed by the Board of Managers
aka sub-account or investment account

it is an investment portfolio of mutual funds or other professionally managed securities held in a special tax deferred account of the insurance company

long term investments & provide a hedge against inflation

two types of units

accumulation units - this is when a holder of the contract is paying INTO the plan

Annuity plans - when the holder of the contract or annuitant is receiving the payment from the plan

Front 6

Which of the following are characteristics of variable annuity contracts:

I. Uses mortality tables to determine the amount paid out of the value of the separate account
II. earnings are tax deferred until annuity payments begin
III. During the accumulation period a contract owner can withdraw the cash surrender value of the contract without penalties unlike fixed annuities
IV. payments into the account are fixed but the payout varies

A. II. III. & IV.
B. II. & III.
C. II. & IV.
D. I. II. & III.

Back 6

C. II & IV. are correct

the value of the units in a variable account do not use mortality tables it is soley based on the value of the separate account

III. is not true because although you may cash the surrender value of your contract surrender charges may and probably will be incurred

Front 7

Is the payout period on a variable annuity based on the Dow Jones Industrial average or the cost of living?

Back 7

Niether

it is based on the value of securities in the separate account

Front 8

There are 3 purchasing methods for Variable annuities.

1. For a Periodic Payment Deferred Annuity it allows you to make monthly, quarterly, semi-annual, or annual payments at a varying rates depending upon the value of the securities in the separate account. (T/F)

2. Single payment Deferred Annuity means that an investor makes a one time lump sum payment and defers the payments to a later date. (T/F)

3. Single Premium Immediate is when investors make one lump-sum purchase and can hold onto the account for as long as they want until they request for an immediate payout. (T/F)

Back 8

1. false. Periodic payment deferred are FIXED payments into the variable annuity account

2. TRUe

3. False. A Single Premium Immediate aka Lump Sum Purschase is when an investor pays at once, upfront, in a lump sum and immediately receives payments. there is no deferred period before the annuity pays out which means there is no accumulation units.

Front 9

If you annuities your annuity what does this mean an investor is doing?

Back 9

going into the payout period.

no longer in the accumulation units no moving into the annuity units

Front 10

What is the type of variable annuity payout method is where an investor receives payments for the rest of their life regardless of how long they live?

What is the plan where an investor receives payments for life regardless of how long they live but if they die the payment made to the beneficiary for the remainder of the pre-determined period?

Back 10

Life annuity

Life annuity-Period certain

Front 11

What type of variable annuity payout method would be used for a married couple that was only concerned with ensuring payments to each other and no other beneficiaries?

Back 11

Joint & Last survivor annuity

Front 12

A unit refund annuity is a type of variable annuity payout method that has which of the following characteristics:

I. Used for a beneficiary if investor dies but if they don't then they can refund the value without penalties when they retire
2. Guaranteed payments of a set # of units
3. Guarantees that total # of units paid will be equal to or more than a predetermined fixed dollar amount
4. Is designed for investor unless dies before contract reaches the payout period then it goes to the beneficiary

A. 1 & 3
B. 2 & 4
C. 3 & 4
D. 1 & 2

Back 12

B

a refund annuity is when the investor of beneficiary upon death of investor receives a set number of units aka payments and is not a fixed dollar amount just a fixed # of payments

for example 360 monthly payments = 30 years of payments at variable dollar amount depending on the value of the seperate account

Front 13

What is it called when an investor receives payments of their variable annuity for a designated period and payments are then halted when even if investor is still living?

What happens to the left over money if the investor dies prior to the installment completion?

Back 13

Installments for a period certain

if investor dies the remaining balance would go to the beneficiary in one payment

Front 14

Like IRA account premature withdrawals from a variable annuity is subject to a _____ % penalty.

Back 14

10%

Front 15

When the annuity owner selects a payout option they are exchanging their accumulation units for annuity units. How do they determine the number of annuity units issued?

Back 15

#annuity units = accumulation units X NAV per unit in the seperate account

Front 16

If a client decides to annuities thier variable annuity and chooses the Life annuity payout method and a few years later after receiving payments they get bad news and find out they only have a few months to live and want the payments to go to their nephew so he can use the money for college what can the client do?

