Evaluate Variable Annuities - Series 7

1. What is a guaranteed lifetime withdrawal benefit (GLWB) rider designed to provide?

   Lifetime withdrawals at a stated rate, even if the account value reaches $0$. GLWB guarantees lifelong income at a set percentage, with insurer covering payments if the account depletes due to markets or longevity.

2. What is a VA contract owner's right to the free-look period?

   The right to cancel and receive a refund within the free-look window. The free-look period protects owners by allowing contract review and cancellation with full refund shortly after issuance.

3. What is a surrender charge in a variable annuity contract?

   A declining fee assessed for withdrawals or surrender during early years. Surrender charges penalize early exits to recover insurer costs, typically decreasing annually until expiring after a set period.

4. What is the $10\%$ IRS penalty rule for early variable annuity distributions?

   A $10\%$ penalty may apply to taxable amounts withdrawn before age $59\frac{1}{2}$. The 10% penalty discourages early access to retirement savings, applying to taxable portions before the standard retirement age.

5. Which owner action triggers taxation in a nonqualified variable annuity: exchanging subaccounts or withdrawing cash?

   Withdrawing cash triggers taxation; subaccount exchanges do not. Cash withdrawals constitute distributions triggering tax on earnings, whereas internal subaccount shifts are non-taxable reallocations.

6. What is the mortality and expense (M&E) risk charge in a variable annuity?

   An insurance charge for mortality risk, expenses, and guarantees. The M&E charge compensates the insurer for risks associated with longevity, administrative costs, and contractual guarantees provided.

7. What is annuitization in a variable annuity?

   Converting the account value into a stream of periodic payments. Annuitization locks in the accumulated value to generate income, transferring investment risk partially to the insurer for payments.

8. What is the tax treatment of earnings inside a nonqualified variable annuity?

   Tax-deferred; no current tax until distributions occur. Nonqualified VA earnings accumulate without immediate taxation, deferring liability until funds are distributed to the owner.

9. What is the primary purpose of a guaranteed minimum death benefit (GMDB) rider?

   To guarantee a minimum benefit payable to beneficiaries if the owner dies. GMDB riders safeguard beneficiaries against market losses by guaranteeing a minimum payout upon the owner's premature death.

10. What is the key risk of a life only annuity payout option to the contract owner's heirs?

    Payments stop at death; no remaining value for beneficiaries. Life only forfeits any remaining value at death to maximize lifetime payments, leaving no inheritance for designated heirs.

11. Which tax rule applies to partial withdrawals from a nonqualified variable annuity?

    LIFO: earnings come out first and are taxed as ordinary income. LIFO treatment ensures taxable earnings are withdrawn first in nonqualified annuities, promoting tax deferral on principal.

12. What does a life with refund annuitization option guarantee at death?

    Total payouts will equal at least the amount annuitized (to beneficiary if needed). Life with refund protects principal by ensuring total payments match or exceed the annuitized amount, with refunds if necessary.

13. What is a guaranteed minimum income benefit (GMIB) rider designed to provide?

    A minimum income base for annuitization regardless of subaccount performance. GMIB establishes a protected base for annuitization, growing at a minimum rate to ensure income despite poor subaccount returns.

14. What is an annuity unit in a variable annuity after annuitization?

    A unit whose value determines each variable payment during the payout phase. Annuity units are used post-annuitization to calculate variable payments, reflecting ongoing subaccount performance adjustments.

15. What is an annuity accumulation unit in a variable annuity?

    A unit used to measure the value of subaccount holdings pre-annuitization. Accumulation units track the owner's proportional interest in the subaccount's value during the accumulation phase before conversion to payments.

16. Which annuitization option continues payments for the life of the annuitant and a beneficiary?

    Joint and survivor (joint life with survivor benefit). Joint and survivor extends coverage to two lives, reducing initial payments but ensuring continuity for the surviving beneficiary.

17. What is a VA subaccount most similar to from an investment standpoint?

    A mutual fund-like investment option inside the annuity. Subaccounts function like mutual funds by pooling investments in securities, allowing diversified exposure within the annuity structure.

18. What is a common GMDB design called "return of premium" in a variable annuity?

    Death benefit equals total purchase payments (adjusted for withdrawals). Return of premium GMDB preserves invested capital by paying out at least the net premiums, protecting against investment declines.

19. Identify the correct taxation rule: VA earnings are taxed as capital gains or ordinary income?

    Ordinary income. VA earnings are treated as ordinary income upon distribution due to IRS rules excluding them from capital gains taxation.

20. What is the tax character of variable annuity distributions (earnings portion)?

    Ordinary income, not capital gains. VA distributions qualify as ordinary income due to the tax-deferred growth structure, without capital gains preferential rates.

21. Which annuitization option pays the highest monthly amount for one annuitant?

    Life only (straight life). Life only maximizes payouts by basing them solely on the annuitant's life expectancy, without provisions for survivors.

22. What does a period certain annuitization option guarantee?

    Payments for at least a stated time period, even if the annuitant dies early. Period certain mitigates longevity risk by guaranteeing payments for a fixed term, directing any remainder to beneficiaries upon early death.

23. What is a variable annuity (VA) in terms of who bears the investment risk?

    A tax-deferred annuity where the contract owner bears investment risk. In variable annuities, the owner selects subaccount investments, assuming the risk of market fluctuations while enjoying tax deferral on growth.

24. What is a guaranteed minimum withdrawal benefit (GMWB) rider designed to provide?

    The ability to withdraw a stated amount annually, typically until a base is recovered. GMWB secures recovery of premiums through annual withdrawals, offering flexibility without full annuitization commitment.

25. Which VA feature allows a fixed number of transfers among subaccounts without tax consequences?

    Subaccount exchange (reallocation) privilege. The exchange privilege enables tax-free portfolio adjustments within the annuity, typically limited to prevent excessive trading.

Study these flashcards