Variable Annuities

The exam will likely ask you 3 or more questions on variable annuities. How would you answer something like this:

Which of the following statements is/are true of non-qualified variable annuities?
I. the annuitant's return of principal is guaranteed
II. the annuitant's net deposits into the account equal her cost basis
III. the annuitant is subject to penalties on withdrawals prior to age 59 1/2
IV. the annuitant is subject to penalties if withdrawals do not commence by age 70 1/2

A. I
B. II, III
C. I, IV
D. II, III, IV

EXPLANATION: choice "I" is true only during the accumulation phase due to the death benefit, but the statement falls apart during the annuity phase and, therefore, has to be eliminated. The variable annuity does not promise a return of principal, which is one of the risks disclosed in the prospectus and sales literature. If the annuitant dies during the accumulation period, the beneficiaries receive at least what he put in, but when the contract is annuitized, there is no guarantee on what will be received. So, eliminate choices A and C. Now, you get II and III for free because they are both in the remaining two choices. The only difference between B and D is that one contains choice "IV" and one doesn't. So, do withdrawals have to begin at age 70 1/2? Even though the 10% early withdrawal penalty is there, the annuitant does not have to start taking money out at age 70 1/2. . . not on a non-qualified variable annuity. Choice D is eliminated, leaving you with . . .



ANSWER: b

Also remember that a qualified variable annuity would be subject to lifetime maximum contributions and would force the annuitant to begin withdrawals at age 70 1/2. So, as always, read each test question very carefully.

Equity Indexed Annuities

Equity Indexed Annuities are on many insurance agents' minds these days. As you probably heard, the SEC recently tweaked the definition of a "security" in the Securities Act of 1933 by re-defining the exclusion for fixed annuities. Starting in 2011, equity indexed annuities that are "more likely than not" to pay out more than the stated guaranteed return will be considered "securities" subject to registration.
Ouch. How will this affect the exams? As usual--who knows? NASAA doesn't put out memo's that help people know what will be tested. That would be, like, fair. But, if you get a question about a "fixed annuity" on your test, remember that a fixed annuity is not a security. It's a pure insurance product. It pays a guaranteed rate of return to the investor backed by the insurance company's "general account." The equity indexed annuity is the one that will be considered a "security" starting in a couple of years.
The Rule is SEC Rule 151A, which amends the Securities Act of 1933. I have NO OPINION ON THIS TOPIC WHATSOEVER, remember. I'm just trying to help prepare you for a potential exam question.