Back 16

nothing.

once the accumulation units are converted to annuity units the client cannot withdraw from the program or change investments

Front 17

When are annuity units valued?

1. when choosing the payout method
2. once a month
3. When buying the contract
4. annually

Back 17

2. once a month prior to payouts

Front 18

What is the interest rate used to determine the payout that covers the insurance companies cost and profits?

Back 18

Assumed Investment Rate - AIR

** if the actual value exceeds the AIR the annuity rate will increase

Front 19

A variable annuity is considered a security because it is based on an underlying account of equity securities which means that at time of purchase it must come with a document known as?

Does this mean that the contract holder has the right to vote?

Back 19

Prospectus

yes they have the right to vote for the Board and to change investment objectives of the separate account
*proxies are sent to owners

Front 20

Which of the following has the greatest protection against purchasing power?

I. Face amount certificates
II. Series H Bonds
III. Fixed Annuity
IV. Variable Annuity

Back 20

IV variable annuity

** but it has investment risk(capital risk - loss of amount invested)

Front 21

What is the difference between a qualified and non-tax qualified annuity?

Back 21

qualified - pre tax dollar contributions; usually in an employer sponsored retirement plan
- upon retirement distributions are taxed as ordinary income (usually you are in a lower tax bracket)

Non-tax qualified annuity - after tax dollars contributed; upon retirement only excess over amount contributed is taxed as part capital and part ordinary income

Front 22

Variable annuities Salesperson must be registered with all of the following except:

1. SEC
2. FINRA
3. State Banking Dept
4. State Insurance Dept

An RR who sells variable annuities must hold what two license?

Back 22

3

life insurance & securities

Front 23

Annuity contracts generally contain Non-forfeiture provision which states what?

Back 23

that if the contract holder stops making payments on an installment contract they will NOT lose claim to previous investment

Front 24

Are contract holders of variable annuities taxed on dividends each year?

Back 24

no

annuities are tax deferred

Front 25

Are variable annuities considered a form of insurance?

Back 25

NO

they are considered securities

Front 26

On one time withdrawals from a variable annuity the tax treatment is LAST IN FIRST OUT meaning if an investor has a cost basis of $20,000 and a current value of $35,000 and makes a one time withdrawal of $5,000 how would it be taxed?

Back 26

the entire amount would be subject to tax as a capital gain

if the person was younger than 59 1/2 they would also have a 10% penalty

Front 27

Do variable annuities have sales charge breakpoints? If so how do you get one and if not then why can't you get one?

Back 27

yes

based on total amount invested in the annuity

Front 28

Can a contract holder exchange their variable annuity for a new one without paying tax?

If a client were to consider doing this what should the RR consider?

Back 28

yes with a "tax free 1035 exchange"
*no tax on income and investment gains on the current variable annuity BUT surrender charges may be incurred and a new surrender period will start with new contract

RR should consider
-if it would benefit the client
- have they had another exchange in the last 3 years/36 months
-surrender charges

Front 29

There are two new annuity contracts the Bonus Annuities and the Equity Indexed Annuities. explain what they are?

Back 29

Bonus annuities provide a premium credit as an incentive to buy the annuity - comes with higher costs and longer period subject to surrender charges

equity index annuities - annuity payments linked to a specific stock index. if the index increases the contract holder is credit with part of gain. if the index declines the contract holder will suffer a loss but usually is guaranteed a min return

Front 30

When an RR is making suitability determination for a variable annuity what must the Registered Principal of the firm review?

Back 30

ROP must review a WRITTEN SIGNED statement by the RR about what factors were considered when making the suitability determination

Front 31

If an investor was looking for income. liquidity, growth, and tax deferred and was interested in a variable annuity what should the RR advise the client?

Back 31

tell them it is NOT liquid investment unless they pay surrender charges they will not have access to the money invested

there is market risk

but there is growth, death benefits, lifetime payments, and tax deferred earnings

Front 32

What is an IRA?

Where can an IRA account be opened?

What can be in an IRA?

What is not allowed in an IRA?

