Sample Suitability Question for Series 7, Annuities

Even though many Series 7 candidates will not get their Life & Health licenses, expect your exam to ask a few questions about insurance-based products. Not just variable annuities, but fixed/equity-indexed annuities, and not just variable life insurance, but also perhaps a little bit about whole life and term life insurance. To make sure you know the basics of annuities, let's do a sample suitability question:

Your customer is ready to retire next month. She wants to receive a monthly check for as long as she lives, but she is not impressed with the low rates of return on the fixed annuity illustration you walked her through last week. She has concerns about purchasing power and has a moderate risk tolerance; therefore, she would most likely be interested in which of the following?
A. deferred variable annuity
B. immediate variable annuity
C. deferred indexed annuity
D. immediate fixed annuity

EXPLANATION: as always, what can we eliminate? The phrase "ready to retire next month" eliminates choices A and C--deferral periods are perhaps 10 years long; this person wants  payments immediately. Now, while I would prefer the immediate FIXED product; this individual clearly wants the VARIABLE annuity so she can be partly invested in stocks. Right? The answer is B here, no doubt about it. Get Series 7 Practice Questions Here

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.

Annuity Payout

I just uploaded seven Series 7 recorded classes that you can purchase "on demand" at www.passthe7.com/classes.htm. There are three lessons on options, two that break down 20 practice questions step by step, one on trading securities, and one on retirement and annuities. The following practice question is on variable annuities and is exactly the sort of thing that pops up on the Series 7 exam.

So, please enjoy:

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 end up paying, either to the annuitant or the beneficiary after the annuitant dies.

ANSWER: C