Tuesday, May 24, 2011

deferred variable annuities

A deferred variable annuity is an investment product with aspects of a retirement plan plus an insurance rider. The "deferred" part means that the individual plans to wait to receive money, and will likely be penalized with a surrender charge if he changes his mind and takes some money out before the surrender period has elapsed. The "variable" part means that when the individual begins to receive payments, those payments will--yes--vary. Is the "annuitant" assured of getting his principal/original investment back? No. During the "accumulation phase" his beneficiary would receive at least what he put into the contract if he were to die, but that's a different matter. Because of the surrender charge, a deferred variable annuity is only suitable for someone with no liquidity needs on this money. They also should have maxed out all other retirement vehicles before putting money into a variable annuity. The ideal candidate for a deferred variable annuity is someone who has already maxed out the 401K and any other plans but still has lots of money he wants to grow tax-deferred. As long as he doesn't need to touch this money for a while and as long as he's comfortable being in the stock and bond markets, subject to all kinds of investment risk, the product may be suitable.

Tuesday, May 17, 2011

Open and Closed-End Funds

Wow. Didn't mean to neglect the Pass the 7 blog, but I haven't posted since flippin' February. Not accpetable. Let's start making up for it right now with a fun practice question . . .

Open- and closed-end funds share none of the following characteristics except that:
A. open-end funds must be "diversified" according to the 75/5/10 rule
B. closed-end funds must be "diversified" according to GAAP accounting rules
C. closed-end funds are non-redeemable investment company securities
D. open-end funds may issue preferred shares

EXPLANATION: once again, a mildly confusing topic can become massively confusing if the question is written a certain way. Oh well. Take a deep breath, look at the question from a different angle, and proceed to kick its butt. Do open-end funds have to be diversified? Heck no--it's just that if they want to call themselves "diversified," they have to follow the SEC rule. Closed-end funds don't have to be diversified, either, and even if they did "GAAP Accounting" is nonsense . . . so you can now eliminate the first two answer choices. Boom. See anything wrong with Choice C? Me neither, but let's not make our move too soon. What about D? Isn't it the CLOSED-end fund that might issue preferred shares to use leverage? Yes. D is false. The answer must be . . .