At the height of the pandemic, heightened fears and a greater awareness of mortality drove consumers away from annuities and increased demand for life insurance products. Now, as the world enters another year of “post” pandemic life, we’ve seen those fears edged out and replaced with a renewed interest in investing for guaranteed income after retirement.
Consumers’ recent increased interest in annuities is in large part driven by the fear of economic uncertainty and the possibility of a recession, much like during the 2008 financial crisis. Multiple sources show a surge in annuity sales, and it seems consumers are especially interested in purchasing fixed and fixed-indexed annuities – two of the lower risk options available.
With consumers eagerly seeking annuity contracts, many producers feel like now’s a good time for them to hop on the bandwagon and become licensed to sell annuities. However, the complicated world of annuities means license requirements aren’t as straightforward as they are with other lines of authority. So keep reading as we take a deep dive into annuities and break down exactly what a producer* needs to sell these insurance products without any regulatory or legal repercussions.
*There is an entire glossary of terms that can be used to describe an insurance professional who specializes in selling annuity products. For the sake of consistency and to avoid confusion we will mainly refer to these individuals as producers.
What is an annuity?
An annuity is a contract between a consumer and an insurer in which the consumer (or beneficiary) makes a payment or series of payments in exchange for regular disbursements from their insurer at a later time. In other words, an annuity offers consumers a guaranteed future retirement income in exchange for a premium paid in advance.
If that definition sounds a little vague, it’s because annuities are hard to define. This is due to the plethora of different annuity types that exist based on the variety of ways income is built, calculated, credited, and paid out. For now, we’ll discuss three of the more common types of annuities: Fixed, variable, and indexed.
What is a fixed annuity?
Often thought of as “set it and forget it” contracts, fixed annuities pay out a set and guaranteed amount. Fixed annuities are perfect for today’s risk averse consumers, as they’re not tied to the performance of a stock market index. Buyers don’t have to worry about market risk and can calculate their exact minimum earnings with a fixed annuity. On the downside, should market conditions improve over time, the beneficiary doesn’t receive a higher payout than their contract specifies.
What is an indexed annuity?
Taking a step into slightly riskier territory, you have indexed annuities. With this type of annuity, the buyer still receives a guaranteed minimum payout. But, unlike fixed annuities, with indexed annuities a portion of the payout is tied to the performance of a market index. Indexed annuities offer buyers greater potential earnings, but often come with growth caps.
What is a variable annuity?
Buyers looking for a high risk, high reward option, have the option of variable annuities. With these types of annuities, earnings are based solely on a buyer’s investments – most commonly in mutual funds. The volatility of mutual funds can lead to plenty of account fluctuation based on the performance of the investments a buyer chooses.
What are the pros and cons of annuities for consumers?
Annuities offer consumers financial security but their complex nature can be a disadvantage. Recently, talk of economic uncertainty and recession fears have fueled the fire, and skyrocketed annuity sales to a record high. Many consumers, scared their savings and Social Security payments will no longer be enough to support them through retirement, are turning their attention to annuities and the benefits they can provide.
Advantages of annuities for consumers
- Death benefit – Annuities can provide financial security to your loved ones in the event of your death. Depending on the terms of the annuity contract, purchasers can pass an annuity to one or more designated beneficiaries.
- Tax-deferred growth – Consumers can use pre or post-tax funds to purchase their annuity contracts and do not have to pay taxes on earnings until they begin making withdrawals or receiving periodic payments.
- No mandatory withdrawals – Generally speaking, as long as your annuity isn’t funded with pre-tax money, like an IRA, there is no required minimum distribution once you reach age 73.
Disadvantages of annuities for consumers
The benefits make annuities an attractive financial solution for many. However, purchasing an annuity also comes with a few disadvantages including:
- Complex in nature – These days, there are more annuity choices for consumers than ever before. As annuity types increase, so does a sense of confusion surrounding the complexity of the multiple contract variations.
- Hidden fees – Always read the fine print! While variable annuities are known for their historically high fees, consumers should also be aware of the hidden fees buried deep within even their fixed annuity contracts. Commission fees, underwriting fees, and penalties can add up quickly and eat a significant portion of returns.
- Risky – A big factor in what makes annuities such an attractive option to consumers is the guaranteed income they can provide. But not all annuities are so predictable. Variable annuities in particular hinge on market performance and can be risky for consumers.
