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ANNUITY FINAL EXAM

Multiple Choice

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 1. 

When establishing an immediate annuity, the contract must also be a(n):
a.
single premium annuity
b.
installment annuity
c.
variable annuity
d.
deferred annuity
 

 2. 

In a variable annuity:
I.    the investor assumes investment risk
II.   the investor assumes purchasing power risk
III.  the insurance company assumes investment risk
IV.  the insurance company assumes purchasing power risk
-
a.
I and II
b.
I and IV
c.
II and III
d.
III and IV
 

 3. 

When determining the first monthly payment from a deferred variable annuity, all of the following factors are considered EXCEPT:
a.
the original premium paid
b.
the current value of the account
c.
the annuitant's age
d.
the payout option selected
 

 4. 

A contract holder of a deferred annuity must choose a payout option:
a.
at age 59 1/2
b.
when initially establishing the contract
c.
when the account is annuitized
d.
when the account is surrendered
 

 5. 

Annuity payments to annuitants under a variable annuity are based on:
a.
a fixed number of accumulation units that vary in value
b.
a variable number of accumulation units that are fixed in value
c.
a fixed number of annuity units that vary in value
d.
a variable number of annuity units that are fixed in value
 

 6. 

Dollar cost averaging refers to:
a.
the tax-free portion of each variable annuity’s payout
b.
purchasing equal numbers of shares of stock on a periodic schedule
c.
investing equal sums on a periodic schedule
d.
IRS rules governing capital gains taxation
 

 7. 

The period of time from a variable annuity contract's issue date until the start of payments is known as the:
a.
premium period
b.
accumulation period
c.
annuity period
d.
funding period
 

 8. 

Upon retirement, a contract holder annuitizes her variable annuity contract. After retirement which of the following remain unchanged?
a.
the number of annuity units
b.
the value of each annuity unit
c.
the dollar amount of monthly payments
d.
the value of the separate account
 

 9. 

Which of the following is NOT required to calculate the size of annuity payments?
a.
the length of the annuity period
b.
the length of the accumulation period
c.
the size of the annuity’s accumulated value
d.
the interest rate applied to the contract
 

 10. 

The “current” rate of interest paid on a traditional fixed annuity is:
a.
tied to current market rates
b.
whatever rate the annuity company chooses to pay
c.
guaranteed at the time the contract is established
d.
whatever rate of interest the company can earn on the investments in the general account
 

 11. 

Client A invests $50,000 in a fixed annuity contract and earns a current rate of 4% this year, while Client B invests $100,000 in the same contract and earns 4.25%.  Which interest crediting method does this contract use?
a.
new money method
b.
portfolio method
c.
sliding scale method
d.
tiered-rate method
 

 12. 

The net asset value of a mutual fund differs from the value of accumulation units of a comparable separate account within a variable annuity because:
a.
mutual funds must make periodic distributions of investment income, annuities do not
b.
investment income in a mutual fund is automatically reinvested in the fund, but not in annuities
c.
reinvested income in a variable annuity results in more units, it does not in mutual funds
d.
investment income reinvested in mutual funds grows tax-deferred, it does not in variable annuities
 

 13. 

The assumed interest rate (AIR) in a variable annuity:
a.
serves the same function as the minimum guaranteed rate in a fixed annuity
b.
is the minimum amount the investments in the separate account must earn before the contract will pay income payments to the annuitant
c.
is compared to the investment returns in the separate account to determine if this month’s income payment will be higher or lower than last month’s
d.
is the rate of interest state regulators apply to determine a variable annuity’s reserve requirement
 

 14. 

An equity indexed annuity that is simply based on the value of the index at maturity relative to the value of the index at inception uses the
a.
point-to-point indexing method
b.
high-water indexing method
c.
ratchet  indexing method
d.
annual reset indexing method
 

 15. 

An investor is comparing the purchase of an equity indexed annuity (EIA) based on the S&P 500 with purchase Spiders®,  an exchange traded fund (ETF) that holds a stock portfolio that mirrors the S&P 500 index.  Which of the following is true?
a.
the total return to the investor will be higher in the EIA than the ETF
b.
the EIA’s return includes dividend income, the ETF does not
c.
the investor can avoid market downturns in the ETF, but not the EIA
d.
none of the above are true
 

 16. 

