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.

Annuity Payout

If you're studying for the Series 65, I highly recommend purchasing one or more of the recorded classes at www.passthe65.com/classes.htm. Maybe you already have materials that your firm provided--these recorded classes will make sense of that stuff in a hurry.

I'm going to write a practice question on variable annuity payouts now since it's still too cold to walk the dog this morning in Chicagoland. Cody can wait--you, on the other hand, are studying for a very difficult and serious exam. Here you go then:

An annuitant chooses life with a 10-year period certain. If the annuitant lives 12 years, what happens?
A. the beneficiary receives two years of payments
B. the annuity pays out for just 10 years
C. the annuity pays out for 12 years
D. annuity units are converted back to accumulation units

EXPLANTION: with a 10-year "period certain" the annuity company will pay for at least 10 years but will also pay as long as the annuitant lives. Whichever turns out to be longer--that's how long they pay.

ANSWER: C