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27 Cards in this Set
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You have 4 clients each expressing interest in a variable annuity contract. Which 2 of the 4 client profiles would a VA be least suitable for?
1. A 45 year old employed individual with no other retirement accounts in place. 2. A 58 year old indiv. near retirement who is in good health and anticipates a lengthy retirement. 3. A 32 year old with a company sponsored 401k plan and will need a lump sum soon to finance graduate school tuition. 4. A 60 year old indiv. nearing retirement who has both IRAs and a 401k in place, is comfortable with market risk and has a lump sum in cash available to fund the annuity. |
Answer: 1 & 3
VAs are less suitable for individuals who have not yet made max contributions to other retirement accts. They are also not considered suitable for anyone who anticipates needing a lump sum within a short period of time. They are more suitable for ppl who can fund the annuity with cash, want to supplement existing retirement benefits they already have and are comfortable with the market risk associated with the VA separate account portfolio and anticipate a long retirement. |
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Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. He makes the following 4 statements, all of which are true, EXCEPT:
A) A lifetime w/d benefit (LWB) or LT income benefit will make a periodic pmt even if the account balance falls to zero. B) With guaranteed min w/d benefits (GMWBs), the periodic pmts can be monthly, quarterly or annually. C) With GMWBs, a lifetime of periodic pmts is guaranteed. D) A LWB or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant. |
Answer: C
With guaranteed min w/d benefits (GMWBs), a lifetime of periodic pmts is not guaranteed b/c pmts stop when the annuitant has received an amount = to the principal acct value or the contract term ends. Each of the other statements are true. |
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Distributions from nonqualified VAs are:
A) taxed as ordinary income only to the extent of earnings. B) tax free. C) taxed at a reduced rate. D) taxed as ordinary income. |
Answer: A
As contributions are made with after-tax dollars, only the earnings generated are taxed upon withdrawal. |
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Your 55 year old client invested $50K four yrs ago in a nonqualified VA. The original investment has grown to a value of $60K. If the client, who is in a 30% tax bracket, makes a random w/d of $15K, what will the tax liability to the IRS be?
A) 0 B) $3K C) $4500 D) $4000 |
Answer: D
Since this is a nonqualified annuity (w/no tax deduction), the client pays taxes only on the growth portion (in this case $10K). The tax on this amount is $3K. However, because the client is not yet age 59 1/2 when making the w/d, he also pays a penalty of 10% (or $1K). This makes a total of $4K tax and penalty paid. |
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All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT:
A) IRAs B) Keogh plans C) defined contribution plans D) Variable Annuities |
Answer: D
Contributions to a nonqualified VA are not tax deductible. |
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If a customer is about to buy a VA contract and wants to select an annuity with a payout option providing the largest possible monthly pmt, which of the following payout options would be MOST suitable?
A) Life annuity w/a 10 yr period certain B) Life only annuity C) Life annuity with period certain D) Unit refund life option |
Answer: B
Generally, a life only contract pays the most per month because pmts cease at the annuitant's death. |
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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 yrs ago, and cashing out another VA that she recently purchased within the past 2 yrs w/out a lifetime income rider like the one you have recommended. Based on ONLY these facts, the VA recommendation is:
A) not suitable b/c a lifetime income rider is only for someone who is already retired. B) not suitable. C) suitable if she has enough equity in the home to fund the VA w/out cashing out the other VA contract. D) suitable regardless of funding sources. |
Answer: B
The VA recommendation would not be suitable. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic re: the sales of VAs. Cashing out life ins. policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. |
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In a VA contract, the provision that guarantees the annuitant pmts for life is called the:
A) payment guarantee B) insurance guarantee C) expense guarantee D) mortality guarantee |
Answer: D
Under the mortality guarantee, the ins. co. assumes mortality risk by guaranteeing pmts for life, though the amount of each pmt is not guaranteed. |
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All of the following characteristics are shared by both a mutual fund and a VAs separate acct EXCEPT:
A) the payout plans provide the client income for life. B) the investment portfolio is managed professionally. C) the client may vote for the board of directors or board of managers. D) the client assumes the investment risk. |
Answer: A
Only VAs have payout plans that provide the client income for life. |
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A joint and last survivor annuity is a payout option where:
A) payments continue until the death of the primary owner. B) payments continue for a pre-determined period of time. C) payments continue until age 70 1/2. D) two people are covered and payments continue until the second death. |
Answer: D
The annuity pmt is made jointly to both parties while both are alive. When the 1st party dies, the annuity pmt is made to the survivor. When the second party dies, all payments cease. |
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The holder of a VA receives the largest monthly pmts under which of the following payout options?