Which of the following are offered to variable annuity contractholders at no additional cost?
a.
guaranteed minimum death benefit
b.
guaranteed minimum income benefit
c.
guaranteed minimum accumulation benefit
d.
guaranteed minimum withdrawal benefit
 

 17. 

A contract holder purchases $150,000 variable annuity with a guaranteed minimum accumulation benefit rider that has a seven-year vesting period with a step-up option.  In year 5, the value of the contract has grown to $200,000.  Under the GWAB rider, the contractholder is guaranteed a minimum contract value of: 
a.
$150,000 in year 7
b.
$200,000 in year 7 if the step up option is exercised in year 5
c.
$200,000 in year 12 if the step up option is exercised in year 5
d.
a or c
 

 18. 

Your client purchases a $200,000 variable annuity with a guaranteed minimum withdrawal benefit rider.  The GMWB allows for 5% withdrawals. In year 5, when value of the annuity has dropped to $150,000, the client chooses to exercise the withdrawal option.  The contractholder will be able withdraw
a.
$10,000 per year for the next 20 years
b.
$7,500 per year for the next 20 years
c.
$10,000 per year for life
d.
$7,500 per year for life
 

 19. 

Which of the following is costs in a deferred fixed annuity is the least transparent (not clearly disclosed) to contractholders?
a.
surrender charges
b.
interest rate spread
c.
contract charges
d.
market value adjustments
 

 20. 

A market value adjustment affects fixed deferred annuity holders who:
a.
annuitize their contracts
b.
surrender their contracts
c.
take penalty-free withdrawals
d.
all none of the above
 

 21. 

Investors might consider making a Section 1035 exchange to:
I.    improve the return on the contract
II.   upgrade the carrier
III.  establish a higher death benefit on a variable contract
IV.  change from a variable to a fixed contract
-
a.
I and II only
b.
III and IV only
c.
I, II and IV only
d.
I, II, III and IV
 

 22. 

A client purchased a non-qualified variable annuity in 2002 for $50,000.  Today the account is worth $75,000.  If the client withdrew $30,000 today, the withdrawal would be taxed:
a.
as $25,000 taxable earnings and $5,000 tax-free return of principal
b.
as $30,000 of tax-free return of principal
c.
using the exclusion ratio, 1/3rd taxable income and 2/3rd tax-free return of principal
d.
as $25,000 capital gain
 

 23. 

The “exclusion ratio” in a variable annuity is based on:
a.
the annuitant’s life expectancy
b.
the value of the annuity units
c.
the value of the accumulation units
d.
projected value of annuity payments
 

 24. 

Which of the following exchanges NOT permitted tax-free under Section 1035?
a.
an annuity exchanged for another annuity
b.
an annuity exchanged for a life insurance policy
c.
a life insurance policy exchanged for an annuity
d.
a life insurance policy exchanged for another life policy
 

 25. 

The 10% penalty applies to withdrawals prior to age 59 1/2 from:
a.
non-qualified annuities
b.
qualified annuities
c.
both a and b
d.
neither a nor b
 

 26. 

A client owns a deferred fixed annuity and wishes to transfer it to his revocable living trust.  For tax purposes, this transfer:
a.
has income tax consequences
b.
has gift tax consequences
c.
has estate tax consequences
d.
none of the above
 

 27. 

Sam purchased a deferred fixed annuity a number of years ago.  Upon his retirement in October 1997, he annuitized the contract, selecting a straight life with 10-year period certain payout that paid him $1,500 per month.  In October 2008, Sam dies.  The value of this annuity, for estate tax purposes, is:
a.
$0
b.
the discounted value of $1,500 per month for 11 years, discounted at the rates published in IRS tables
c.
the comparable cost to purchase an annuity paying $1,500 a month for 10 years
d.
none of the above
 

 28. 