For as much confusion as there is when it comes to purchasing annuities, there can be just as much for those looking to sell them. Which types of annuities can producers sell with which type of insurance license, and how do they benefit from doing so? Read on for a brief overview of annuities from the producer side.
Who can sell annuities?
Licensed insurance producers who have the necessary credentials to sell life insurance in their state can get started with fixed annuities. But, things get a little complicated when it comes to the specific licensing requirements for the different types of annuity contracts.
How do producers benefit from selling annuities?
Insurance producers get paid a commission for selling annuities. Typically, that commission is higher than what they can make selling other insurance products, due to the long-term and complex nature of annuity contracts. With a little research and understanding, agents can sell these high-commission products with nearly the same amount of work as low-commission products but with 5-10 times the payoff.
Fixed annuity licensing requirements
When it comes to selling fixed annuities (including single premium annuities, longevity annuities, fixed-rate annuities, qualified longevity annuities, and fixed index annuities) we have some good news. The regulating authorities for these types of annuities are the state departments of insurance and their governing body, the National Association of Insurance Commissioners. Since they don’t require additional oversight, a standard life insurance license issued by your resident state is enough to get the ball rolling on selling fixed annuities.
Variable annuity licensing requirements
Things get a little more complex when it comes to licensing requirements for selling variable annuities and registered index-linked annuities (RILAs). Because they’re classified as securities, these types of annuities are also overseen by the U.S Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA) in addition to the state departments. This additional oversight means producers who wish to sell variable annuities and RILAs will have to jump through a few more hoops in order to do so.
Like fixed annuities, an agent will first need a valid life insurance license. But, they’ll also need to register with FINRA and pass specific Series exams depending on the products they’d like to focus their selling on.
Series 6 exam
The Series 6 exam offers producers a limited investment securities license. Those who pass can sell packaged investments including variable annuities. Before taking the Series 6 securities exam, you’ll need to obtain a sponsorship from a broker-dealer firm who will oversee your activities and client transactions. The exam includes 100 multiple choice questions and in order to pass, a candidate must score at least 70 percent.
Series 7 exam
Passing the General Securities Representative Qualifications Examination, also known as the Series 7 Exam permits a producer to offer almost every type of security (with limitations around real estate, life insurance, and commodity futures). Because this test covers so many aspects of securities, it’s also considered the most rigorous. Once an agent has secured a sponsor from a FINRA-registered broker-dealer firm and has sufficiently studied, they can take the six-hour exam.
Series 63 exam
Several states also require producers to pass the Uniform Securities Agent State Law Exam, or the Series 63 exam, in order to sell securities like variable annuities. The Series 63 exam focuses mainly on ensuring a producer is familiar with the state securities regulations outlined in the Uniform Securities Act. Passing a Series 63 exam doesn’t mean much on its own. Producers will also need to register with FINRA by completing either the Series 6 or Series 7 exam in order to sell variable annuities.
Series 65 exam
If, instead of selling annuities on a commission basis, you’re more interested in charging clients a fee for securities advisory services, you’ll need to pass the Series 65 exam. Passing this exam does not authorize a producer to sell securities, but it does allow them to act as an investment advisor to their clients. If a producer wishes to both sell securities that require a Series 7 license and charge for securities advisory services, they have the option to skip the Series 63 and 65 exams and instead complete a combination Series 66 exam.
Each of these exams is challenging and covers a great deal of information. These tests help ensure anyone wishing to sell securities has the knowledge and expertise they need to act in the best interest of consumers. And producers aren’t off the hook after passing. They’ll have to complete continuing education requirements every three years to stay in compliance with FINRA regulations and keep their licenses.
Staying on top of licensing requirements for annuities doesn’t have to be hard
The world of licensing requirements for selling annuities truly is complicated, but for good reason. When it comes to annuities, especially variable annuities and other securities based types, consumers put a lot of trust in their agent. The tests do their part in helping to weed out any ill-intentioned individuals who may wish to take advantage of the complexity and confusion common in these insurance products.
Of course, the complex licensing requirements also make staying on top of compliance for producers selling annuities a little more complicated too. This is where AgentSync comes in. Our solution makes managing and validating the various license requirements for annuity sellers simple.
While our solution can’t validate FINRA Series qualifications, it can help producers, carriers, and agencies working in the life insurance and annuity sector remain in compliance when it comes to selling fixed and fixed-index annuities (which, as we mentioned, are kind of on fire right now). If you’d like to take the worry out of compliance and get your licensed life insurance producers jumping on the fixed annuity train sooner rather than later, see what AgentSync can do for you.