1
Q
annuity
A
- contract between an individual and a life insurance company, usually purchased for retirement income
- earnings are tax deferred - can be valuable for investors looking to accumulate additional funds for retirement
- no limit on contribution amt
- either fixed or variable
2
Q
annuitant
A
- investor
- pays the premium in one lump sum or periodic payments
- at a future date the annuitant can surrender the policy and receive lump payment or get regular income distributions that will continue for life
3
Q
fixed annuities
A
- not securities
- guarantees a fixed rate of return
- when annuitant elects to receive income, the payout is based on the accts value, the annuitant’s life expectancy
- inflation risk
- premium goes to the insurance companies general acct
4
Q
variable annuities
A
- money is directed onto one or more sub accounts of the company’s separate acct.
- these separate accts act like mutual funds and have a wide variety of objectives
- returns are not guaranteed and loss of principal is possible
- separate accts are registered as investment companies (often as UIT)
- required by the Securities Act of 1933 to deliver a prospectus prior to or concurrent with the sale
- most often invested in a stock portfolio - has a better chance of keeping pace with inflation than fixed income investments
- more risk than a fixed annuity
- payments vary due to the sub accounts performance
- guaranteed death benefit: if the investor dies during the accumulation period, the beneficiary will get the greater if the current value of the acct or amt invested
5
Q
variable
A
- if you see the word variable, 2 licenses are needed to sell: an insurance license and a securities license
6
Q
life insurance
A
- provides death benefit to a named beneficiary or beneficiaries upon the death of the insured
- premium for the policy is calculated according to the insured’s health, age, sex and policy’s face amt at issue
7
Q
whole life insurance
A
- designed to last unit at least age 100 or the death of the insured, whichever occurs first
- accrue cash value that may be borrowed for living needs
- insurance license is needed to sell
- not a security and not sold as an investment
8
Q
term life insurance
A
- protection for a specified period.
- provides pure protection and is the least expensive form of life insurance
- does not build cash values
- if the policy is surrender before death or is not renewed there is nothing beyond the expired policy
9
Q
Variable life insurance
A
- has a fixed scheduled premium but it is split between the insurance company’s general acct (used to guarantee a min death benefit) and the rest is in a separate acct (cash value of the policy which fluctuates in value)
- value of the separate acct portion is priced daily but policyholder’s cash value is reported month
- the separate acct portion is subject to investment risk and is a security
- net premium (Amt after premium determined and expenses deducted) is invested in subaccounts of the separate acct. Objectives may include: growth, income, balanced, index, money market
10
Q
assumed interest rate (AIR) and variable death benefits
A
- AIR is the min rat of return necessary to provide the level death benefit.
- AIR is determined by actuaries and stated in the policy contract.
- AIR is a TARGET
- death benefit payable under a variable life insurance policy is adjusted on an annual basis and can increase/decrease based on performance of the sub accounts with AIR.
- benefit of variable life insurance policy is that it can adjust upward and maybe keep pace with inflation
- acct will never fall below the amt guaranteed at issue
- if the separate acct performance is greater than AIR the death benefit will increase
- if the separate acct performance is equal to AIR, the death benefit remains the same
- if the separate acct performance is below AIR, the death benefit decreases but not below the policy’s face amt
11
Q
purchasing annuities
A
- aggregate fees include sales charges on the front end and conditional deferred sales loads which are levied upon surrender
- if you surrender the policy in early yrs, fees can be significant
- payments to the insurance company can be made in a lump sum or periodically
12
Q
FINRA rule 2320
A
- no max sales charge of variable annuities, but the sales charge must be reasonable
13
Q
single premium deferred annuity
A
- bought with a lump sum, but payment of benefits is delayed until a later date selected by the annuitant
14
Q
periodic payment deferred annuity
A
- allows investments over time
- benefit payments are deferred until a future date selected by the annuitant
15
Q
immediate annuity
A
- purchased with a lump sum
- payout of benefits usually starts within 60 days
16
Q
bonus annuities
A
- offers an upfront or first year interest rate bonus
- have surrender chargers lasting longer than those without the bonus
- must disclose the additional costs and benefits
17
Q
settlement options
A
- annuitants wishing to get scheduled payments for life may annuitize and a payout option must be selected
- annuity payment options are: life annuity, life annuity with a certain period, joint life with last survivor annuity, unit refund option
- this is a contractual obligation that is entered into and once annuitized, the decision is final
18
Q
life annuity/straight life
A
- largest monthly payout
- insurance company pays the annuitant for life
- when the annuitant dies, there are no additional payments for a beneficiary
- money remaining in the acct reverts to the insurer
19
Q
life annuity with a certain period
A
- a little less risky than straight life
- allows for payments to a beneficiary
- guarantees that a min # of payments will be made even if the annuitant dies
- smaller check than straight life
- allows for choice of time period
20
Q
joint life with last survivor annuity
A
- guarantees payments over 2 lives
- smaller check than straight life and life annuity with a certain period
21
Q
unit refund option
A
- min # of payments are made upon retirement
- value remains in the acct after the death of the annuitant
- payable in a lump sum to the annuitant’s beneficiary
- can be added as a rider to one of the other options
- smallest check per month
22
Q
accumulation phase of a variable annuity
A
- growth phase
- pay in period for a deferred annuity
- contracts terms are flexible
- OK for investor to miss periodic payment, not in danger of forfeiting the preceding contributions
- contract holder can terminate at any time, but might incur surrender charges on amounts withdrawn in the first 5 -10 yrs after issuance of the contract
23
Q
accumulation units of a variable annuity
A
- accumulation unit is an accounting measure that represents an investor’s share of ownership in the separate account
- When money is deposited into the annuity, it is purchasing accumulation units.