At retirement, Tristan used the $500,000 of proceeds from his 401k plan to purchase an immediate joint and one-half survivor annuity to provide a lifetime income for him and his wife, Isolde.  The joint payments are $2,000 per month.  If Tristan dies, what is the practical impact of this annuity on on his estate taxes?
a.
the estate must pay taxes on the value of a lifetime annuity paying $2,000 per month to Isolde
b.
the estate must pay taxes on the value of a lifetime annuity paying $1,000 per month to Isolde
c.
there is no estate tax consequence since Isolde was married to Tristan
d.
only the annuity’s death benefits are taxable for estate tax purposes
 

 29. 

Due to tax complications, advisors should refrain from recommending that an annuity contract:
a.
be owned by a trust
b.
be owned jointly
c.
name a trust as beneficiary
d.
all of the above
 

 30. 

In a tax sheltered annuity:
a.
employee contributions are made with before-tax dollars
b.
employee contributions are made with after-tax dollars
c.
employer contributions are made with after-tax dollars
d.
both a and c
 

 31. 

All of the following are functions of the National Association of Insurance Commissioners EXCEPT to:
a.
promote uniformity among state insurance laws
b.
enact statutes to regulate insurance nationwide
c.
preserve state regulation of insurance
d.
protect the insurance-buying public
 

 32. 

If an annuity company becomes financially insolvent, the failed company’s obligations to its contractholders will be fulfilled by Florida’s:
a.
Department of Financial Services
b.
Consumer Assistance Plan
c.
Life & Health Guaranty Association
d.
Office of Insurance Regulation
 

 33. 

An agent found to be soliciting policies on behalf of an unauthorized insurance entity may be:
a.
convicted of a third-degree felony
b.
be subject to a $50,000 fine
c.
convicted of a first-degree felony
d.
any of the above
 

 34. 

Private annuities:
a.
are another name for an individual annuities
b.
were once permitted under the tax code but are now prohibited by the
c.
can be used as an estate planning tool to transfer ownership of assets between family members
d.
must be underwritten by private sector insurance companies
 

 35. 

Which of the following does NOT rate the financial strength of insurance companies?
a.
Fitch
b.
Duff & Phelps
c.
J.D. Powers
d.
A.M. Best
 

 36. 

The increased use of third party distribution systems have resulted in:
a.
greater agent loyalty to annuity companies
b.
longer persistancy factors for annuity contracts
c.
greater profitability of annuity companies
d.
wider selections of annuity products for consumers
 

 37. 

The increased use of third-party distributors in the annuity marketplace has:
a.
improved long-term client satisfaction
b.
improved overall supervision of agents and suitability of their recommendations
c.
reduced the incidence of unsuitable “replacements”
d.
increased competition between annuity companies
 

 38. 

Which of the following regulatory bodies oversees the secondary market in annuities?
a.
FINRA
b.
state insurance commissioners
c.
SEC
d.
none of the above
 

 39. 

Under the decisions Appel v. Moss and Abbott v Beardmore, which of the following are deemed to have a fiduciary responsibility to their clients?
a.
agents
b.
brokers
c.
both a and b
d.
neither a nor b
 

 40. 

An agent’s license may remain valid without an appropriate appointment for:
a.
12 months
b.
24 months
c.
36 months
d.
48 months
 

 41. 

Regarding premium payments collected by an agent, Florida law requires agents to maintain records of premiums for:
a.
12 months
b.
24 months
c.
36 months
d.
48 months
 

 42. 

Agents selling an equity indexed annuity must deliver which of the following to the client?
a.
Contract Summary
c.
both a and b
b.
Prospectus
d.
neither a nor b
 

 43. 

For client’s seeking capital accumulation, which of the following types of variable annuity subaccounts would best fit within Modern Portfolio Theory?
a.
an actively managed growth account
b.
a passively managed growth account
c.
the contract’s fixed account
d.
any of the above
 

 44. 

Under Modern Portfolio Theory, an investor who owns an “efficient portfolio” holds:
a.
a portfolio of weakly corrolated stocks
b.
a portfolio of strongly corrolated stocks
c.
a portfolio with few transaction costs
d.
a relatively small portfolio that can be easily managed
 

 45. 

