Study guide
Completes Function 3 and folds in Function 4 (order processing). Roughly 25 of 50 scored questions with Chapter 5 for Function 3, plus about 5 more for Function 4.
Variable Annuity Structure: Accumulation and Annuitization
Accumulation units fluctuate in number and value; at annuitization, converted to a fixed number of annuity units with fluctuating value.
The Assumed Interest Rate and Variable Payout Mechanics
AIR is the benchmark for each payment; returns above AIR raise the payment, at it holds level, below it lowers it — compared to AIR, not prior period.
1035 Exchanges and Variable Annuity Suitability Review
1035 exchanges: life-to-life, life-to-annuity, annuity-to-annuity qualify; annuity-to-life does not. Rule 2330 requires principal review and 36-month exchange history check.
Retirement Accounts and Annuity Taxation
Traditional IRA tax-deferred, RMDs required; Roth IRA tax-free qualified withdrawals, no lifetime RMDs; nonqualified annuity withdrawals LIFO taxed.
Order Handling, Confirmations, and Settlement
Forward pricing for fund orders; late trading is illegal; Rule 10b-10 confirmations; fund family exchanges are taxable events.
Key terms
- Accumulation unit
- — Measure of interest in the separate account during accumulation phase.
- Annuity unit
- — Fixed number of units used post-annuitization; value fluctuates.
- Assumed interest rate (AIR)
- — Benchmark determining whether payments rise, hold, or fall.
- Section 1035 exchange
- — Tax-free exchange between annuity/life contracts; annuity-to-life does not qualify.
- FINRA Rule 2330
- — Requires principal review of deferred VA purchases/exchanges and 36-month exchange history check.
- Required minimum distribution (RMD)
- — Mandatory annual withdrawal from traditional IRAs/employer plans.
- LIFO annuity taxation
- — Nonqualified annuity withdrawals: earnings out first, taxed as ordinary income.
- Exclusion ratio
- — Splits annuitized payments between taxable earnings and tax-free basis return.
- Forward pricing
- — Orders execute at the next calculated NAV.
- Late trading
- — Illegally pricing a late order at an already-computed NAV.
Exam tips
- Compare each period's return to the AIR itself, never to the prior period's return.
- 1035 exchanges run one-way out of life insurance: annuity-to-life does not qualify.
- 1035 exchanges defer tax but usually restart the surrender-charge clock.
- Nonqualified annuity withdrawals are LIFO; annuitized payments use an exclusion ratio instead.
- Forward pricing means the next calculated NAV always applies, regardless of how soon after the cutoff the order arrives.
- Fund family exchanges avoid a new sales charge but remain taxable events in nonqualified accounts.