As per Assembly Bill 207, the Elder Abuse and Dependent Civil Protection Act has been updated to include required disclosures and has also given the
Commissioner the authority to assess penalties against persons who violate the following rules:
• If an agent offers an annuity to a senior, they must advise the senior in writing that liquidation of any assets to fund the annuity or liquidating the annuity itself may have tax consequences or other associated penalties.
• Additionally, the agent will disclose to the senior that they may wish to consult independent legal or financial council before selling or liquidating any assets or before buying any annuity products.
The required disclosure has to have the following structure:
Prospective California Client (please print)
Agent (please print)
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Pursuant to California Insurance regulation, I am required to advise you of the following:
In the event I recommend that you sell or liquidate any stocks, bonds, IRA,
certificate of deposit, mutual fund annuity, or other assets to fund the purchase of an annuity from an insurance company, you may be subject to some or all of the following:
1. Tax consequences;
2. Early withdrawal penalties;
3. Or, other costs or penalties.
You may wish to consult an independent legal or financial advisor before selling or liquidating any assets and prior to purchasing an annuity.
I acknowledge receipt of this disclosure and understand its contents.
Signature of Prospective California Client Date
Signature of Agent Date
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1. Money in annuity grows faster than money in CDs mainly due to: (Lesson 5:
Income Tax on Qualified and Non-Qualified Annuities) A. Better investment management
B. Tax-deferred Compounding C. Improved market access D. Taxed Compounding
2. Senior J has asked you about the tax bracket they would need to be in when they start getting annuity payments in order to make the returns equal to taxed investments. To explain this, you would need to discuss the: (Lesson 5: Tax-deferred growth)
A. Break even point B. Interest rates
C. Margins and options
D. Stock market holding points
3. 1035 exchanges allow investors to exchange their _________ for a(n) _______. (Lesson 5: IRS Section 1035 exchanges)
A. Life insurance policy; annuity B. Annuity, life insurance policy
C. Variable annuity; money market account D. Long-term care insurance; annuity
4. It is generally recommended that before investing in an annuity, the investor should exhaust: (Lesson 5: Premiums)
A. Payments towards a mortgage B. His/her personal savings account C. All standard qualified retirement plans
D. All standard non-qualified investment vehicles
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5. The taxation on partial withdrawal from annuities is on what kind of basis?
(Lesson 5: Partial Withdrawals)
A. LIFO (Last In, First Out) for annuities with initial investments greater than
B. FIFO (First In, First Out) for annuitants who invested prior to their 30th birthday
C. FIFO (First In, First Out) regardless of age or investment amount D. LIFO (Last In, First Out) regardless of age or investment amount
6. If a withdrawal is made before the annuitant reaches the age of 59½, the IRS penalizes the withdrawal by: (Lesson 5: Partial Withdrawals)
7. Senior L has given up one annuity and rolled her investment over to a company that is offering better returns on annuities. This would be called:
(Lesson 5: Income Tax on Qualified and Non-Qualified Annuities) A. Rate Exchange
B. A 1035 exchange C. IRS Tax Penalty D. Annuity roll-over
8. What are the tax implications for loans out taken against an annuity? (Lesson 5: Loans and Assignments)
A. They are considered taxable funds B. They are considered non-taxable funds
C. Only loans over $10,000 are considered taxable D. Only loans under $5,000 are considered non-taxble
9. In case a senior annuity owner dies during the accumulation phase, the entire amount that is present in the annuity would be: (Lesson 5: Death Cases)
A. Disbursed to the beneficiaries B. Retained by the insurance provider
C. Delivered to the annuity charity program for seniors D. Added to the annuity owner’s estate
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10. The highest advantages for taxation and estate planning can be obtained by an annuitant if they name their ________ as a beneficiary. (Lesson 5: Beneficiary Estate Issues)
A. Children B. Spouse C. Estate D. Charity
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Quiz 5 Answers
1. (B) The money accumulating in an annuity grows faster than in a CD because of tax-deferred compounding. CDs have access to the same markets and
investment management, and taxed compounding does not take place in annuities.
2. (A) The money that accumulates in an annuity grows on a tax-deferred basis, which gives the investors the advantage of having their money grow faster due to compounding. However, this growth can be misleading if the person is not told about his/her break-even tax bracket. If a senior does not think that he or she will be in such brackets once he or she withdraws from his/her annuity, then an annuity may not be the best choice for them to begin with.
3. (A) A 1035 exchange presents a person the option to get rid of old unfavorable contracts and enter into new or better contracts. This helps to defer the
applicable income taxes which must be paid once the annuity matures. An
existing life insurance policy can be exchanged for a new annuity. But because of tax considerations, annuities cannot be exchanged for life insurance policies, and 1035 exchanges do not govern exchanges between long-term care insurance and money market accounts.
4. (B) Since standard qualified retirement plans offer many of the same
investment benefits as annuities, it is generally recommended that the investor should exhaust all standard retirement plans available before turning to an annuity.
5. (D) The taxation from annuities is on a LIFO (Last In, First Out) basis
regardless of the date the person bought the annuity or the amount invested in the annuity initially. That is to say that the government will consider this
withdrawal as coming from the earnings on the account and levy the applicable income tax.
6. (B) The IRS penalizes any withdrawals by 10% if the money is withdrawn before the annuitant reaches age 59½, since the government will consider this withdrawal as coming from the earnings on the account and levy the applicable income tax.
7. (B) 1035 exchanges allow a person to swap one annuity for another without making any withdrawals or suffering penalties. 1035 exchanges present a person with the option to get rid of old unfavorable contracts and enter into new or better contracts. This helps to defer the applicable income taxes which must be paid once the annuity matures.
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8. (A) One of the disadvantages of annuities when compared to life insurance policies is that loans made against a life insurance policy may not be taxable as income tax, while loans taken against the cash value of an annuity are treated as taxable funds for the annuitant, usually at the ordinary income tax rates.
9. (A) In the event of the annuity owner dying during the accumulation period the entire death benefit will be disbursed within five years of the person’s death. This prevents the annuity proceeds from becoming part of the annuity owner’s estate, which could end up in probate. Whatever the case, if there is a beneficiary
named, the any money in the annuity would not remain with the insurance provider or into the state fund.
10. (B) The greatest advantage for taxation and estate planning can be obtained by an annuitant if they name their surviving spouse as a beneficiary. If an
installment method is selected by the spouse for life payments, they can still withdraw money from the annuity for other expenses and thus reduce their income taxes by distributing the disbursement over time. Single sum payments may also provide advantages, because once the tax has been paid, they are less harmful for estate taxes. If the sums withdrawn are used as gifts for other
beneficiaries, i.e., children or step-children, then there is a further reduction in the estate taxable amounts.
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