Back 32

Individual Retirement Account - a container for investments used for retirement income that are either tax deferred OR tax free way to save

can open an account at any Custodian institution - bank brokerage or insurance company

Contributions that MAY be invested:
stocks, bonds, mutual funds, and other securities
certain US Government or state issued gold, silver, platinum and palladium coins and bullion
REAL ESTATE

CANNOT BE INVESTED:
Collectible items
Life insurance

Front 33

If Mrs. Andersons husband passes away and she is the designated beneficiary for her husbands IRA account what are her options for the account?

Back 33

she can rollover the IRA into her own account
elect to become the owner and treat the account as her own and make contributions
at distribution the spouse would pay taxes

Front 34

If the IRA account were set up to benefit some oner other than a spouse upon death what would the beneficiary be allowed to do?

Back 34

they would NOT be allowed to become the owner and there for could not make the account their own or rollover the IRA to another account

they would however receive distributions which would be taxed as ordinary income in the year that they were received

Front 35

IF the IRA is designated to a trust account then who would become the owner upon death of the IRA account owner and what would the maximum payout period be based upon?

Back 35

the trust would become the owner of the account but not the beneficiaries of the trust

max payout period would be based on the OLDEST beneficiaries age

so if there was a son who was 35, daughter who was 26 and another son who was 22. the IRA payout would be based on the oldest son who was 35.

Front 36

What is the biggest difference between Traditional IRAs & Roth IRAs?

Back 36

Traditional IRA = contributions are tax deductible and taxes on contributions and earnings in account are deferred until withdrawals
**no contributions after 70 1/2
Roth IRAs = NOT tax deductible from the owners gross income but contributions can be withdrawn at anytime without penalties and upon retirement QUALIFIED withdrawals of both contributions and earning in the account can be made tax free
**can still make contributions after 70 1/2

Front 37

What are the characteristics of Traditional IRA and Roth IRA that are the same?

Back 37

Roth & Traditional IRAs are also aggregated meaning if you have both types of accounts the max contribution for both cannot total more than $5,000 & catch up $1,000

max contribution = $5,000
Catch up = at least 50yrs old $1,00

Both opened and used by individuals and their spouses who receive compensation and are personal accounts controlled by the individuals themselves

Front 38

In a Roth IRA qualified distributions means that the contributions and earnings are tax free when withdrawn. What two requirements must be met in order for an individual to withdraw their money and be considered qualified?

Back 38

1. 5 year holding period - distribution must not be made within 5 years meaning before the end of the 5th year after the individual made their initial contribution to the IRA

2. must meet one of the following criteria:
- owner is 59 1/2
- owner dies or becomes disabled
- first time home buyer expenses
- educational expenses
-medical insurance premiums

Front 39

At what age must a Traditional IRA and a Roth IRA owner begin withdrawals and if not what are the penalties?

Back 39

Traditional IRA = April 1st following the year the person reaches 70 1/2
** if min distributions are not withdrawn 50% penalty tax on insufficient distributed money

Roth IRA = no age requirement for distributions

Front 40

What type of retirement plan is used by small business?
What are the advantages for the business?
What is the max contribution limit?
What makes an employee eligible?

Back 40

Simplified Employee Pension (SEP IRA)
low administration cost;
contributions are tax deductible for the employer
Max contributions 25% of employees compensation nte $50,000 (2012)
eligible employees = min $550 wages in current tax year; worked for employer at least 3 of the past 5 years; 21 years of age or older

Front 41

What is the difference in the SIMPLE plan compared to a SEP IRA?

what is the rollover requirement and the penalties if done within the first two years?

Back 41

Savings Incentive Match Plan for Employees - SIMPLE

Small business for 100 or fewer employees

Allow for employees to make pretax contributions of their salary

employee max contribution - $11,500 (2012) catch up = $2,500

employer can either match contributions on the elective contributions up to 3% of compensation OR non-elective compensation of a straight 2% of all eligible employee

employee eligibility = $5,000 annual compensation last two years and expected to receive in the current year

can only be rolled over to another SIMPLE plan within first 2 years then can be rolled over to other type of retirement plans after

early distributions within first 2 years equals 25% after is 10%

Front 42

Are IRAs considered a qualified plan?
What is a qualified plan?
What are the two categories of qualified plans?

Back 42

IRAs are not qualified plans

Qualified plans were created by ERISA - Employee Retirement Income Security Act and have higher contribution limits and require more complex administration than IRA plans

-defined benefit plans
-defined contribution plans

Front 43

Can a qualified plan under ERISA allow transactions in covered call writing and indue options?

