Series 6 > Variable Insurance and Annuities > Flashcards

Variable Insurance and Annuities Flashcards

Explain the features, valuation, and taxation of variable life and annuity products. (41 cards)

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1
Q

What is the primary difference between fixed and variable annuities?

A

Fixed annuities offer guaranteed returns, while variable annuities have returns based on investment performance.

Fixed annuities provide a steady income stream, whereas variable annuities can fluctuate in value, depending on the performance of underlying investments like mutual funds.

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2
Q

Fill in the blank:

______ annuities offer potential growth tied to a stock market index but with protection against market losses.

A

Indexed

Indexed annuities typically offer a minimum guaranteed interest rate and the opportunity to earn additional interest based on the performance of a specified index, such as the S&P 500.

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3
Q

List the three main types of annuities.

A
  • Fixed annuities
  • Variable annuities
  • Indexed annuities

Each annuity type serves different financial goals and risk tolerances, providing various levels of risk and potential return.

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4
Q

What is a key feature of indexed annuities?

A

They offer returns linked to a stock market index with a cap on maximum gains.

Indexed annuities often include participation rates and cap rates, which limit the amount of index-linked interest credited to the annuity.

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5
Q

How do variable annuities provide income?

A

Through subaccounts that invest in various securities.

Variable annuities allow investors to allocate premiums among different subaccounts, similar to mutual funds, which can affect the annuity’s value and income payments.

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6
Q

Fill in the blank:

Fixed annuities are most suitable for investors seeking ______, ______.

A

stable, predictable income

Fixed annuities provide a guaranteed interest rate and consistent payments, making them ideal for risk-averse investors looking for security.

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7
Q

What is a common benefit of variable annuities?

A

Potential for higher returns based on market performance.

While variable annuities carry more risk than fixed annuities, they offer the opportunity for greater returns, depending on the performance of chosen investments.

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8
Q

List one advantage and disadvantage of indexed annuities.

A
  • Advantage: Protection against market losses
  • Disadvantage: Limited upside potential

Indexed annuities provide a balance between risk and reward by offering some market-linked gains while protecting against downturns, but they often cap potential earnings.

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9
Q

Fill in the blanks:

The primary risk associated with variable annuities is _______ _____.

A

investment risk

Variable annuities expose investors to the risk of losing principal due to poor investment performance, unlike fixed annuities which offer guaranteed returns.

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10
Q

What determines the interest credited to an indexed annuity?

A

The performance of a specified market index.

Indexed annuities calculate interest credits based on changes in a selected index, but they may include features like participation rates and cap rates that affect the final credit.

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11
Q

What is the primary function of a separate account in variable insurance products?

A

To segregate the investment assets supporting variable life insurance and annuity products from the insurer’s general account.

This separation allows for investment flexibility and the potential for higher returns, as the assets in the separate account can be invested in various securities like stocks and bonds.

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12
Q

Fill in the blank:

The ______ is a hypothetical rate of return used to illustrate the performance of a variable annuity.

A

AIR

(Assumed Interest Rate)

AIR is used to project future income payments from a variable annuity. It is not a guarantee but a benchmark for performance evaluation.

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13
Q

List two key features of a separate account in variable annuities.

A
  • Investment flexibility
  • Potential for higher returns

Separate accounts allow policyholders to choose from a variety of investment options, which can lead to greater growth potential compared to fixed accounts.

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14
Q

How does the performance of a separate account affect the cash value of a variable life insurance policy?

A

The cash value fluctuates based on the performance of the investments in the separate account.

If the investments perform well, the cash value increases; if not, it decreases. This variability is a key characteristic of variable life insurance.

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15
Q

What is one risk associated with investing in a variable annuity’s separate account?

A

Market risk

Since the separate account is invested in securities, its value can fluctuate with market conditions, potentially affecting the annuity’s performance and value.

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16
Q

Fill in the blanks:

The performance of a variable life insurance policy is directly linked to the ______ ______ chosen by the policyholder.

A

investment options

Policyholders can choose from a range of subaccounts, similar to mutual funds, which determine the policy’s cash value growth potential.

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17
Q

What happens if the actual return on a variable annuity’s separate account is higher than the AIR?

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A

The annuity payments increase.

When actual returns exceed the AIR, the excess is reflected in higher annuity payments, providing the annuitant with potentially greater income.

18
Q

List the two types of accounts involved in a variable annuity.

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A
  • General account
  • Separate account

The general account supports fixed annuity options, while the separate account supports variable options, offering different risk and return profiles.

19
Q

How does a decrease in the separate account’s performance impact a variable life insurance policy?

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A

It can reduce the policy’s cash value and death benefit.

Poor investment performance in the separate account directly affects the policy’s value, potentially necessitating additional premium payments to maintain coverage.

20
Q

Why might an investor choose a variable annuity over a fixed annuity?

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A

For the potential of higher returns through investment in separate accounts.

Variable annuities offer the opportunity to invest in equities and other securities, which can lead to greater long-term growth compared to the fixed returns of a fixed annuity.

21
Q

What is the primary purpose of an annuity?

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A

To provide a stream of income, typically for retirement.

