FINRA Series 6 — All Questions

The mortality and expense risk (M&E) charge in a variable annuity compensates the insurer for:

• a.Guaranteeing the death benefit and the annuity payout rate, and bearing the risk that expenses exceed the contract's guaranteed maximum✓
• b.The commission paid to the selling representative only
• c.The securities transaction costs inside the subaccounts
• d.The state premium tax on the contract

The M&E charge covers the insurer's mortality guarantees, such as the death benefit and the promise to pay for life at the guaranteed rate, plus the risk that its expenses run higher than the contract's ceiling. It is not simply the sales commission, nor the subaccounts' internal trading costs, nor state premium tax, which are separate items. M&E is a recurring asset-based charge disclosed in the prospectus.

During the accumulation phase of a typical variable annuity, the standard death benefit pays the beneficiary:

• a.The total of all future annuity payments the owner would have received under the contract's settlement option
• b.The greater of the current account value or total purchase payments made, less any withdrawals✓
• c.A fixed amount set by the state insurance department
• d.Nothing, because death benefits apply only after annuitization

The common variable annuity death benefit guarantees the beneficiary at least the money paid in (net of withdrawals) even if the separate account has fallen, or the account value if it is higher. It is not a projection of future payments, nor a state-set figure, and the benefit applies during the accumulation phase. Enhanced death benefit riders can raise this floor for an added fee.

A guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity:

• a.Guarantees that the separate account itself will never lose value
• b.Allows the owner to withdraw a specified minimum amount each year regardless of separate account performance, usually for an additional fee✓
• c.Eliminates all surrender charges on the contract
• d.Automatically converts the variable annuity into a fixed annuity

A GMWB guarantees a stream of withdrawals up to a stated amount even if poor performance would otherwise deplete the account, and the insurer charges an extra fee for the guarantee. It protects the withdrawal stream, not the account value itself, so the subaccounts can still decline. It neither waives surrender charges nor changes the contract into a fixed annuity.

A representative recommends that a customer surrender an existing variable annuity to buy a new 'bonus' annuity that credits an extra 4% to the initial premium. The primary suitability concern is that:

• a.FINRA bars recommending a deferred variable annuity exchange within 36 months of a prior exchange, so the recommendation is automatically a violation
• b.The bonus is taxed as ordinary income in the year it is credited, and the surrender also triggers the 10% early-withdrawal penalty on all gains
• c.The new contract may carry higher ongoing fees and a fresh, longer surrender period that outweigh the bonus, while the surrender may trigger charges on the old contract✓
• d.A Section 1035 exchange cannot be used between two variable annuities, so surrendering the old contract makes all of its gains taxable at once

Bonus annuities typically recover the credited bonus through higher M&E fees and a new multi-year surrender schedule, so the headline bonus can cost the customer more than it delivers, and surrendering the old contract may impose its own charges. Rule 2330 requires a reasonable basis that the customer benefits and consideration of surrender charges and recent exchanges; it does not ban exchanges within 36 months. The bonus is not taxed when credited, and the transaction can qualify as a tax-free 1035 exchange. This is a classic unsuitable-switch red flag.FINRA Rule 2330

The value of one accumulation unit in a variable annuity separate account is determined by:

• a.Dividing the net asset value of the separate account by the number of accumulation units outstanding✓
• b.The assumed interest rate stated in the contract
• c.The performance of the insurer's general account
• d.Premiums paid to date divided by the units issued, so the value changes only when the owner adds new premium

An accumulation unit works like a mutual fund share: its value is the separate account's net assets divided by the units outstanding, so it moves with subaccount performance. The assumed interest rate is used only in the payout phase to price annuity units, not accumulation units. The general account backs fixed guarantees, and the unit value is not tied to premiums paid.Investment Company Act of 1940

An owner of a non-qualified variable annuity dies and leaves the contract to a beneficiary. Compared with inheriting appreciated mutual fund shares, the annuity:

