The Office of General Counsel issued the following informal opinion on July 11, 2001, representing the position of the New York State Insurance Department. Are there any rules or regulations under the New York
Insurance Law that govern replacements of annuity contracts? Yes. The inquirer is a financial consultant with an investment banking and securities firm. The inquirer recently recommended a variable annuity exchange pursuant to Internal Revenue Code §1035 (2001) for one of the inquirers elderly clients to diversify the clients holding and to lock in a new death benefit. Both the current and the new insurer were using the same opening balance, the
same rates of return, and both insurers purported to have the same mortality and expense charges ("M & E"). However, in completing the contract comparisons the inquirer discovered that the current insurer showed 6% and 12% rates of return net of M & E (i.e. 13.15% less 1.15%= 12%) and the new insurer showed the 6% and 12% levels less the M & E (12%- 1.15%+10.85%). The comparison appeared to favor the current insurer, when in reality all the numbers should have been the same. The
inquirer was concerned about the insurance agents liability if the agent was unable to properly document the discrepancy. The inquirer asked whether there are any specific rules or regulations under the New York Insurance Law that govern replacements of annuity contracts. N.Y. Ins. Law § 2123 (a)(1) (McKinney 2001) provides in pertinent part: (a) (1) no agent or representative of any insurer . . . in this state and no insurance broker, and no other person, firm,
association or corporation, shall issue or circulate or cause or permit to be issued or circulated, any illustration, circular, statement or memorandum misrepresenting the terms, benefits or advantages of any policy or contract of life, accident or health insurance, any annuity contract. . . delivered or issued for delivery or to be delivered or issued for delivery, in this state, or shall make any misleading estimate as to the dividends or share of surplus or additional amounts to be received
in the future on such policy or contract, or shall make any false or misleading statement as to the dividends or share of surplus or additional amounts previously paid by any such insurer or health maintenance organization on similar policies or contracts . . . N.Y. Comp. Codes R. and Regs. tit. 11, § 51.5 (c)(3)(2001)(Regulation 60) provides that where a replacement is involved the agent must, inter alia, provide the insured with the "IMPORTANT Notice Regarding
Replacement or Change of Life Insurance Policies or Annuity Contracts" and a completed "Disclosure Statement" signed by the agent. The purpose of Regulation 60 is to prevent unfair methods of competition and practices in the replacement of life insurance policies and annuity contracts by providing applicants with enough information to make an informed decision regarding replacements. See N.Y. Comp. Codes R. and Regs. tit. 11, § 51.1 (b) 2001). Thus, a disclosure statement
should provide the insured with accurate comparative information about significant features of the replaced and replacing policies or annuity contracts. Regulation 60 is applicable to replacements of both life insurance policies and annuity contracts, including both fixed and variable annuities. Thus, variable annuity exchanges performed pursuant to Internal Revenue Code §1035 (2001) are replacements that are subject to the disclosure requirements of Regulation 60. It is the position
of the Department that, under circumstances surrounding the sale of products, where fees and charges may be a significant factor in a determination by a client to purchase or replace a product, an illustration of applicable fees and charges is an essential element in the disclosure. Although the disclosure forms contained in N.Y. Comp. Codes R. & Regs., tit. 11, Appendices10A and 10B (2001) do not specifically provide space for information regarding charges and fees, they do provide a
space for remarks, which may be used by the agent to clarify any discrepancies in the illustration. For further information, you may contact Attorney Pascale Joasil at the New York City office.