The Provident Annuity Company offers its variable annuity investors the choice of the Global Growth subaccount managed by Pacific Investments.  Pacific also manages the Global Growth mutual fund, which has performed very well in the past.  Advisors who recommend the Global Growth subaccount to their clients should:
a.
refer to the subaccount as a “clone” of the mutual fund
b.
note that the past investment results of the mutual fund
c.
disclose that Pacific manages both the fund and the subaccount
d.
disclose that the fund and the subaccount may not be managed by the same investment analyst
 

 46. 

The difference between accumulating capital using an equity indexed annuity versus a variable annuity invested in an indexed subaccount is:
a.
the indexed subaccount may go down in value, the equity indexed annuity will not
b.
the investor in the indexed subaccount is credited with full market movements, the equity indexed annuity is not
c.
the indexed subaccount will receive dividend income from its passively managed portfolio, the equity indexed annuity will not
d.
all of the above are true
 

 47. 

Which of the following annuity types is most appropriate for investors with investment objectives of accumulation and conservation of capital
a.
fixed deferred annuities
b.
equity indexed annuities
c.
variable deferred annuities
d.
all of these annuities fulfill both accumulation and conservation objectives
 

 48. 

What is the greatest risk facing investors who seek conservation of principal?
a.
tax risk
b.
purchasing power risk
c.
interest rate risk
d.
opportunity risk
 

 49. 

Which of the following riders would make a variable annuity a more suitable recommendation for an investor with an objective of conservation of principal?
a.
guaranteed minimum accumulation benefit (GMAB) rider
b.
guaranteed minimum income benefit (GMIB) rider
c.
guaranteed minimum withdraw benefit (GMWB) rider
d.
enhanced minimum death benefit rider
 

 50. 

Which of the following variable annuity riders is most suitable for client’s who have an objective of distribution and wish to retain as much flexibility as possible over her principal?
a.
guaranteed minimum accumulation benefit (GMAB) rider
b.
guaranteed minimum income benefit (GMIB) rider
c.
guaranteed minimum withdraw benefit (GMWB) rider
d.
enhanced minimum death benefit rider
 

 51. 

All deferred annuities will contain minimum payout tables when the contract is established.  Historically, those minimum payout table are typically:
a.
less favorable than payouts based on current conditions when the account is annuitized
b.
the same as payouts based on current conditions when the account is annuitized
c.
more favorable than payouts based on current conditions when the account is annuitized
d.
there is no fixed relationship between the two possible payouts
 

 52. 

When analyzing a client’s assets prior to recommending an annuity, which of the following should NOT be considered?
a.
family residence
b.
life insurance cash value
c.
liquid assets
d.
death benefits of life insurance
 

 53. 

Before recommending an annuity to a client, an advisor should consider the client’s existing:
a.
annuity holdings
b.
financial needs
c.
income and expenses
d.
all of the above
 

 54. 

An advisor should consider all of the following when proposing an exchange of annuity contracts EXCEPT:
a.
the new surrender period
b.
fees and charges on the old and new contracts
c.
commission payout on the new contract
d.
investment options, if a variable annuity is proposed
 

 55. 

All of the following could negatively affect a client who exchanges an annuity contract for another EXCEPT:
a.
loss of grandfathered rights
b.
income taxes owed on the exchange
c.
extended surrender period
d.
higher fees and charges
 

 56. 

When compared with an investment in a corporate bond of comparable quality, which of the following is true of a fixed deferred annuity?
a.
the fixed annuity will offer a higher rate of return than the bond
b.
the fixed annuity offers the investor a possibility of gain if interest rates fall
c.
the investor will be guaranteed return of total investment if interest rates rise
d.
the fixed annuity may be subject to penalties due to premature withdrawal
 

 57. 

An elderly client is concerned with his Social Security benefits being taxed. Which of the following sources of income are included in determining the taxability of those benefits?
a.
interest earned on corporate bonds
b.
deferred income earned on fixed annuities
c.
both a and b
d.
neither a nor b
 

 58. 

