Variable Products in Insurance Flashcards

What is a '1035 exchange' in the context of variable annuities in DC?

Answer: A tax-free transfer of cash value from one annuity or life insurance policy to another of like kind

A Section 1035 exchange allows tax-free transfer of cash value from one life insurance, endowment, or annuity contract to another of like kind without triggering a taxable event.

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

Answer: A fee charged by the insurance company for bearing the mortality and expense risk inherent in the contract

The M&E charge compensates the insurer for bearing the risk that annuitants will live longer than expected and for administrative expenses.

For DC tax purposes, what is the tax treatment of variable annuity withdrawals taken before age 59½?

Answer: Earnings are taxed as ordinary income, plus a 10% IRS early withdrawal penalty applies to the taxable portion

Non-qualified variable annuity withdrawals before age 59½ are subject to ordinary income tax on the earnings portion plus a 10% IRS early withdrawal penalty.

A DC client wants guaranteed lifetime income from their variable annuity. Which optional rider would provide this?

Answer: Guaranteed lifetime withdrawal benefit (GLWB) rider

A guaranteed lifetime withdrawal benefit (GLWB) rider guarantees the policyholder can withdraw a specified percentage annually for life, regardless of account performance.

Under DC securities law, which entity must a variable annuity contract be registered with before it can be sold?

Answer: The Securities and Exchange Commission (SEC) as a securities offering

Variable annuity contracts must be registered as securities with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940.

What is the 'annuitization' of a variable annuity, and what happens to the policyholder's ability to control their funds after annuitization?

Answer: Annuitization converts the account value into a stream of periodic payments; the policyholder typically surrenders control of the lump sum in exchange for guaranteed income

Annuitization converts the accumulated value into a series of income payments. Once annuitized, the policyholder typically cannot access the lump sum—they receive only the periodic income stream.