Annuities are financial products that can be used to ensure a steady income stream for a specified period or for life, helping individuals manage longevity risk.

22
Q

List three common types of annuities.

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A
  • Fixed annuities
  • Variable annuities
  • Indexed annuities

Each type of annuity has unique features: fixed annuities offer guaranteed interest rates, variable annuities provide returns based on investment performance, and indexed annuities link returns to a market index.

23
Q

Fill in the blank:

An annuity contract’s ______ period is the time during which the annuitant receives payments.

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A

payout

The payout period follows the accumulation phase, during which the annuitant builds up the value of the annuity.

24
Q

How are earnings from a non-qualified annuity taxed upon withdrawal?

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A

Taxed as ordinary income.

Earnings in a non-qualified annuity grow tax-deferred, but withdrawals are subject to income tax on the earnings portion.

25
What is a **surrender charge** in an annuity contract?
A fee for **early withdrawal** of funds. ## Footnote Surrender charges are typically applied if funds are withdrawn before a specified period, often decreasing over time.
26
# Fill in the blanks: The \_\_\_\_\_\_ \_\_\_\_\_\_ provision allows annuity owners to withdraw a percentage of their contract value without incurring surrender charges.
free withdrawal ## Footnote This provision typically allows for annual withdrawals up to a certain percentage, such as 10% of the contract value.
27
What is the **tax treatment** of annuity payments received from a qualified annuity?
Fully taxable as ordinary income. ## Footnote Since contributions to qualified annuities are often pre-tax, the entire distribution is subject to income tax.
28
Define the term '**annuitization**'.
The process of **converting an annuity's accumulated value** into periodic income payments. ## Footnote Annuitization can provide a guaranteed income stream for life or a specified period, depending on the contract terms.
29
What is the **exclusion ratio** in an annuity?
The portion of each annuity payment that is **not taxable**. ## Footnote The exclusion ratio is used to determine the amount of each payment that represents a return of the annuitant's principal, which is not subject to taxation.
30
# Fill in the blanks: A \_\_\_\_\_\_ annuity allows for investment in sub-accounts that resemble mutual funds.
variable ## Footnote Variable annuities offer the potential for higher returns based on the performance of chosen sub-accounts, but they also carry investment risk.
31
What is the **main risk** associated with fixed annuities?
Inflation risk ## Footnote Fixed annuities provide stable, predictable payments, but they may lose purchasing power over time if inflation rates exceed the fixed interest rate.
32
What is the **primary feature** that distinguishes variable life insurance from other types of life insurance?
Investment component ## Footnote Variable life insurance allows policyholders to allocate a portion of their premium to separate accounts, which can be invested in stocks, bonds, or other securities. This offers the potential for higher returns compared to traditional life insurance policies.
33
List the **regulatory bodies** overseeing variable life insurance.
* FINRA * SEC * State insurance departments ## Footnote Variable life insurance is subject to both federal securities laws and state insurance regulations, ensuring that both the investment and insurance aspects are adequately monitored.
34
# Fill in the blank: The cash value of a variable life insurance policy \_\_\_\_\_\_ based on the performance of the underlying investments.
fluctuates ## Footnote Unlike whole life insurance, the cash value in variable life insurance can increase or decrease depending on market conditions, reflecting the performance of the chosen investment options.
35
What is a **prospectus**, and why is it important in variable life insurance?
A prospectus is a **legal document** that provides detailed information about an investment offering. It is important because it helps investors understand the risks, fees, and investment options associated with the policy. ## Footnote The prospectus must be provided to potential buyers of variable life insurance and annuities, ensuring transparency and informed decision-making.
36
Describe the **death benefit feature** of variable life insurance.
It can be **fixed or variable**, depending on the policyholder's choice. ## Footnote Policyholders can select a fixed death benefit or one that varies with the cash value. This flexibility allows for potential growth in the death benefit if the investments perform well.
37
# Fill in the blank: Variable life insurance policies are considered \_\_\_\_\_\_ products due to their investment component.
securities ## Footnote Because they include an investment element, variable life insurance policies are regulated as securities, requiring compliance with both insurance and securities laws.
38
What are the **two main charges** associated with variable life insurance policies?
* Mortality and expense risk charge * Administrative fees ## Footnote These charges cover the cost of insurance protection and administrative expenses. Additional fees may apply based on the investment options selected by the policyholder.
39
Explain the role of **separate accounts** in variable life insurance.
Separate accounts are used to **invest the cash value** in a range of securities, providing potential for growth. ## Footnote The performance of these accounts directly impacts the policy's cash value and, potentially, the death benefit. Policyholders can choose from different investment options within these accounts.
40
# Fill in the blank: Policyholders can switch between investment options in a variable life insurance policy without \_\_\_\_\_\_.
triggering a taxable event ## Footnote This flexibility allows policyholders to adjust their investment strategies in response to market conditions without immediate tax consequences.
41
What is the **primary risk** associated with variable life insurance?
Investment risk ## Footnote The policyholder bears the investment risk, meaning the cash value and death benefit can decrease if the underlying investments perform poorly. This contrasts with traditional life insurance, where the insurer assumes the investment risk.
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