Chapter 7 Retirement Plans- Variable Annuities & Retirement Accounts

A variable annuity is what kind of product?
Click the card to flip 👆
1 / 75
Terms in this set (75)
A variable annuity is what kind of product?
Insurance and Security product
Why is a variable annuity considered to be a security product?
Because the investor bears the investment risk
Is there a guarantee rate of return with a variable annuity?
No
What is the difference between a variable annuity and a fixed annuity?
The fixed annuity has a guaranteed rate of return
What licenses are required to sell a variable annuity?
Series 6 or 7
State Insurance License
What are the 2 types of contributions for variable annuities?
Single Premium
Periodic Premium
Type of VA contribution:

One lump sum payment, paid in full
Single Premium
Type of VA contribution:

Periodic payments to fund the annuity
Periodic Premium
What are the two types of variable annuity distribution methods?
Immediate
Deferred
Type of VA distribution:

Receive money right away
Immediate
Type of VA distribution: Take distributions at a later dateDeferredWhat is the contribution/distribution combination that is not allowed?Periodic Payments/ Immediate distributionDefinition: Phase when the investor makes contributions into the separate accountAccumulation PhaseDefinition: A type of account where the investor makes contributions into it and it is held apart from the general holdings fund held by the insurance companySeparate accountHow are dividends and interest payments used in the separate account?Automatically reinvested and grow tax deferredDefinition: These are like shares of mutual funds but for variable annuities, but there isn't a specific number of shares issued they are used to fund the variable annuity and then are converted when the annuity is annuitizedAccumulation UnitsWhat is a major benefit that variable annuities offer for customers during the accumulation phase?A death benefitWhat are the two death benefit options for the beneficiary when the owner of the variable annuity dies during the accumulation phase?Sum of all premium payments made into the account or Value of the account it paid outWhat is the age of an investor to be able to take out of the variable annuity without any penalty?59 & 1/2What is the penalty if an investor who is not 59 & 1/2 makes a withdrawal from the variable annuity?Regular income tax plus a 10% penaltyIf an investor decides to completely withdrawal and close the variable annuity what additional fees could they see?Surrender charges from the insurance companyWhat are the 2 types of distribution options for variable annuities?Random withdrawals AnnuitizationRandom withdrawals from an annuity benefit the investor how?maintains full control of the accountDefinition: Contract owner surrenders the account to the insurance company in return for a stream of lifetime paymentsAnnuitizationHow does annuitizing the variable annuity benefit the customer?Gives them guaranteed lifetime payments even if the account is depletedWhat is the benefit to the insurance company if the investor decides to annuitize the annuity?If customer dies before account is depleted the insurance company receives the rest of the moneyWhat is the phase where the actuary converts the accumulation units into a fixed number of annuity units?Annuity phaseEach annuity payout has a _______ number of annuity units and a _______ amount of payment?Fixed VariableAnnuity payments are based on what?Performance of the separate accountDefinition: Assumed interest rate of how your annuity will do over time, a non guaranteed rateAIRIf your separate account performance is greater than the AIR your next months payout will? (Increase, Decrease, Stay the Same)IncreaseIf your separate account performance is equal to the AIR your next months payout will? (Increase, Decrease, Stay the Same)Stay the sameIf your separate account performance is lower than the AIR your next months payout will? (Increase, Decrease, Stay the Same)DecreaseBasic Payment Options for Annuities: Largest Payment per month, last until death of customer, least risk for insurance customerLifeBasic Payment Options for Annuities: Payment until death or if you die before a set timeframe the beneficiary receives the paymentLife with period certainBasic Payment Options for Annuities: Covers the remaining lifespans of both the annuitant and a beneficiary- smallest monthly payout- most risk to insurance companyLife with Joint SurvivorWhat are the 2 different annuity guarantees?Mortality ExpenseDefinition: Type of annuity guarantee