Back 43

Yes as long as that particular plan doesn't say it can't

Front 44

What type of qualified plan benefits higher salaried employees the most?

Back 44

defined BENEFIT plans

Front 45

What are the three types of defined-contribution plans?
What is the difference?

Back 45

401 (k) plan aka CODA - cash or deferred arrangements/cash accumulation plans/capital accumulation plans =
Pre-tax contributions may be made up to max $17,000 & $5,500 catch up; after tax contributions may also be made
min age of disbursement is april 1st 70 1/2 EXCEPT if you are still employed by the plan sponsor and do not own more than 5% of the company

Roth 401 (k) plan - after tax contributions and qualified distributions are tax free

Profit Sharing Plan - company shares it profits with employees and all funds are tax sheltered; give employees incentive to be productive

Front 46

What type of plan would a self-employed individual use if they wanted a qualified plan that allowed for higher contribution limits?

Back 46

KEOGH plan / HR-10 plan

can be contribution or benefit plan

Front 47

what is the maximum contribution for a Keogh plan for a defined benefit plan? defined contribution plan?

Back 47

benefit - average compensation for three highest years net $195,000

Contribution - max annually $49,000

Front 48

What type of retirement plan is used for tax-exempt non-profit organizations only?

what is the max contribution an employee can make annually?

Back 48

403(b)/tax sheltered Annuity Arrangement TSA


up to $50,000 (2012) catch up $5,500 including what your employer already contributed

so if your employer already put in $3,000 and you are under 50 yrs old you can only add $47,000

Front 49

Can you delay a 403(b) retirement plan even if you are over 70 1/2?

How are distributions taxed?

Back 49

yes if you are still employed by the non-profit organization that sponsored the plan

as ordinary income with a cost basis of zero

Front 50

Would a Non-qualified Deferred compensation plan be regulated by ERISA?

What is this plan frequently used for?

Back 50

not regulated by ERISA

for highly paid athletes and executives who enter into large compensation contracts

employee agrees to defer part of compensation until retirement, death or disability

income taxes deferred until distribution

Front 51

Which Rollovers are not allowed?

1. Roth IRA --> Qualified Plan
2. Qualified Plan --> Roth IRA
3. Roth IRA --> 401 (k)
4. Roth IRA --> Keogh plan

A. 1
B. 1, 2, & 4
C. 2
D. 2, 3, & 4

Back 51

B. 401 (k), Keogh Plan, profit sharing plan, Roth 401 (k) plan, defined contribution or benefit = qualified plans

ROTH IRA CANNOT rollover to a qualified plan

BUT

A qualified plan can --> Roth IRA

Front 52

All of the following are try of Coverdell Education Savings Accounts except:

1. Max annual contribution is $2,000 until 18
2. Contributions can only be paid in cash
3. Eligibility is phased out for taxpayers for married joint filers between $220,000 and $250,000
4. Can be rolled over to another sibling if not used

Back 52

3. eligibility for married joint filers $190,000 & $220,000
single = 95,000 and 110,000

Front 53

Which type of education savings account is mort appropriate for low and middle income contributors:

1. 529 Prepaid Tuition
2. 529 College savings
3. Coverdell education savings
4. Money market fund

Back 53

3.

Front 54

Which of the following can be sued for any level of education:

1. 529 Prepaid Tuition
2. 529 College savings
3. Coverdell education savings
4. Money market fund

Back 54

3

Front 55

Which type of education savings has investment risk:

1. 529 Prepaid Tuition
2. 529 College savings
3. Coverdell education savings
4. Money market fund

Back 55

2.

Front 56

Which of the following retirement plans allow for a max contribution of $17,000 per year and a catch up of $5,500 if you are 50 years of age or more?

1. SIMPLE IRA
2. 401 (k)
3. SEP
4. Roth 401 (k)

Back 56

2 & 4

Front 57

Which out of the following is not tax deductible?

1. Roth IRA
2. SEP
3. SIMPLE IRA
4. Keogh

Back 57

1. roth IRA

Front 58

Which of the following allows for tax free withdrawals?

1. Roth IRA
2. SEP
3. SIMPLE IRA
4. Keogh

Back 58

1.