- value is determined in the same way as mutual fund shares
- unit value changes with the value of the securities held in the separate account
- unit has a NAV
24
Q
annuity units of a variable annuity
A
- when a variable annuity contract is annuitized, accumulation units are exchanged for annuity units
- annuity units = a measure of value used only during an annuitized contract’s payout period
- an accounting measure that determines the amt of each payment to the annuitant during the payout period
- # of annuity units is calculated when an owner annuitizes the contract
- the # of annuity units liquidated each does not change, it is fixed at the time annuitizing base on the value of the contract when the payout period begins and other variables (payout option, age, sec, AIR)
- monthly payment will vary bc the unit’s value moves with the separate acct portfolio’s value
25
assumed interest rate (AIR) for variable annuities
- AIR is the basis for determining distributions from a variable annuity
- estimated conservatively, provides an earnings target for the separate account over the life of the contract
- actuarial dept of the insurance company determines the initial value for the annuity units and the amt of the first month's annuity payment. this is when AIR is established
- value of an annuity unit and the annuitant's subsequent monthly income will vary
26
annuity accumulation stage
- also growth in the value of an accumulation unit is deferred until withdrawal
- all contributions to annuities are made with after tax dollars unless the annuity is part of an employer sponsored (qualified) retirement plan or held in an IRA
27
annuity payout stage
- on withdrawal, the amt exceeding the investor's cost basis is taxed as ordinary income
- random withdrawls, lump sum withdrawals, annuitization
28
random withdrawals
- taxed under last in, first out method (LIFO)
- earnings are assumed by the IRS to be the last monies deposited
- the earnings are considered to be withdrawn first from the annuity, this is taxable as ordinary income
- after the withdrawal of all earnings, contributions representing cost basis may be withdrawn without tax
29
lump sum withdrawals
- LIFO method
- earnings are removed before contributions
- if investor gets a lump sum before 59.5, the earning portion withdrawn is taxed as ordinary income and subject to an additional 10% tax penalty
30
annuitization
- annuitized payouts are typically made monthly and are taxed according to an exclusion ratio
- each monthly payment consists of principal + earnings
- money paid isn't taxed but the earnings are
31
exclusion ratio
espresso the % of each monthly payment that will be taxable
32
1035 exchange
- tax free exchange between like contracts
- annuity and life insurance holders can exchange their policies wit tax current liability
- applies to: cash values from annuity to life, life to life, and life to annuity
- Can NOT be applied to annuity to life
- possible disadvantages: surrender charges on the old policy, new surrender charge period on the new policy and possible loss of a higher death benefit
-Section 1035 of the Internal Revenue Code permits the exchange of an annuity to another annuity, whether issued by the same or a competing company, with the tax-deferral on earnings continuing. These exchanges can also be made from an insurance policy to an annuity, but not from an annuity to an insurance policy.
33
qualified annuities
- tax shelter annuities available in 403b plans, which are made with pretax dollars, so the investor's cost basis is zero.
- any withdrawal is taxed as ordinary income
34
FINRA rule 2320 - variable contracts of an insurance company
- no max on sales charge for variable annuities
- suitability of variable life insurance: must be a life insurance need, applicant must be comfortable with the separate account and that cash value is not guaranteed, applicant must understand the variable death benefit feature
35
FINRA rule 2330 - member's responsibility regarding deferred variable annuities
- applies to recommended purchases and exchanges of deferred variable annuities and recommended initial sub account allocations
- does NOT apply to reallocations, once the investor has made the initial purchase, any subsequent investments don't fall under the rule
- member must have reasonable basis that a deferred variable annuity is suitable
36
suitability requirements
- customer has been informed of various features of deferred variable annuities (surrender period and charges - potential tax penalty, mortality and expense fees, investment advisory fees, potential charges for and features of riders, insurance and investment components market risk.
- customer would benefit from tax deferred growth, annuitization, death or living benefit
- product enhancements
37
suitability of 1035 exchanges
- negative conditions to be aware of:
- surrender charges imposed by the insurance company
- the beginning of a new surrender period
- possible reduction in death benefit
- how the expenses of the new contract compare with the old contract
- benefits included in the new product might not be needed by the purchaser
38
36 month rule
- has the customer had another deferred variable annuity exchange in past 36 months
- member must make a reasonable effort to get this info and must document in writing the nature of the inquiry and the response from the customer
39
policy loans
- the insured may borrow a % of cash value (75% after the policy has been in force for 3 yrs)
- the death benefit becomes available, the loan amt is deducted from the death benefit before payment
- interest rate of loan is stated in the policy
40
variable life insurance contract exchange
- the contract exchange provision must be available for a min of 2 yrs
- no medical underwriting (evidence of insurability) is required for the exchange
- the new policy is issued as if everything were retroactive - age of the insured at original issue date is used
41
sales chargers
- sales charges on a fixed premium variable life contract may not exceed 9% of the payments to be made over the life of the contract
42
refund provisions
- a policy owner who wants a refund within 45 days receives all money paid
- from 45 days to 2 years there is a partial refund of sales charge
- after a variable life policy has been in effect for 2 years, the surrender value of the policy is the cash value, there is no sales charge refund
43
free look period
The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.
Series 7
flashcards
Decks in class (19)
# Cards