When compared with an investment in a similar mutual fund, variable annuities offer which of the following advantages?
a.
lower upfront sales charges
b.
step up in value for estate planning purposes
c.
guaranteed death benefit
d.
all of the above
 

 59. 

Generally speaking, the capital gains tax treatment of mutual fund investments is:
a.
more advantageous to an investor than tax deferred growth in a variable annuity’s comparable subaccount
b.
less advantageous to an investor than tax deferred growth in a variable annuity’s comparable subaccount
c.
roughly similar to an investor than tax deferred growth in a variable annuity’s comparable subaccount
d.
cannot not be generally compared to tax deferred growth in a variable annuity’s comparable subaccount
 

 60. 

Variable annuities provide a minimum guaranteed death benefit, and the contractholder pays a mortality charge for this benefit.   In most contracts, the mortality charge for variable annuities increases as the amount of protection for beneficiaries
a.
increases
b.
decreases
c.
remains the same
d.
there is no relationship between the mortality cost and the level of protection
 

 61. 

Investor A purchases an indexed annuity based on the S&P 500.  Investor B invests an equal amount in SPDR® shares, an exchange traded fund based on the S&P 500 index.  After five years, the two investors liquate their investments.  Which of the following is most likely true? 
a.
Investor A will always outperform Investor B
b.
Investor A will outperform Investor B if the index has risen in the past five years
c.
Investor A will outperform Investor B if the index has fallen in the past five years
d.
There is not enough information make a general comparison
 

 62. 

Which of the following is NOT a prohibited practice?
a.
twisting
b.
churning
c.
replacement
d.
stripping
 

 63. 

In a practical sense, which of the following are subject to the disclosures required under Florida’s Annuity Suitability law?
a.
sale of fixed annuities to all consumers
b.
sale of variable annuities to senior consumers
c.
sales of indexed annuities to senior consumers
d.
all of the above
 

 64. 

Florida’s Senior Suitability law defines a senior consumer as one:
a.
age 60 and older
b.
age 65 and older
c.
age 70 and older
d.
age 75 and older
 

 65. 

Under Florida’s Senior Suitabilty law, a recommendation is defined as:
a.
any advice the agent provides on annuities to senior consumers
b.
an annuity transaction that follows the advice of an agent
c.
any sale, exchange, replacement, or transfer of an annuity
d.
none of the above
 

 66. 

Florida’s Senior Suitability law requires agents to make recommendations based on:
a.
what the agent believes is in the best interests of the client
b.
an objective standard
c.
reasonable efforts to ascertain the client’s investment objectives, financial situation and needs
d.
the prudent man rule
 

 67. 

If a client refuses to give the agent the information required by Florida’s Senior Suitability law, the agent:
a.
may not make any recommendations to that client
b.
must have the client sign a form noting that fact before making any recommendation to that client
c.
will totally absolved from any duty to make suitable recommendations to that client
d.
must notify the Department of Financial Services prior to making any recommendations to that client
 

 68. 

If a senior customer holds other annuities, a Florida life agent must ascertain which of the following?
a.
the type of contracts
b.
applicable surrender charges
c.
the asset allocation within variable contracts
d.
all of the above
 

 69. 

Florida law requires agents who recommend an annuity transaction to senior consumers to complete a written questionnaire.  The agent must:
a.
file the questionnaire with the Department of Financial Services
b.
submit that questionnaire to his or her supervisor for approval
c.
submit that questionnaire to the annuity company within 10 days of the application
d.
all of the above
 

 70. 

Florida law requires that completed copies of the suitability questionnaire be retained by:
a.
the agent
b.
the issuing company
c.
third party marketers
d.
all of the above
 

 71. 

Which of the following items do not need be retained as part of the Senior Suitability law?
a.
applications
b.
customer questionnaires
c.
Buyers’ Guides
d.
contract illustrations
 

 72. 

If the Office of Insurance Regulation finds that an unsuitable recommendation has harmed a senior consumer, the Office has the power to:
a.
revoke the agent’s license
b.
cancel the contract and order a refund of the investment
c.
pursue criminal prosecution
d.
all of the above
 

 73. 