• a.Also receives a full step-up in basis to date-of-death value, precisely as inherited appreciated mutual fund shares receive
• b.Passes entirely income-tax free to the beneficiary
• c.Is taxed to the beneficiary at long-term capital gains rates on the appreciation above the owner's original cost basis
• d.Does not receive a stepped-up basis; the gain above cost basis is taxed to the beneficiary as ordinary income✓

Annuity gains are tax-deferred ordinary income and do not qualify for a step-up at death, so the beneficiary pays ordinary income tax on the amount exceeding the owner's cost basis. Inherited appreciated stock or fund shares, by contrast, generally get a basis step-up that erases the gain. The annuity wrapper never converts that gain into capital gains treatment.Internal Revenue Code

A distinctive feature of variable life insurance compared with a variable annuity is that variable life:

• a.Provides no death benefit, paying only the accumulated cash value to the estate at death
• b.Allows the policyowner to borrow against the policy's cash value through a policy loan✓
• c.Is not considered a security and therefore requires no prospectus or securities registration
• d.Guarantees that the cash value will grow each year regardless of the separate account's investment performance

Variable life builds a cash value the owner can access through policy loans, a feature annuities do not offer in the same way. Variable life provides a guaranteed minimum death benefit and, like variable annuities, is a security requiring securities registration to sell. Its cash value rides on separate account performance and is not guaranteed to grow.

Compared with a scheduled (fixed) premium variable life policy, a variable universal life (VUL) policy generally offers:

• a.Flexible premium payments and an adjustable death benefit within policy limits✓
• b.A minimum guaranteed cash value, as in whole life, regardless of separate account performance
• c.No exposure to investment risk, because premiums are swept into the general account
• d.Fixed, level premiums for life, while a scheduled-premium variable life policy lets the owner skip payments

VUL combines the investment flexibility of variable life with the premium and death-benefit flexibility of universal life, letting the owner vary payments and adjust coverage within limits. Its cash value is still tied to the separate account and is not guaranteed. A scheduled premium policy is the one that requires fixed, level premiums, so the premium flexibility runs the opposite way.

An open-end investment company share is called a redeemable security because:

• a.It can be resold to other investors on a stock exchange
• b.The issuing fund stands ready to buy the share back from the investor at its next computed net asset value✓
• c.It may be redeemed only at a fixed price stated in the prospectus
• d.The investor may return it for a full refund of the sales charge at any time at any time following the original date of purchase

A redeemable security is one the issuer will repurchase; an open-end fund continuously redeems its shares at the next-computed NAV under forward pricing. Selling to other investors on an exchange describes closed-end funds and ETFs. The redemption price is NAV, which floats, not a fixed figure, and the sales charge is not refunded on redemption.Investment Company Act of 1940

A balanced fund is best described as a fund that:

• a.Invests only in money market instruments to hold its net asset value stable at exactly one dollar per share
• b.Holds a mix of both equity and fixed-income securities to provide a combination of growth and income✓
• c.Invests exclusively in a single industry sector chosen for its long-term growth potential over the market cycle
• d.Guarantees an equal return to every shareholder each year regardless of prevailing market conditions or portfolio holdings

A balanced fund blends stocks and bonds in one portfolio, aiming to deliver growth from equities and income and stability from fixed income. A money market fund and a sector fund pursue very different, narrower objectives. No fund guarantees a return, so the promise of an equal annual return is false.

A variable annuity separate account has net assets of $9,000,000 and 600,000 accumulation units outstanding. The value of one accumulation unit is:

• a.$15.00✓
• b.$6.67
• c.$150.00
• d.$1.50

Accumulation unit value equals the separate account's net assets divided by the units outstanding: $9,000,000 / 600,000 = $15.00. Inverting the division gives $0.067 and misplacing the decimal gives $1.50 or $150.00. The calculation mirrors how a mutual fund computes NAV per share.

An open-end fund has a net asset value of $18.60 per share and a maximum sales charge of 7% of the public offering price. What is the public offering price?