that if a contract is annuitized the insurance company promises to pay until deathMortalityDefinition: Annuity guarantee that expenses associated to the account won't increaseExpenseIf an annuity plan is tax qualified this means its funded with pre-tax money and contributions are ______?DeductibleHow are withdrawals for a qualified annuity plan taxed?Fully taxableIf an annuity plan is non-tax qualified this means its funded with after-tax money and the contributions are ________?Not deductibleTaxation on withdrawals from a non-qualified annuity plan if the owner does not annuitize?LIFO- untaxed earnings come out firstTaxation on withdrawals from a non-qualified annuity plan if the owner does annuitize?Payments are taxed using exclusion ratioWhat are the 3 benefits for investing in Variable Annuities?Tax Deferred growth Lifetime income No limits on contributionsWhat are the risks of variable annuities? (4) (Not type of investment risk, just actual risks)Income is variable Not suitable for short term investors High front end loads Possible surrender chargesWhat are the two types of investors that typically invest in variable annuitiesWealthy Supplemental retirement savingsContribution amount for Traditional IRA per year for Individual Individual and Spouse6K 12KTraditional IRA is funded with pre-tax money from what?Earned IncomeWhat are the 6 ineligible investments for a Traditional IRA?Art & Collectibles Life Insurance Speculative options Margin Short SalesDistributions can be made without a penalty at what age for a traditional IRA?59 1/2If distributions are taken from a traditional ira prior to turning 59 1/2 what is the penalty?Regular income tax plus 10% penaltyWhat are the 5 exceptions to avoid the early withdrawal penalty?Death Disability First time home purchase up to 10K High education expenses Childbirth up to 5KA required minimum distribution is required at what age for a traditional ira?the following year they turn 72Max contribution for a Roth IRA per year?6KRoth IRAs are contributed with?After tax moneyCan higher income earners invest in roth IRAsNoDistributions are tax free for a Roth IRA when what 2 qualifications have been made?Held for at least 5 years and is over the age of 59 1/2Is there any RMDs for a ROTH IRA?NoType of Corporate Pension Plans: Promised benefit at retirement Favors high salaried employees closet to retirement Funded liability assumed by employerDefined Benefit PlanType of Corporate Pension Plans: Unknown eventual retirement benefit Contributions are formula based Typically favors long tenured employeesDefined contribution plansWhat are the 3 qualified corporate plans governed under ERISA?401 K Profit Sharing Keogh PlansERISA applies to certain qualified ________ employer sponsored plansPrivate sectorType of Qualified Corporate Plan: Allows employee to contribute a % of salary and employees are allowed matching contributions by the employer401KType of Qualified Corporate Plan: Based on company's profits and the employer decides how much to contribute each yearProfit sharing planType of Qualified Corporate Plan: Plans used by self-employed individuals, employer contributions at a max of 61K and must contribute 25% of salary for employee at a max of 61KKeogh PlanWhat are the 3 types of Non-qualified public sector plans?Simple IRA SEP IRA 403BType of Non-qualified public sector plan: Employers with fewer than 100 employees, employee makes deductible contributionsSIMPLE IRAType of Non-qualified public sector plan: Simplified plan allows for easier management by small business ownersSEP IRAType of Non-qualified public sector plan: Used by public education institutions, non-profits, and churches403BType of Educational Savings plans: Used to fund all levels of school Tax free withdrawals for qualified expenses Max contributions of $2000 per year Distributions must be taken by the age of 30Coverdell Savings accountType of Educational Savings Plans: State issued municipal fund security Used to fund higher education expenses State determines contribution limits Tax free withdrawals for qualified expenses529 Savings plansIf an individual contributes 6K in one year to a traditional IRA can they still contribute to a roth in the same year?No and vice versaA self-employed client with high annual income and is in a high tax bracket, doesn't have a retirement plan set up wants to reduce his taxable income, what kind of retirement account is most suitable for him?SEP IRAContributions to a Coverdell Education Savings Account must cease when the beneficiaries reaches the age of?18