What Are the Distribution Options for an Inherited Annuity? When money is deposited into the annuity, it is purchasing accumulation units. All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. 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. Registration with FINRA is de facto registration with the SEC; no registration is required by the state banking commission. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies. 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. Reference: 12.3.1 in the License Exam, Question #30 of 48Question ID: 606833 An equity indexed annuity is a type of fixed annuity, but looks like a hybrid. Is required by the Securities Act of 1933, 4. Find out how you can intelligently organize your Flashcards. 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. U.S. Securities and Exchange Commission. Annuities are similar to other forms of investing in that the owner invests money with the hope that it will gain in value, but annuities also come with higher fees than most mutual funds. A prospectus for a variable annuity contract: Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase. The most popular type of variable annuity is a deferred annuity. Once annuitized, the number of annuity units does not vary. audio not yet available for this language, {"cdnAssetsUrl":"","site_dot_caption":"Cram.com","premium_user":false,"premium_set":false,"payreferer":"clone_set","payreferer_set_title":"Variable Annuities","payreferer_url":"\/flashcards\/copy\/variable-annuities-5097323","isGuest":true,"ga_id":"UA-272909-1","facebook":{"clientId":"363499237066029","version":"v12.0","language":"en_US"}}. features they offer rather than as an investment. Therefore only a fixed annuity could be considered as suitable. Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the policyowner bears the investment risk. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. In addition, an element of risk must be present. All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: The investor has already paid tax on the contributions but the earnings have grown tax-deferred. \end{array} D)Dow Jones Industrial Average. During the accumulation phase, the number of accumulation units will increase as additional money is invested. If this client is in the payout phase, how would his April payment compare to his March payment? There are many categories of annuities. The customer, in the accumulation stage of the annuity, is holding accumulation units. Your email address will not be published. A)Fixed annuity contract with a discussion regarding purchasing power risk Some state statutes and court decisions also protect some or all of the payments from those annuities. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. The growth portion is subject to a 10% penalty. Your client owns a variable annuity contract with an AIR of 4%. However, it does guarantee payments for life (mortality). Your answer, The policyowner., was correct!. co., assumes the investment risk. The accumulation period of a variable annuity may continue for many years. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Required fields are marked *. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic pay-ments to you, beginning either immediately or at some future date. Question #22 of 48Question ID: 606803 Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. Fixed Annuity, Retirement Annuities: Know the Pros and Cons. Under rebalancing, investors shift their investments periodically to return them to the proportions that represent the risk/return combination most appropriate for the investors situation. B)a majority vote from the shareholders is required to change the investment objectives. 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. A fixed annuity is a contract between the policyholder and an insurance company. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? Typically, they allow one withdrawal each year during the accumulation phase. Which of the following are defined as securities? You can buy an annuity with either a lump sum or a series of payments, and the accounts value will grow accordingly. Reference: 12.2.1 in the License Exam. Contributions to a nonqualified variable annuity are not tax deductible. There is a common apprehension that if an individual starts an immediate lifetime annuity and dies soon after that, the insurance company keeps all of the investment in the annuity. The downside was that the buyer was exposed to market risk, which could result in losses. Life annuity has the largest payout because less risk is assumed by the insurance company. Who assumes the investment risk in a variable annuity contract? Please sign in to share these flashcards. Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain period of time designated in the contract should the annuitant die within that period. A)IPO. Uses in Investing, Pros, and Cons, Indexed Annuity: Definition, How It Works, Yields, and Caps, Joint and Survivor Annuity: Key Takeaways. D)I and III. B)unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. You can learn more about the standards we follow in producing accurate, unbiased content in our. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Qualified Longevity Annuity Contract (QLAC): Definition, Taxes, and Example, Present Value of an Annuity: Meaning, Formula, and Example, Future Value of an Annuity: What Is It, Formula, and Calculation, Calculating Present and Future Value of Annuities, Annuity Table: Overview, Examples, and Formulas, Present Value Interest Factor of Annuity (PVIFA) Formula, Tables. Reference: 12.1.2.1.1 in the License Exam. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. C)number of accumulation units. If you die before the payout phase, your beneficiaries may receive a. It may decrease in value. Variable Annuities. Your 65-year-old client owns a nonqualified variable annuity. B)a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero A)the yield is always higher than mortgage yields. An investor who purchases a fixed annuity contract assumes purchasing-power risk. Her agent recommended she choose a variable annuity as a safe haven for the funds. Oct. 2014, Subjects: Annuity Contracts,Purchasing Annuities,Receiving Distribution from Annuities,Variable Life. A policyholder will make a lump sum payment or a series of payments in exchange for a guaranteed amount of income. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. a variable annuity does not guarantee payments for life. Generally, a life only contract pays the most per month because payments cease at the annuitant's death. 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 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. The annuity unit's value represents a guaranteed return. B)II and III. C)I and IV. d. 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. The accumulation period of a variable annuity may continue for many years. The upside was the possibility of higher returns during the accumulation phase and a larger income during the payout phase. Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Reference: 12.3.1 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. Which of the following recommendations would best meet the customer profile? Her agent recommended she choose a variable annuity as a safe haven for the funds. A customer is receiving annuitized payments from a variable annuity. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Reference: 12.1.1 in the License Exam. Add to folder You dont have to worry about it anymore. required to be located off of the company's premises. These contracts cover both lives and will continue to make payments until the last spouse dies. Variable annuities must be registered with: Based on the client's profile, which of the following would be the best recommendation? C)100% tax deferred. This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. 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. B) Any tax due is deferred. B)Life annuity with period certain. Deferred Annuity Definition, Types, How They Work, What Is a Fixed Annuity? D)separate account may consist of mutual funds. C)suitable due to the death benefit features of a variable annuity. Once a variable annuity has been annuitized: Your answer, each annuity unit's value varies with time, but the number of annuity units is fixed., was correct!. 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. For a retired person, which of the following investments would provide the greatest protection against inflation? An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. A)accumulation shares. Please sign in to access member exclusive content. The value of an annuity unit varies from month to month according to the performance of the separate account in comparison to the assumed interest rate. A)I and IV. A market-value adjusted annuity is one that combines two desirable features the ability to select and fix the time period and interest rate over which the annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected. used for the investment of funds paid by contract holders. D)II and III. Pretend you are on the leadership team of a manufacturing company that is currently challenged by low-cost competition. Reference: 12.2.1 in the License Exam. Registration with FINRA is de factor registration with the SEC; no registration is required by the state banking commission. Reference: 12.3.2.1 in the License Exam. A lifetime immediate annuity converts an investment into a stream of payments that last until the annuity owner dies. vote on proposed changes in investment policy. Variable annuities are designed to combat inflation risk. What is the taxable consequence of this withdrawal to your client? A)exempt from taxes The entire amount is taxed as ordinary income. Reference: 12.1.4.1 in the License Exam. A variable annuity is both an insurance and a securities product. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs. Question #33 of 48Question ID: 606832 A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. 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. A)II and III D. Value of each annuity unit each month. The following annuities are available in fixed or variable form: 1. 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. In March, the actual net return to the separate account was 8%. A guaranteed lifetime annuity promises to pay the owner an income for the rest of their life. D)value of accumulation units. Compound Accreted Value (CAV) of a municipal bond is used as the starting point in determining the value of a zero coupon bond. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. Distribution can take place before or during any solicitation for sale. She will receive the annuity's entire value in a lump-sum payment. Her intent was to use the funds for the down payment on a house after graduation. Are Variable Annuities Subject to Required Minimum Distributions? For this potential advantage, the investor, rather than the ins. 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. & securities licenses. In a variable annuity contract, the provision that guarantees the annuitant payments for life is called the: Your answer, mortality guarantee., was correct!. Your 65-year-old client owns a nonqualified variable annuity. Many investments are taxed year by year, but the investment earningscapital gains and investment incomein annuities arent taxable until the investor withdraws money. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. A)value of underlying securities held in the separate account. 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. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. C)annuity units. D)II and IV. 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? For a retired person, which of the following investments would provide the greatest protection against inflation? Reference: 12.1.2 in the License Exam. A security is any investment for profit with management performed by a third party. the state banking commission. 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?