• a.$21.30
• b.$18.60
• c.$19.90
• d.$20.00✓

POP equals NAV divided by (100% minus the sales charge percent): $18.60 / 0.93 = $20.00. Adding 7% to the NAV gives $19.90, the classic error, because the sales charge is a percentage of the offering price, not of NAV (FINRA Rule 2341).

A fund's public offering price is $50.00 and its net asset value is $46.50. What is the sales charge percentage?

• a.6.5%
• b.7.5%
• c.7.0%✓
• d.8.0%

Sales charge % = (POP - NAV) / POP = ($50.00 - $46.50) / $50.00 = $3.50 / $50.00 = 7%. Dividing the $3.50 spread by NAV instead yields about 7.5%, the trap, since the charge is always stated as a percent of the POP (FINRA Rule 2341).

A customer invests $9,000 in a fund whose public offering price is $18.00 per share. Ignoring fractional shares, how many shares are purchased?

• a.450
• b.500✓
• c.540
• d.1,800

Shares = dollars invested / POP, because the investor pays the offering price (NAV plus load): $9,000 / $18.00 = 500 shares. The sales charge is already embedded in the POP, so no separate deduction is made.

A variable annuity separate account has net assets of $24,000,000 and 1,500,000 accumulation units outstanding. What is the value of one accumulation unit?

• a.$62.50
• b.$1.60
• c.$160.00
• d.$16.00✓

Accumulation unit value = separate account net assets / units outstanding = $24,000,000 / 1,500,000 = $16.00, the same conduit math a mutual fund uses for NAV per share (Investment Company Act of 1940).

A fund's public offering price is $25.00 per share and it charges a 5% sales load. What is its net asset value per share?

• a.$20.00
• b.$26.25
• c.$23.81
• d.$23.75✓

NAV = POP x (1 - sales charge %) = $25.00 x 0.95 = $23.75. Dividing $25.00 by 1.05 gives $23.81, a trap, because the 5% load is a percentage of the POP, not of NAV.

A fund's schedule is: under $50,000 = 4.5%; $50,000-$99,999 = 3.5%; $100,000-$249,999 = 2.5%. A customer invests $75,000. What sales charge, in dollars, applies?

• a.$3,375
• b.$1,875
• c.$2,625✓
• d.$1,500

A $75,000 purchase falls in the $50,000-$99,999 tier at 3.5%: $75,000 x 0.035 = $2,625. Applying the first-tier 4.5% ($3,375) ignores that the breakpoint already lowered the rate; reaching 2.5% would require $100,000 (FINRA Rule 2341).

An investor signs a $50,000 letter of intent and deposits $30,000, then adds nothing more before the letter expires. The fund will:

• a.Automatically renew the letter for another 13 months
• b.Liquidate shares held in escrow to collect the higher sales charge due on the $30,000 actually invested✓
• c.Charge a cash penalty equal to the unmet $20,000 commitment, since a signed letter of intent is a binding purchase obligation
• d.Refund all sales charges the investor paid

A letter of intent is not binding; if the investor fails to reach the stated amount within 13 months, the fund redeems escrowed shares to recover the difference between the reduced and full sales charge on the amount actually invested (FINRA Rule 2341).

FINRA rules cap a fund's total annual 12b-1 charge (asset-based sales charge plus service fee) at what percentage of average net assets?

• a.0.25%
• b.1.00%✓
• c.0.75%
• d.0.50%

Under FINRA Rule 2341 the service (shareholder-servicing) fee is capped at 0.25% and the asset-based sales charge at 0.75%, for a combined ceiling of 1.00% of average net assets per year.

Which description best fits Class C mutual fund shares?

• a.A high front-end load and no ongoing 12b-1 fee
• b.A level ongoing asset-based fee and usually a small 1% contingent deferred sales charge that lapses after about one year✓
• c.The lowest total cost of any class for a 20-year holding period
• d.A back-end charge that steps down over six years and then converts to Class A, giving it the lowest long-run cost of any share class

Class C shares carry a level annual asset-based (12b-1) fee and typically a 1% CDSC that expires after roughly 12 months, which suits short horizons but is costly over long periods because the level fee never goes away.