A) Joint and last survivor annuity B) Joint tenants annuity C) Life annuity D) Life annuity w/period certain |
Answer: C
Life annuity has the largest payout because less risk is assumed by the ins. co. There is no beneficiary in the event the annuitant dies.
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Your client owns a VA contract with an AIR of 4%. In March, the actual net return to the separate acct was 8%. If this client is in the payout phase, how would his April pmt compare to his Mar pmt?
A) It will be higher B) It will be lower C) It will stay the same D) It cannot be determined until the April return is calculated |
Answer: A
If the separate acct of a VA with an AIR of 4% had actual net earnings of 8% in March, the April pmt will be higher than the march pmt. |
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The payout of an annuitized VA acct changes from month to month in a manner determined by which of the following?
1. The separate acct performance is compared to last month's performance. 2. The payout compared to the initial payout upon annuitization. 3. The separate acct performance compared to an assumed interest rate. 4. The payout compared to last month's payout. |
Answer: 3 & 4
A VA payout is determined by comparing acct performance with AIR, and this month's payout with last month's payout. |
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If your customer invests in a VA and chooses to annuitize at age 65, which of the following statements are TRUE?
1. She will receive the annuity's entire value in a lump sum pmt. 2. She may choose to receive monthly pmts for the rest of her life. 3. The accumulation unit's value is used to calculate the total value of the acct. 4. The annuity unit's value represents a guaranteed return. |
Answer: 2 & 3
When a VA contract is annuitized (distributed in regular pmts, not as a lump sum), the number of accumulation units is multipled by the unit value to arrive at the acct's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. The factor is used to establish the dollar amt of the 1st annuity pmt. Future annuity pmts will vary according to the separate acct's performance.
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If your 60 yr old customer purchases a non-qualified VA and withdraws some of her funds before the contract is annuitized, what are the consequences of this action?
A) 10% penalty + pmt of ordinary income tax on all funds w/d exceeding basis. B) Capital gains tax on earnings exceeding basis. C) Ordinary income tax on earnings exceeding basis. D) 10% penalty plus pmt of ordinary income tax on all funds w/d. |
Answer: Distributions from a non-qualified plan represent both a return on the orig investment made in the plan w/after-tax dollars (a nontaxable return of capital) and the income from that investment. The income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before 59 1/2. |
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Your 65 yr old client owns a nonqualified VA. He originally invested $29K 4 yrs ago. It now has a value of $39K. If your client, who is in the 28% tax bracket, makes a lump sum w/d of $15K, what tax liability results from the w/d?
A) 0 B) $3800 C) $4200 D) $2800 |
Answer: D
This annuity is disqualified, which means the client has paid for it w/after-tax dollars and has a basis = to the original $29K investment. Consequently, the client pays taxes only on the growth portion of the w/d ($10K). The tax on this is $2800 ($10K x 28%). Because the client is older than 59 1/2, there is no 10% early distribution penalty. |
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Changes in pmts on a VA correspond MOST closesly to fluctuations in the:
A) prime rate B) value of underlying securities held in the separate acct. C) cost of living D) Dow Jones Industrual Average |
Answer: B
Payments from a VA depend upon the securities' value in the separate account's underlying investment portfolio. |
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A joint life with last survivor annuity:
1. covers more than one person. 2. continues payments as long as one annuitant is alive. 3. continues payments only as long as all annuitants are alive. 4. guarantees payments for a certain period of time. |
Answer: 1 & 2
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A 45 yr old investor takes a lump sum distribution from a nonqualified VA. How is the distribution taxed?
1. The entire amt is taxed as ordinary income 2. The growth portion is taxed as ordinary income 3. The growth portion is taxed as capital gain 4. The growth portion is subject to a 10% penalty |
Answer: 2 & 4
On withdrawals from a nonqualified annuity, taxes are pd only on the amt that exceeds cost basis (the amt pd into the annuity). In this case, the investor is taking a lump sum distribution before reaching 59 1/2 and must pay an additional 10% penalty on the taxable amount. |
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A customer has contributed $1K/yr for 10 yrs to his tax-deferred nonqualified VA. The value of the separate acct is now $30K. If the customer takes a w/d of $10K, what are the tax consequences?