An investor who has purchased a nonqualified variable annuity has the right to: 1. vote on proposed changes in investment policy. Answer: 1 & 3: Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. Variable annuities must be registered with: 1. the state banking commission 2. the state insurance commission 3. the SEC 4. FINRA Answer: 2 & 3: A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the SEC. All of the following statements concerning a variable annuity are correct EXCEPT: A. the invested money will be professionally managed according to the issuers' investment objectives. B. separate account may consist of mutual funds. C. variable annuities will protect an investor against capital loss. D. a majority vote from the shareholders is required to change the investment objectives. Answer: C: As the name implies, the investment performance of a variable annuity's portfolio (separate account) can vary, and the investor bears the risk of any potential decline in its value. Many variable annuities invest the separate account in mutual funds. If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor? A. Purchasing power risk. B. Investment risk. C. Mortality risk. D. Value of each annuity unit each month. Answer: A: An investor who purchases a fixed annuity contract assumes purchasing-power risk. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. All of the following statements regarding variable annuities are true EXCEPT: A. variable annuities may only be sold by registered representatives. B. variable annuities offer the investor protection against capital loss. C. variable annuities are classified as insurance products. D. insurance companies keep variable annuity funds in separate accounts from other insurance products. Answer: B: A variable annuity is both an insurance and a securities product. An annuitant assumes the investment risk of a variable annuity and is not protected byt he insurance company from capital losses. Variable annuity salespeople must register with all of the following EXCEPT: A) FINRA. B) the state insurance department. C) the state banking commission. D) the SEC. Answer: C: Variable annuity salespeople must be registered with FINRA and the state insurance department. Registration with FINRA is de factor registration with the SEC; no registration is required by the state banking commission. Which of the following are defined as securities? 1. Fixed annuities. Answer: 2 & 3: A security is an investment for profit with management performed by a third party. In addition, an element of risk must be present. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return. An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is: A) suitable due to the relative safety of the investment. B) unsuitable because the return on something as conservative as a variable annuity tends to be low. C) suitable due to the death benefit features of a variable annuity. D) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. Answer: D: This customer has no spouse or dependents, which negates the value of the death benefit. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59 1/2. A variable annuity's separate account is: 1. used for the investment of funds paid by contract holders. Answer: 1 & 4: The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in - bonds and growth stocks - makes it necessary that sales reps and their principals be licensed in securities as well as insurance. A separate account will invest in a number of different securities. The separate account is NOT likely to invest in: A. equity funds B. corporate stock C. money market funds D. municipal bonds Answer: D: The earnings on dollars invested into a variable annuity accumulate tax-deferred, which is why variable annuities are popular products for retirement accumulation. As with all tax-deferred accounts, muni bonds are not appropriate investments because interest earned on munis is already tax exempt at the federal level. An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) the safety of the principal invested B) the yield is always higher than bond yields C) the yield is always higher than mortgage yields D) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices Answer: D: Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation. Who assumes the investment risk in a variable annuity contract? A) There is no risk in a variable annuity. B) The policyowner. C) The insurance company. D) The investment risk is shared between the insurance company and the policyowner. Answer: B: Variable annuity contracts were devised to help investors keep pace with inflation. Because this is not guaranteed, the policyowner bears the investment risk. From an insurance company, mortality risk turns out unfavorably if: 1. an annuitant lives longer than expected 2. an annuitant dies sooner than expected 3. a life ins. holder lives longer than expected 4. a life ins. holder dies sooner than expected Answer: 1 & 4: Mortality assumptions are based on life expectancy or mortality tables prepared by ins. co. actuaries. If an annuitant lives longer than expected, the ins. co. will have to continue payments longer than expected. If an ins. holder dies sooner than expected, the ins. co. will have to pay the death benefit sooner than expected - that is, before receiving some of the expected premium payments. All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. B) the rate of return is determined by the underlying portfolio's value C) such an annuity is designed to combat inflation risk D) the number of annuity units becomes fixed when the contract is annuitized Answer: A: The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The # of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates. Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? A) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children B) Age 40, currently unemployed C) Age 27, saving for 1st home D) Age 56, available cash to invest, makes the max retirement plan contributions to an existing IRA & 401K plan Answer: D: The individual already making the max retirement acct contributions, with cash to invest, would be most suitable for a VA recommendation. Having a supplemental income stream for retirement and keeping pace with inflation should be the reasons to consider a VA as suitable, but not preservation of capital. For anyone who may need access to the sum invested at a later time, a VA would not be considered a suitable recommendation. A prospectus for a variable annuity contract: 1. Must provide full and fair disclosure 2. Is required by the Securities Act of 1933 3. Must be filed with FINRA 4. Must precede every sales presentation Answer: 1 & 2: A VA is a security & must be registered with the SEC, not FINRA. As part of the registration requirements, a prospectus must be filed & distributed to prospective investors. Distribution can take place before or during any solicitation for