An investor buys $600 of a fund each quarter. In a fluctuating market, the mathematical result over time is that the investor's average cost per share is:

• a.Guaranteed to produce a profit
• b.Equal to the average of the prices paid
• c.Higher than the average of the prices paid, because a fixed schedule concentrates buying when prices are high over the full holding period
• d.Lower than the average of the prices paid, because the fixed dollar amount buys more shares when prices are low✓

Dollar cost averaging buys more shares at low prices and fewer at high prices, so average cost per share is mathematically below the simple average of the prices paid. It does not guarantee a profit or eliminate market risk.

Shares of a closed-end investment company in the secondary market are priced at:

• a.A fixed price stated in the prospectus
• b.A market price set by supply and demand, which may be above or below net asset value✓
• c.Net asset value plus a maximum 8.5% sales charge, the same ceiling that applies to open-end mutual fund shares
• d.Net asset value only, set once daily

A closed-end fund issues a fixed number of shares that then trade among investors, so the market price can be at a premium or discount to NAV. Redeemability at NAV is instead the hallmark of open-end funds.

A unit investment trust is characterized by:

• a.A fixed, unmanaged portfolio, no board of directors or investment adviser, and a stated termination date✓
• b.Shares that trade on an exchange at a premium or discount, with the trust adjusting the portfolio to track a benchmark
• c.An actively managed portfolio and a board of directors
• d.A perpetual existence with no termination date

A UIT holds a fixed portfolio under a trust indenture with a preset end date and needs neither a board nor an adviser (Investment Company Act of 1940). Its redeemable units are not exchange-traded like closed-end shares.

Which statement about a money market mutual fund is correct?

• a.It guarantees investors a fixed rate of return for the term stated in the prospectus, like a certificate of deposit
• b.Its shares trade on an exchange throughout the day at prices that may be above or below the net asset value
• c.Its shares are insured by the FDIC up to applicable limits
• d.It invests in short-term, high-quality instruments and generally carries no sales charge✓

Money market funds hold short-term, high-quality paper, are typically no-load, and seek a stable $1.00 NAV. They are securities, not FDIC-insured deposits, and can in rare cases lose value. They are redeemed at NAV rather than traded on an exchange, and they pay a floating yield, not a fixed rate guaranteed for a term.

How does a retail investor typically buy and sell shares of an exchange-traded fund (ETF)?

• a.In the secondary market at intraday market prices, with only authorized participants dealing in creation units✓
• b.By redeeming directly with the fund at NAV, like an open-end fund, with the trade priced once daily after the market close
• c.At the net asset value calculated once after the close, with the order sent to the fund's transfer agent and settled a day later
• d.Only in creation units of 50,000 shares or more, the minimum order the exchange accepts from any investor

Retail investors trade ETF shares intraday on an exchange at market prices; only authorized participants create or redeem large creation units directly with the fund, and arbitrage keeps the price near NAV. Pricing once a day at NAV through the fund or a transfer agent describes a conventional open-end fund, and no minimum creation-unit size applies to ordinary investors.Investment Company Act Rule 6c-11 (17 CFR 270.6c-11)

Compared with a broadly diversified equity fund, a sector fund concentrated in one industry primarily exposes an investor to greater:

• a.Purchasing power risk, because a single industry cannot keep pace with long-run inflation
• b.Interest rate risk
• c.Reinvestment risk
• d.Non-systematic (industry concentration) risk✓

Concentrating in a single industry increases non-systematic (unsystematic) risk that broad diversification would otherwise reduce. Interest rate and reinvestment risks chiefly affect bonds, and all equities share systematic risk.

A fund that holds a continuous mix of common stocks and bonds to provide both growth and income is called a:

• a.Sector fund
• b.Balanced fund✓
• c.Specialized fund
• d.Money market fund

A balanced fund blends equities for growth with fixed income for income and relative stability in one portfolio. Sector, money market, and specialized funds pursue narrower objectives.

