Variable Annuities (Uits)

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Variable annuity contracts:

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have the issuer bear the investment risk,are non-exempt securities must be sold with a prospectus

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To sell a variable annuity, what license(s) is (are) needed?

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Series #6 or Series #7 plus a state insurance license

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To sell a variable annuity, salespersons must be registered with

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FINRA

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Variable annuity contracts contain which of the following guarantees?

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mortality guarantee and an expense guarantee.

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Variable annuities are considered to be securities regulated by the

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Investment Company Act of 1940

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Annuity payments may not be

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reduced because of increased expenses experienced by the insurance company

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An "accumulation unit" of a variable annuity contract is

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accounting measure of the owner's interest in the separate account

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separate account

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the account in which a variable annuity investor's monies are used to buy designated mutual fund shares. It is called a separate account because its assets are kept separate from the insurance company's other investments

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What will determine the amount of the annuity to be received?

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The performance of the mutual fund held in the separate account will determine the amount of the annuity to be received.

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Variable annuity purchasers buy

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accumulation units in the separate account

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Variable annuity separate accounts are subject to risk of what?

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investment risk - there is no minimum guaranteed growth rate and no cap on the growth rate.

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GMIB

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Guaranteed Minimum Income Benefit - that will give a minimum guaranteed growth rate for an additional cost. However, this is an optional feature, and is not part of the basic variable annuity contract

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During the accumulation phase of a variable annuity

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payments can be made into the plan; but distributions may not be taken from the plan

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During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account

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must be automatically reinvested to buy more accumulation units for the contract holder.

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A major tax advantage of buying a variable annuity over making a direct investment in a mutual fund

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build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period

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Once a variable annuity contract is annuitized, accumulation units are

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converted to annuity units. These determine the annuity payments to be made.

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Any changes in value of a variable annuity unit are directly related to changes in

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Value of the securities funding the separate account

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life annuity-period certain

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pays for the annuitant's life, but if that person dies prematurely, the annuity will pay a designated beneficiary for a specified minimum time period (usually 10 years).

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life annuity

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A life annuity usually pays the largest amount of all of the annuity payment options

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When a variable annuity contract is annuitized, the accumulation units

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are converted into a fixed number of annuity units. This calculation is based on the dollar value of the accumulation units, the annuity option chosen, and the customer's expected mortality.

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Determines the monthly payment.

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The fixed number of annuity units times the unit value (which varies with the performance of the mutual fund held in the separate account)

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Purchase and payout options for variable annuity contracts? NOT?

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Lump sum payment; Deferred annuity-----Periodic payments; Deferred annuity------ Lump sum payment; Immediate annuity---NOT Periodic payments; Immediate annuity

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In a variable annuity contract, the number of _____fixed,______vary

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accumulation units can vary, annuity units is fixed

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Comparing fixed annuities to variable annuities

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A fixed annuity account grows at a guaranteed rate ---- Variable annuities are subject to investment risk

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Assumed Interest Rate

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conservative illustration of an interest rate for the annuity

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If the actual interest rate earned in the separate account underlying a variable annuity contract is lower than the "AIR," the annuity payment:

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will decrease

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Death benefit associated with a variable annuity

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If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."

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Variable Annuity Tax - Contributions

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There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account.

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Variable Annuity Tax - Distributions

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When distributions are taken at retirement age, they are taxable as ordinary income

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If an individual, aged 65, wishes to withdraw money from her variable annuity, taxation of her withdrawal?

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only part of the monthly payment is taxable (the portion that represents the tax deferred build up).

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A customer contributed $20,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $35,000. The customer is now age 60, and takes a lump-sum distribution of $20,000 to pay for expenses. Tax?

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$15,000 of the distribution is taxable and $5,000 is not taxable

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A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed:

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then the customer's cost basis is the amount invested and the sale proceeds is the amount received on redemption. Any loss is deductible as an ordinary loss, but any portion of the loss due to the surrender fee is not deductible!

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"like-kind" exchanges

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variable annuity can be exchanged for which of the following without a tax consequence for another variable or fixed annuity

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Once all required representations and determinations were completed the rep. must ______________

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The representative must sign a statement that all required representations and determinations were completed.

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The unit holder can vote for

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vote for the Board of Trustees and can vote to change the investment objective. Also terminating the trust