As a result of the FINRA exception to Florida’s Annuity Suitability law, this state law effectively applies to the sale or exchange of:
a.
all types of annuities to all annuity purchasers in the state
b.
all types of annuities to senior consumers in the state
c.
fixed and indexed annuities to all annuity purchasers in the state
d.
fixed and indexed annuities to senior consumers in the state
 

 74. 

In Florida, Contract Summaries and Buyer’s Guides must be given to purchasers of
a.
fixed annuities
b.
indexed annuities
c.
variable annuities
d.
all of the above
 

 75. 

Regarding Florida’s Free Look law, purchasers have the right to a refund of their premiums within:
a.
10 days for the purchase of fixed and indexed annuities
b.
10 days for the purchase of fixed, indexed and variable annuities
c.
14 days for the purchase of fixed and indexed annuities
d.
14 days for the purchase of fixed, indexed and variable annuities
 

 76. 

An agent misleads a client into surrendering her whole life insurance policy with Acme Insurance, and recommends that she purchase an immediate annuity from Acme with the cash value.  The agent then sells the client an Acme flexible premium, deferred annuity -- using part of the immediate annuity payments to pay the premium on the deferred annuity.  This is an example of
a.
twisting
b.
direct churning
c.
indirect churning
d.
stripping
 

 77. 

Which of the following disclosures by an agent to a senior consumer would most likely be prohibited under Florida law?
a.
I am a Certified Senior Financial Advisor
b.
I hold a designation as a Certified Financial Planner.
c.
I hold a Series 6 license by FINRA to sell variable annuities and mutual funds
d.
all of the above
 

 78. 

FINRA requires that registered representatives make a written determination of the suitability of his or her recommendations.  That written determination is then given to the:
a.
representative’s supervisor
b.
client
c.
annuity company
d.
all of the above
 

 79. 

When comparing Florida’s Senior Suitability law and FINRA’s Annuity Suitability rule:
a.
Florida law imposes a subjective standard, FINRA imposes an objective standard
b.
Florida law imposes an objective standard, FINRA imposes a subjective standard
c.
both Florida law and FINRA impose objective standards
d.
both Florida law ans FINRA impose subjective standards
 

 80. 

Which of the following require an agent or registered representative to ascertain whether the client has exchanged other annuity contracts in the 36 months prior to a recommended annnuity transaction?
a.
FINRA’s Rule 2821
b.
Florida’s Senior Suitability Law
c.
both a and b
d.
neither a nor b
 

 81. 

A client currently owns a variable annuity contract that is invested in a balanced growth stock separate account.  The client’s advisor recommends that the client switch to a more volatile small cap account.   Which of the following requires an agent or registered representative to determine, in writing, reallocation of investments within a variable annuity ?
a.
FINRA’s Rule 2821
b.
Florida’s Senior Suitability Law
c.
both a and b
d.
neither a nor b
 

 82. 

Which of the following recommendations does NOT require a written determination of suitability under either FINRA or state law?
a.
Anita recommends that her 55-year old client exchanges a deferred variable annuity for another variable contract issued by a different company
b.
Bernard recommends that his 55-year old client purchase an equity indexed annuity
c.
Christina recommends that her 70-year old client purchase a variable annuity
d.
Dante recommends that his 72-year old client exchange an equity indexed annuity for a fixed contract issued by the same company
 

 83. 

Under Florida law, when recommending an annuity transaction to a senior consumer, a copy of the completed questionnaire must be: 
a.
submitted to the issuing company with the application
b.
submitted to the issuing company within 7 days
c.
submitted to the issuing company within 10 days
d.
none of the above
 

 84. 

Which of the following are responsible to assure an agent’s compliance with Florida’s Senior Suitability law?
a.
the agent
b.
the agency the agent works for
c.
the company the agent submits applications to
d.
all of the above
 

 85. 

Under state law, documents related to annuity recommendations for senior consumers must be retained for:
a.
1 year
b.
2 years
c.
3 years
d.
5 years
 



 
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