An index fund is best described as a fund that:

• a.Actively trades to beat its benchmark and charges high fees to cover its research and frequent portfolio turnover
• b.Guarantees the exact return of the index it tracks
• c.Is always organized as a closed-end fund
• d.Seeks to replicate a market index, with low expenses and low portfolio turnover✓

An index fund passively mirrors a benchmark, keeping management, research, and trading costs low. It tracks but cannot guarantee the index return, and it is commonly an open-end fund or ETF.

A fund whose primary objective is maximum capital appreciation, with little or no current income, is a:

• a.Growth fund✓
• b.Money market fund
• c.Government bond fund
• d.Balanced fund

A growth fund invests in companies expected to appreciate, reinvesting rather than paying large dividends, so it fits a long-horizon appreciation objective. The other choices emphasize income or stability.

A fund has annual operating expenses of $8,000,000 and average net assets of $640,000,000. Its expense ratio is:

• a.1.25%✓
• b.0.125%
• c.0.80%
• d.8.00%

Expense ratio = annual operating expenses / average net assets = $8,000,000 / $640,000,000 = 1.25%. It captures ongoing costs such as the advisory and 12b-1 fees, not one-time sales charges.

A shareholder submits a redemption order for a mutual fund at 2:00 p.m.; the fund prices once daily at the 4:00 p.m. close. The shareholder receives:

• a.The average of today's and yesterday's NAV
• b.The prior day's closing NAV
• c.That day's NAV computed at the 4:00 p.m. close✓
• d.The NAV at the moment the order was received, locking in the intraday price quoted when the customer phoned in

Forward pricing requires purchase and redemption orders to be executed at the next NAV computed after the order is received, which here is the 4:00 p.m. close (Investment Company Act of 1940). Proceeds must be paid within seven days.

Under the Investment Company Act of 1940, once a mutual fund receives a proper redemption request, it must pay the proceeds within:

• a.Seven calendar days✓
• b.Fifteen calendar days
• c.Thirty calendar days
• d.Two business days

The Act requires redemption proceeds to be sent within seven calendar days of a proper request, absent an SEC-approved suspension. Ordinary trade-settlement conventions do not govern the statutory redemption deadline.

When a customer buys open-end fund shares, the public offering price the customer pays consists of:

• a.The net asset value per share plus the applicable sales charge✓
• b.A price negotiated between the customer and the representative
• c.The net asset value per share minus a redemption fee
• d.The prior day's closing price plus a commission

For a load fund the POP equals NAV plus the sales charge, with the charge figured as a percentage of the POP (FINRA Rule 2341). Fund shares are not priced by negotiation or by the prior day's close.

A 40-year-old will invest a $300,000 lump sum for retirement 25 years away and add more over time. Which share class is generally most appropriate?

• a.Any class, since long-run costs are identical
• b.Class A, because the large purchase earns steep breakpoint discounts and ongoing expenses are lowest✓
• c.Class C, so the level fee stays constant
• d.Class B, so the deferred charge disappears over time and the large purchase avoids any front-end sales charge entirely

A large, long-horizon investment favors Class A: breakpoints sharply cut the front-end load and the low 12b-1 fee compounds into a small drag over decades. Class C's level fee costs far more over 25 years, and Class B is usually unavailable at this size.

A key tax feature of a non-qualified variable annuity's accumulation phase, compared with a taxable mutual fund account, is that:

• a.Earnings grow tax-deferred until withdrawal, when they are taxed as ordinary income✓
• b.Gains are taxed as long-term capital gains
• c.Contributions are federally tax-deductible, much like pre-tax contributions to a traditional retirement account
• d.Distributions are always tax-free

A non-qualified annuity's earnings compound tax-deferred, but withdrawals are taxed as ordinary income on a LIFO basis, never at capital-gains rates (Internal Revenue Code). Contributions to a non-qualified annuity are not deductible.