sale. A registered person recommends the purchase of a variable annuity to one of his clients. He must ensure that the client, in addition to meeting suitability requirements, is aware of all of the following EXCEPT: A) a VA contract will provide a fluctuating monthly check upon the annuitization of the contract. B) a VA contract is not required to be sold by prospectus because it is an ins. contract. C) a VA contract does not guarantee any type of return. D) a VA contract is subject to fluctuating values due to market fluctuations in the underlying separate accounts. Answer: B: VA contracts must be sold by prospectus due to the characterization of the separate accounts as securities, which must be registered under the Securities Act of 1933 & the Investment Co. Act of 1940. A registered representative explaining variable annuities to a customer would be CORRECT in stating that: 1. a VA guarantees an earnings rate of return 2. a VA does not guarantee an earnings rate of return 3. a VA guarantees payments for life 4. a VA does not guarantee payments for life Answer: 2 & 3: A VA does not guarantee an earnings rate because earnings will depend on the performance of the separate account. However, it does guarantee payments for life (mortality). For an investor, which of the following is the MOST important factor in determining the suitability of a VA investment? A) The fact that the annuity payment may increase or decrease. B) The investor's marital status. C) The investor's concerns about taxes. D) The fact that periodic payments into the contract may increase or decrease. Answer: A: The most important consideration in purchasing a VA is to be aware that benefit payments will fluctuate with the investment performance of the separate account. Periodic payments are not a consideration because normally the payments into an annuity are level or in a lump sum. If the owner of a VA dies during the accumulation period, any death benefit will: A) be returned to the separate account. B) be paid to the issuing company to complete the plan C) be paid to the designated beneficiary D) be paid to any legal heirs as recognized by the annuitant's state of domicile Answer: C: The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased. For a retired person, which of the following investments would provide the greatest protection against inflation? A) Corporate Bonds B) Variable Annuities C) Fixed Annuities D) Municipal Bonds Answer: B Fixed income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would BEST meet the customer profile? A) Universal variable life policy B) Variable Annuity C) Money Market Fund D) IPO Answer: B Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. For this potential advantage, the investor, rather than the ins. co., assumes the investment risk. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. Universal variable life policies: 1. have investment risk that is assumed by the investor 2. do not have a separate account 3. can be sold by someone with only an insurance license 4. are purchased primarily for their insurance features Answer: 1 & 4: Universal variable life policies are ins. co. products that should be purchased primarily for the ins. features they offer rather than as an investment. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both ins. & securities licenses. Your client has $50,000 to invest. His objective is monthly income that he can receive after he retires to supplement his small pension and Soc Sec benefits. As part of his profile, he stresses that he has had uncomfortable experiences in the past with the stock market and is not inclined to invest in anything that is based on stock market performance and would opt for principal protection instead. Based on the client's profile, which of the following would be the best recommendation? A) Variable Annuity B) Fixed Annuity C) ETFs or ETNs D) Mutual Fund portfolio consisting of blue chip stocks Answer: B Though its stated return might not be as high as the other choices' potential returns, only a fixed annuity fits the objective and risk averse traits of his client. VAs, blue chip mutual fund portfolios, ETFS & ETNs are all tied to market performance in some way and have risk characteristics that would not align in terms of suitability for this client. Which of the following statements regarding variable annuities are TRUE? 1. The # of accumulation units is always fixed throughout the accumulation period 2. The # of accumulation units can rise during the accumulation period 3. The # of annuity units is fixed at the time of annuitization 4. The # of annuity units rises once annuitization begins Answer: 2 & 3 The # of VA accumulation units can rise during the accumulation period when additional units are being purchased. When a VA contract is annuitized, the # of annuity units is fixed. The holder of a VA receives the largest monthly payments under which of the following payout options? A) Joint tenants annuity B) Life annuity C) Joint & last survivor annuity D) Life annuity with period certain Answer: B Life annuity has the largest payout because less risk is assumed by the insurance company. There is no beneficiary in the event the annuitant dies. If a customer is about to buy a variable annuity contract and wants to select an annuity with a payout option providing the largest possible monthly payment, which of the following payout options would be MOST suitable? A) Life only annuity B) Unit refund life option C) Life annuity with 10 year period certain D) Life annuity with period certain Answer: A Generally, a life only contract pays the most per month because payments cease at the annuitant's death. What is true regarding variable annuities?Variable annuities grow tax-deferred, so you don't have to pay taxes on any investment gains until you begin receiving income or make a withdrawal. 4 This is also true of retirement accounts, such as traditional IRAs and 401(k)s. You can tailor the income stream to suit your needs.
Which statements are true regarding variable annuities during the annuity phase?Which statements are true regarding variable annuities during the annuity phase? Once the separate account interest is "annuitized," the accumulation units are converted into a fixed number of annuity units.
What are variable annuity contracts?A variable annuity is a contract between you and an insurance company. It serves as an investment account that may grow on a tax-deferred basis and includes certain insurance features, such as the ability to turn your account into a stream of periodic payments.
Which of the following statements regarding variable annuities is not true?All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. Answer: A: The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value.
|
Which of the following statements are true regarding variable annuity contracts?
zusammenhängende Posts
Urheberrechte © © 2024 nguoilontuoi Inc.