A) There is no tax as the w/d is considered return of capital. B) 2/3 of the w/d is taxable as ordinary income. C) Any tax due is deferred. D) The entire $10K is taxable as ordinary income. |
Answer: D
The $30K contract value represents $10K of contributions and $20K of earnings. When a partial w/d is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10K. In addition, if the customer is not at least 59 1/2, there will be a tax penalty of an additional 10%. |
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A customer has a non-qualified VA. Once the contract is annuitized, monthly pmts to the customer are:
A) 100% taxable B) 100% tax free C) 100% tax deferred D) partially a tax-free return of capital and partially taxable. |
Answer: D
The investor has already pd tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each pmt represents both capital and earnings. The money pd in will be returned tax free, but the earnings portion will be taxed as ordinary income. |
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John is the annuitant in a VA plan, and Sue is the beneficiary. Upon John's death during the annuitization period, Sue takes a lump-sum pmt. What is her total tax liability?
A) None, because it is the proceeds from a life ins. co. B) The entire amt is taxed as ordinary income b/c it is not life ins. C) The proceeds minus John's cost basis is taxed as ordinary income at Sue's tax rate. 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 1/2. |
Answer: C
Annuity death benefits are generally pd in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amt taxed is the amt of the lump sum pmt minus the deceased's cost basis in the investment. |
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In a variable life annuity with 10 yr period certain, a contract holder receives:
A) variable pmts for 10 yrs, followed by fixed pmts for life. B) fixed pmts for 10 yrs, followed by variable pmts for life. C) 10 yrs of variable pmts D) a min of 10 yrs of variable pmts, followed by additional variable pmts for life. |
Answer: D
The owner of a life annuity with 10 yr period certain will receive pmts for life, subject to a min of 10 yrs. If the contract holder dies before the period expires, the remaining pmts are made to the beneficiary. An example would be if a life annuity w/a 10 yr period certain contract holder died after 5 yrs, pmts would continue for 5 more years to the beneficiary and then stop. |
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A client has purchased a nonqualified VA from a commercial ins. co. Before the contract is annuitized, your client, currently 60 yrs old, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?
A) A 10% penalty plus the pmt of ordinary income tax on funds w/d in excess of the owner's basis. B) Capital gains taxation on the earnings w/d in excess of the owner's basis. C) Ordinary income taxation on the earnings w/d until reaching the owner's cost basis. D) A 10% penalty plus the pmt of ordinary income tax on all of the funds w/d. |
Answer: C
Contributions to a nonqualified annuity are made with the owner's after tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Since the client is older than 59 1/2, the additional 10% penalty tax is not incurred. |
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Of the 4 client profiles below, which might be the best suited for a VA recommendation?
A) A 50 yr old indiv with $50K cash to invest, who has already made the maximum contributions to an IRA and the 401K plan at his place of employment and would like to minimize some of the tax consequences of his currently high tax bracket. B) A 75 yr old woman, who is a former executive, retired for over 10 yrs, who wants to preserve as much capital as she can to leave to her 2 grandchildren. C) A 30 yr old construction worker recently unemployed who wants to invest his severance pay amounting to 9 mos salary. D) A 25 yr old public school teacher who would like to save enough for the purchase of her first home within the next 3-5 yrs. |
Answer: A
Supplemental income stream for retirement, not preservation of capital, should be the catalyst to consider a VA. |
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Your customer in his early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable?
A) A variable annuity B) Corporate and debt securities C) Tax-free municipal bonds D) Growth mutual funds |
Answer: A
VAs offer tax-deferred growth and are suitable for achieving supplemental retirement income. Ideally, they should be funded with readily available cash rather than using funds liquidated from existing investments. None of the other investments listed here offer tax-deferred growth. |
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John is the annuitant in a variable plan and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?
A) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59 1/2 years old. B) None, because it is the proceeds from a life ins. co. C) The proceeds minus John's cost basis, taxed as ordinary income at Sue's tax rate. D) The entire amount is taxed as ordinary income, because it is not life insurance. |
Answer: C
Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of hte lump-sum payment minus the deceased's cost basis in the investment. |