A variable annuity has an assumed interest rate (AIR) of 5%. In a month when the separate account earns 3%, the next annuity payment will:

• a.Be suspended until performance recovers
• b.Stay the same
• c.Increase from the prior payment
• d.Decrease from the prior payment✓

When actual separate-account performance is below the AIR, the annuity unit value falls and the payment decreases versus the prior one. Performance above the AIR raises the payment; performance exactly at the AIR keeps it level. The AIR is a pricing benchmark, not a guarantee.

After a variable annuity is annuitized, the number of annuity units credited to the contract each month is:

• a.Fixed, while the value of each unit fluctuates with separate account performance✓
• b.Reduced each year by the surrender charge
• c.Fixed, and each unit's value is also fixed for life
• d.Increased whenever the separate account rises, so a strong market adds more annuity units to the contract each month

At annuitization the accumulated value converts into a fixed number of annuity units; monthly income then varies only because the unit value moves with separate-account performance relative to the AIR.

For a given account value, which annuity settlement option generally produces the smallest monthly payment?

• a.Life with 10-year period certain
• b.Unit refund life annuity
• c.Joint and last survivor✓
• d.Straight life (life only)

Joint and last survivor must cover two lives, the longest expected payout, so each payment is smallest. Straight life pays the most because it ends at the single annuitant's death with no residual guarantee.

A surrender charge on a deferred variable annuity is:

• a.A fee deducted from every purchase payment before investment, similar to a front-end sales load charged on a mutual fund
• b.A contract charge on early withdrawals that typically declines each year and eventually reaches zero✓
• c.A recurring annual charge on all contract assets for life
• d.An IRS penalty on withdrawals before age 59 1/2

The surrender charge lets the insurer recover distribution costs if the owner withdraws in the early contract years; the schedule steps down to zero over time. The 10% early-distribution penalty is a separate IRS tax.

The mortality and expense (M&E) risk charge in a variable annuity compensates the insurer for:

• a.The subaccounts' internal securities trading costs and the brokerage commissions the separate account pays each time it trades securities
• b.Guaranteeing the death benefit and lifetime payout rate and bearing the risk that expenses exceed the contract's ceiling✓
• c.State premium taxes on the contract
• d.The representative's sales commission only

The recurring asset-based M&E charge covers the insurer's mortality guarantees (death benefit and the promise to pay for life at the guaranteed rate) plus the risk that expenses exceed the contract maximum. Trading costs, premium tax, and commissions are separate items.

During a variable annuity's accumulation phase, if the owner dies, the standard (base) death benefit pays the beneficiary:

• a.A fixed amount set by the state
• b.Nothing, because death benefits apply only after annuitization once the contract has been annuitized and payments begin
• c.The projected total of all future annuity payments
• d.The greater of the current account value or total purchase payments made, less withdrawals✓

The common death benefit guarantees the beneficiary at least the money paid in (net of withdrawals) or the account value if higher. Enhanced riders can raise this floor for an added fee.

In a scheduled-premium variable life insurance policy, if the scheduled premiums are paid:

• a.The cash value is guaranteed but the death benefit is not
• b.A minimum death benefit is guaranteed, while the cash value rides on separate-account performance and can fall to zero✓
• c.Neither the cash value nor the death benefit can change
• d.Both the cash value and the death benefit are fully guaranteed by the insurer for as long as the scheduled premiums are paid

Variable life guarantees a minimum face amount as long as scheduled premiums are paid, but the cash value follows the separate account with no floor. Strong performance can raise the death benefit above the minimum.

Compared with scheduled-premium variable life, variable universal life (VUL) generally adds:

• a.Investment only in the insurer's general account, with the insurer bearing all of the investment risk
• b.Fixed, level premiums for life, as in a whole life policy
• c.A fully guaranteed cash value that the insurer credits regardless of separate-account performance
• d.Flexible premium payments and an adjustable death benefit within limits✓

VUL combines variable-life investment risk with universal-life flexibility, letting the owner vary premiums and adjust coverage within limits. Its cash value still depends on the separate account and is not guaranteed, and the owner, not the insurer, bears the investment risk. Fixed, level premiums describe the scheduled-premium and whole life approach, not VUL.

To sell a variable annuity, a representative must hold:

• a.Both a state insurance license and the appropriate FINRA securities registration✓
• b.Only a state insurance license, because the annuity is regulated solely as an insurance contract
• c.Neither, if the sale is made through a bank
• d.Only a FINRA securities registration

Variable products are dual-regulated: the insurance element requires a state license and the security element (the separate account interest) requires FINRA registration through a broker-dealer. Holding just one credential is insufficient.

The separate account that funds a variable annuity is:

• a.The broker-dealer's proprietary trading account
• b.Part of the insurer's general account, backed by its reserves and its overall claims-paying ability as a company, where the insurer bears all investment risk
• c.Registered as an investment company under the Investment Company Act of 1940 and insulated from the insurer's creditors✓
• d.A bank custodial account titled in the contract owner's name

Variable annuity assets sit in a separate account registered under the 1940 Act (often as a unit investment trust) and shielded from the insurer's general creditors. The general account backs fixed products, where the insurer bears investment risk.

A customer moves the full value of one non-qualified annuity directly into another insurer's non-qualified annuity. Handled correctly, this is:

• a.Taxable only on the gain above cost basis
• b.Fully taxable as ordinary income on the entire value in the year the funds move between the two carriers, with tax due even though no cash was received
• c.Prohibited under state insurance law
• d.A Section 1035 exchange, not a taxable event, though surrender charges may still apply and cost basis carries over✓

Section 1035 of the Internal Revenue Code lets funds move annuity-to-annuity between carriers without current tax; cost basis carries over. Old surrender charges and a new surrender schedule may still apply, which is why suitability review is required.

Which exchange does NOT qualify for tax-free treatment under Section 1035?

• a.Life insurance for life insurance
• b.Annuity for an annuity
• c.An annuity for a life insurance policy✓
• d.Life insurance for an annuity

Section 1035 permits life-to-life, life-to-annuity, and annuity-to-annuity, but not annuity-to-life, which would move always-taxable annuity gains into a contract whose death benefit can pass income-tax-free.

How does a guaranteed minimum withdrawal benefit (GMWB) rider on a variable annuity work?

• a.Eliminates all surrender charges
• b.Lets the owner withdraw a stated minimum amount each year regardless of separate-account performance, usually for an extra fee✓
• c.Guarantees the separate account will never lose value, protecting the full account balance from any market decline, so the owner can never lose principal
• d.Converts the contract into a fixed annuity automatically

A GMWB protects a withdrawal stream up to a stated amount even if performance would otherwise deplete the account; the insurer charges an added fee. It does not protect the account value itself or waive surrender charges.

A representative recommends surrendering an in-force variable annuity to buy a new bonus annuity crediting an extra 5% to the deposit. The chief suitability concern is that:

• a.A 1035 exchange cannot be used
• b.Higher ongoing fees and a fresh, longer surrender period may outweigh the bonus, and surrendering the old contract may trigger charges✓
• c.The 5% bonus is immediately taxable
• d.Bonus annuities are illegal

Bonus annuities typically recoup the credit through higher M&E fees and a new multi-year surrender schedule, so the bonus can cost more than it delivers; surrendering the old contract may impose its own charges (FINRA Rules). This is a classic unsuitable-switch red flag.

How is the value of a single accumulation unit in a variable annuity separate account computed?

• a.The net investment performance of the insurer's general account, credited to each unit every contract year
• b.The assumed interest rate stated in the contract compared with the subaccount's actual return each month
• c.Premiums paid to date divided by the number of units issued, so it changes only with new premium
• d.Dividing the separate account's net assets by the accumulation units outstanding✓

An accumulation unit works like a mutual fund share: value = separate-account net assets / units outstanding, so it moves with subaccount performance. The assumed interest rate prices annuity units only in the payout phase. The general account backs fixed guarantees, and the unit value is not tied to premiums paid.